By Douglas Guest
When I completed my finance degree at McGill University nearly twenty years ago, most financial planning theory was based upon a version of the financial pyramid and asset allocation theory. These are still the time-tested foundations to any financial plan but today's market is truly putting these concepts to the test. As yields on fixed income and safe money are at historical lows, it is easy to think about looking to other options and simply forgoing the savings or fixed income components of a portfolio. Too many clients end up chasing yield and fail to account for the additional risks that they are taking.
Over the years, the terms ‘saving’ and ‘investing’ have overlapped and almost become fused. We use the terms interchangeably as though they mean the same thing. But they don't. Saving and investing are two very distinct concepts. For any solid financial strategy, there should be two clear groups of money. Your savings consists of money that you do not want to lose; whereas, money you invest is money that is subject to the risk of loss. To be clear: when you have money in the stock market or even exempt markets, no matter what it is called, it is an investment, subject to loss. There may be varying degrees of risk but there is always the risk of loss in these products. Saving is really only accomplished in a financial vehicle in which your money cannot be lost.
The current difficulty with saving is that traditional savings vehicles offer a very low yield. Currently, our thirty year (Long Term) Government of Canada Bond was yielding less than 2%. Across the Atlantic, investors and institutions are currently paying for the privilege of owning a two year German Government bond (Affectionately known as the Bund) as its yield has dropped to a negative -0.5%! This is scary stuff. When rates do rise, the price of these and other bonds will fall, in some cases quite significantly. Despite all of this, I still believe that we need an allocation of safe money separate from the ‘investments’ in a portfolio.
To get there, we need to think outside the box of ‘traditional’ financial planning. Exempt markets provide a great opportunity to invest with much less volatility and typically higher returns but it is not without its own set of risks. So how do we fit in the ‘safe’ money to balance a client's portfolio?
I strongly believe that participating whole life insurance is an important consideration for every investor, not only for its death benefit, but just as importantly for its living benefits. Properly designed whole life insurance provides you with access to guaranteed cash values during your life time, as well as providing coverage to take care of your family. Discover a new approach with an established product with a history of proven long term results and several guarantees built in around the safety and growth of your money.
Participating whole life policies are one of the very few financial products that can actually use the word guaranteed when it comes to your money. First off, this type of insurance contract is what they call a unilateral contract. This basically means that once the insurance company extends it, they are bound by its terms as long as the client continues to pay for it. The terms cannot be altered. This is why they do their underwriting up front to determine your specific pricing.
Whole life insurance provides a guaranteed tax-free death benefit (according to today's tax law), guaranteed cash values that will grow over time and never lose their value (again, tax-free according to today's tax laws), and guaranteed access to your cash values when you want them.
The reserve balance to support these policies is overseen by the government body known as OFSI (Office of the Superintendent of Financial Institutions). Additionally, there is also an industry insurer called Assuris, which guarantees that it will provide capital to help support the policy should an insurance company ever simply fail. Needless to say, this product category is very safe in Canada.
Traditional theories such as asset allocation and the financial planning pyramid still hold merit, but we need to think outside the box. By including a safe, guaranteed participating whole life insurance policy to your client's wealth building strategy, you can potentially satisfy the requirement for safe money (as well as providing asset protection and insurance needs), and achieve reasonable rates of return that exceed those currently possible with traditional fixed income products. While each policy is unique, most policies provide rates of return on your cash typically between 3 to 5% (tax-free) with no risk of loss. With a whole life policy, you put a safety net under your portfolio strategy and help balance some of the risks inherent with investment volatility. Clients are crying out for alternatives to the cheap rates on GICs at the banks and the roller coaster ride in the public markets. Clients and advisors alike are looking for alternative solutions for their safe money They want alternative solutions and they are willing to listen. For some clients, participating whole life insurance is the best option for growing your money safely and doing the right thing by the client at the same time. After all, isn't that our primary objective as financial advisors?
Douglas Guest graduated McGill University and Wharton School of Business and is a fully licensed life insurance advisor. Douglas is a member of National Best Financial Network and is also the co-author of two best-selling books on Whole Life Insurance: "The Wealthy Physician: The Canadian Edition" and "Live Your Life Insurance: The Canadian Edition." His passion is to help educate his clients so that they can make their own informed financial decisions. You can find and connect with Douglas Guest online at https://ca.linkedin.com/in/douglas-guest-979b88b7.