IFI Blog

The Bond That Matures Upfront

Tuesday, October 29, 2013

John Girouard - Chief Storyteller

I know I talk a lot about insurance in my Forbes columns and in my writings but that is because I find it somewhat humorous that one of the major financial products that has so much negative emotions attached to it. And is a victim of the most misplaced analysis as to its true purpose is perhaps the main financial tool used by Wall Street companies, banks, hedge funds, the product which they use to protect their assets.

For individual investors your most valuable asset is your human capital and as a person ages ones human capital gets transferred into investment capital during the accumulation stages of life. However when someone retires what they’re looking for is a way to protect their human capital that is now exclusively in investment capital and is subject to risk and uncertainty. Now when they can no longer depend on their ability to earn a living. Their entire life and security is dependent on things that they cannot control to take care of their lifestyle.

Why is it that most advisors are afraid of having this conversation with clients?
It’s time to be honest.

So why not buy a bond that matures upfront to protect ones investment capital that they wish to accumulate over their lifetime. (Participating Whole Life Insurance)  

Rather than wait 30 years to have that bond (sold by Wall Street) reach maturity and for that 30 years subject their wealth to: interest rate risk, tax uncertainty, purchasing power risk, inflation risk and default and market risk.

Investing for growth.  Requires risk and uncertainty.
Uncertainty: not only as to the return, but also the taxes in the future.

Investing to protect one's human capital

 -requires upfront cost
 -protection from risk
 -guarantees completion
 -provides tax protection.

By the way I am not discounting the normal stock, bond and real estate investments held in the clients typical financial plan.  After all the majority of people's wealth is in retirement accounts which are in most cases invested in stocks, bonds or bank accounts since this is what our Government mandates where we put our money.

I am simply focusing on the one part of most financial plans that are often ignored by people in our industry and not included in their portfolio of financial tools.

The point I try to stress is it makes one question the wisdom communicated by our industry.  The one financial tool that most American banks and major corporations consider instrumental to protect their future is the same one the tell clients not to own.

Why not consider buying a bond that matures upfront.  That’s why I try to incorporate mutual whole life insurance into many clients portfolio.  A place to transfer their wealth over their lifetime, to protect ones human capital as they get older. A time in most retiree’s life that all they desire is less risk, more certainty, more guarantees, and more predictability.

When they need the confidence that they will be able to enjoy what they worked so hard to accumulate. And at the same time enabling them to enhancing their life by using their principal over the lifetime while still being able to replace what the used   for long-term care or leave a lasting legacy.

If done properly the way the financial industry uses life insurance it can be a valuable tool.

However sold as most people do in the industry the largest life insurance contract for the least amount of money. Statistically done this way is like playing a Vegas betting game. If Protection is what one seeks for the least cost Term Insurance is still the best option.

But if someone wants to protect the net worth that they hope to accumulate over their lifetime, a properly structured participating whole life with the least amount of insurance for the maximum amount of money saved is a welcome addition to any clients portfolio. An additional lesson and strategy, they will always thank you for when times are tough and as they age.

After all, this is how banks utilize this product, maybe it’s time we do what they do with their money not what they tell us to do with our money.