Is it time to put away whole life insurance?

By Brandon Roberts

The Insurance Pro Blog


Despite being a year marked by what many consider the unluckiest number of them all, 13, last year was anything but unlucky for the stock market. With all major U.S. indices comfortably up in the double digits, the market allure has definitely started to come back en vogue.

Those who listened to their broker and held strong throughout 2008 to today are finally smiling again — or at least breaking even. In fact, we’ve finally broken into positive territory for the S&P since the beginning of 2008. It’s around 4 percent by end of year 2013, but it’s something.

So, like most Americans who get excited at the peak and start to entertain getting in, our fellow insurance and investment friends are finally coming around to the possibility that this bounce back from 2008 might just be the beginning of more growth for the American economy.

And I genuinely hope it is, but even the most optimistic among us would probably remain tame in terms of their expectations. Still, let’s ignore all of that for a minute, and let’s pretend that a new day is upon us.

Does whole life insurance then go get tucked away to be forgotten until the next market fallout? Of course not.

When the butterfly flaps its wings

Before we dive into a discussion about rate of return — and don’t worry, we’ll get there — let’s take a more theoretical approach to this discussion for a few paragraphs and talk more strategically.

Keep in mind that life is preciously friable. I don’t really mean this in the teary-eyed, Sunday morning sermon or someone just received some bad news sense, but rather in a much more profound and practical sense (though the fundamental point behind either example applies the same). There are a lot of things that can come along and mess things up, and since you only get one shot at getting this life thing correct, it's best to be as strategic about mitigating those “oh no” moments as possible.

Whole life insurance can be a financial tool that absorbs bad times and leaves options on the table for good ones. And it does it phenomenally well.

How do I know this? Because just like every other financial tool that exists, it has greatly declined in terms of yield over the last six years; and yet despite this, people want it now more than ever.

They all dance in unison

Despite what some will tell you, all financial products react to market conditions with a relatively high degree of predictability. This is a function of price elasticity and more specifically cross price elasticity. For those who have never heard the term before, allow me to tell you everything you need to know in 60 words or less:

When a condition comes up that makes one type of good less attractive, people will swap consumption from that good to another good (a substitute). And when a condition comes up that makes one good more attractive, any good that is consumed with that now more attractive good also benefits (a complementary good).
For those who want to dive deep into the weeds, studying the derivative of substitutes and complements can give you some precision when it comes to estimating the exact impact that a certain event will have on consumption of various goods.

For those who are less interested in the math, the important take away is this: As people become more or less interested in certain financial vehicles due to economic conditions, it will have an impact on what happens to those vehicles, as well as vehicles that are complements and substitutions to those goods.

I don’t want to spin this into a lengthy discussion about what events cause what sort of impact on each asset class, but I do want to point out that it’s this very fundamental economic premise that drives the tightly woven nexus that is our economy. Everything happens in equilibrium.

If history does repeat itself and we do again see economic conditions reminiscent of the 1980s and1990s, stocks will not be the only asset class to benefit.

Whole life dividend rates did pretty well over this period of time. If we take the historical rates of the big four mutuals, we see that the 30-year average among the group is 8.54 percent or 37 percent higher than today’s average of 6.24 percent. So, if conditions mirror previous success, we can only assume positive things for whole life insurance.

Also, keep in mind that whole life insurance as an asset class is much more than just yield (though it does yield very well). There are many additional reasons to buy it or its close cousin universal life insurance, and these reasons help complement a sound financial strategy that is well-insulated from troubling economic conditions and poised to jump when opportunities present themselves. Whole life insurance is certainly not ready to be tucked away, and anyone who believes differently is making a very serious mistake.