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Every investment carries some form of risk.
It’s printed at the bottom of every stock prospectus … and a legally-mandated inclusion in most every piece of financial marketing you’ll ever read.
It’s the kind of warning we see so often that we barely even notice it. Let alone think about it.
When we do think about risk, it’s often in terms of 10 or 20% pullback in stocks. Or closing out an options trade to cut our losses when things go sideways. Or maybe an unexpected fender-bender on the way home from the grocery store.
In other words; we think about risk in very limited terms.
In reality, virtually everything we own carries some degree of financial risk. From the value of your stock portfolio to your home, your car—even your grandmother’s old hand-me-down collectibles. It all has a financial value that’s determined externally by the markets.
Most folks don’t mind this fact, since markets have historically worked to grow wealth over time — but the risk is still there. And it can still have a serious, negative impact on your life when you expect it the least.
One of my old mentors worked with a client named Ernie, who found this fact out the hard way…
Ernie was a clever guy. He’d worked out a system for investing in bonds that paid him a substantially higher income than he would’ve gotten from Treasuries at the time. My mentor warned him about the additional risk in this investing strategy, but Ernie was confident in his system, since he’d diversified his bond purchases across several different industries. Ernie’s monthly costs were low, since he still had some pension income and he’d paid off his home ages before retiring.
Sounds like a pretty smart system, right?
Well, then came the global financial crisis of 2008/2009. Worldwide economic upheaval on a scale not seen since the Great Depression. Markets crashed across the board, and Ernie was among the worst hit.
His once-diversified portfolio of “high-income” bonds (often referred to as junk bonds) experienced several painful defaults as the crisis played out — with Ernie’s accessible income all but evaporating as a result. Liquidating his small stock portfolio would’ve meant taking a painful loss. And downsizing to a smaller home wasn’t an option with real estate markets in freefall.
Fortunately, Ernie also had a mostly paid-up whole life insurance plan, and he was able to take out a substantial loan against the cash value of his policy in order to keep the lights on.
This is one of the most critical benefits of whole life insurance, and also the most overlooked…
Life insurance is more than just a death benefit. It’s insurance for your life, your lifestyle, your health, your family, and your future.
In Ernie’s case, it was a loan that covered his living expenses while the worst of the market crash played out. Bank lending at the time was essentially frozen, but Ernie was able to process his loan almost immediate for instant access to liquidity.
What’s more, since this kind of loan is essentially “self-banking,” you’re not tied to a strict payment schedule to cover the balance of the loan. The interest will simply accrue against the remaining cash value of your policy until you’re ready to pay off the loan.
Ernie’s loan was indispensable at the time, providing much-needed breathing room for him sort out his financial affairs. It also meant that he wasn’t forced to sell off key assets at a steep loss, like so many other Americans ended up doing during the crisis.
It may seem ludicrous these days, but at the very height of the panic, some of America’s wealthiest investors were taking gold Rolex watches and Ferrari sports cars down to the local pawn shop — just to free up some cash.
We’re talking about some of the richest folks in America … but since all of their money was tied up in beaten-down stocks or illiquid assets, they had no choice but to sell off luxury items at pennies on the dollar … all just to keep the cash flowing and the bills paid during a brief but vicious moment of unprecedented risk.
Selling off assets during a downturn can wipe out years of hard-earned gains, and it can interrupt the long-term compounding that investors often spend decades building up to. Since Ernie didn’t have to sell his stocks, he was able to watch them gradually recover and surge to new highs. Likewise for his home, which doubled in value between the time of the crisis and when he finally sold it a few years ago. He even recovered most of his bond investments in the coming months and years.
That is the life-changing impact a “volatility buffer” can have on your financial future.
A volatility buffer is a portion of your wealth that’s protected from unpredictable moves in stocks, bonds, real estate, gold, crypto, or any other investments. Once again, all these investments carry risk. Even just parking your money in a bank account carries some degree of risk these days (especially if you’re over the $250,000 FDIC limit).
Volatility buffers are there to help offset that risk. So if you ever experience an unexpected downturn, or an unpredicted event that threatens your cash flow, then a volatility buffer can step in to keep your portfolio and your financial plans intact.
Volatility buffers exist in several different forms, but whole life insurance is arguably the most powerful and the most flexible. Because once again, life insurance is not an investment.
If you have the right policy with the right paid-up additions (PUA), then it can grow to provide investment-like returns over time. But it’s still not an investment. So it’s not subject to the same ups and downs that drive our increasingly centralized markets.
Insurance companies are strictly regulated in terms of their capital requirements and the types of investments they’re allowed to make. That’s part of the reason why so many of these companies have endured for so long — with the market’s top life insurance companies now more than a century old on average.
Whole life insurance obviously offers a wide range of different benefits and tax advantages … but it’s value as a volatility buffer to backstop your wealth is simple immense.
Ready to see how this could apply to your wealth plan? Click the big yellow Clarity Call button and let’s map it out together.
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