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The Personal Insurance Advantage for your Finances

Some may say it is too soon to start planning for the next financial upheaval but if 2008 taught me anything is that you can never plan soon enough and the best time to start is while you feel the sting of the current situation. In 2008, I was able to transition to a new industry, insurance, from what many would consider a great industry to be in, Chemical Engineering. I did this for several reasons, but the one that has paid off the most for me is the fact that the insurance industry was built to grow during the good times and boom during the downturns. So what can you do during this time in regards to the insurance industry if you do not plan on making a career move (which might not be a bad idea these days as our agents are doing a great job helping clients virtually)?

Use this time to learn about insurance vehicles that can inoculate you from financial illness.

Traditional Financial Vehicles for your Assets

This isn’t a one or the other post, this is about why multiple vehicles should be used. Many people argue that you should keep your emergency funds in a savings account at the bank and invest the remainder in the market with an indexed mutual fund or some other strategy that is supposed to give you an 8-12% return over the long term. That is all well and good but what happens when you break down the numbers?

That savings account value is being destroyed by inflation. When will .25-1% returns ever beat 2-3%?

The managed market funds are not giving you the returns it may seem. As Jack Bogle, the founder of Vanguard and modern mutual funds once said, “Who wants to invest, 100% of the capital, take 100% of the risk and get 30% of the returns?” For more information on this side of things listen to Jack Bogel speak with Frontline. If someone is managing your retirement in a tax-deferred account (401K, IRA, or the like) you must watch this! If you have never watched this and do anything with helping people with their finances or insurance, shame on you, take the time, Bogel is a legend.

So, what should you do with those two accounts and what else is there?

In Times Like These…

From the savings account perspective it is a great place to keep some short-term need money that you can quickly access, but let’s all be honest with one another. How long do we keep money in a savings account without raiding it when the slightest thing pops up? Have a month's worth of expenses set aside in your savings account sure, but more than that and you may be using your money very inefficiently, especially if the interest rate you are earning is less than 2%.

How about that mutual fund, indexed or not? Invest for your future but keep an eye on your time horizons. There are no exact percentages, everyone has their formula for this but in no way should 100% of your investable excess go into this type of retirement account. It is great that the CARES act is allowing people to withdraw up to $100,000 from their 401Ks right now, penalty-free, but this is an extraordinary situation. What happens when the situation is just localized to you? What happens when you can do that withdrawal and the market is down 25%? If you need to pull that money then you miss out on the ability for that money to grow back to at least what you had before, once you gain double the percentage of the percentage you just lost (do the math).

The Insurance Advantage, for Now, and Later…

So, here is my thought that everyone should strongly consider. Talk with an insurance professional that has the ability to structure Cash Value building insurance products in a way that grows your dollars the most efficiently. Here are two reasons why:

1.      A highly competitive savings vehicle – Life Insurance is not an investment vehicle, it is a savings vehicle, one of the best. Your funds are secured by companies that are typically required to have 100% or more in reserves, versus 10% for the typical bank.

During the last recession and its recovery,2007-2012, 468 banks failed according to the FDIC. During the same period on 10 insurance companies in the US became insolvent according to the National Organization of Life and Health Insurance Guaranty Associations.

So, banks failed 46 times more than insurance companies during a crucial period for anyone with savings in the bank. The silver lining for those with their funds in banks, an insurance company had them covered for up to $250,000. Not sure how quickly they received those funds though.

What about the insurance companies that went insolvent and their policyholders? Well, those policies were also insured by the state Guaranty Insurance Fund where the policy was purchased, so they were in effect doubly insured. 

2.      Access to your Funds without depleting your funds – The great thing about cash value is it is always available should you need it. However, you can allow it to continue to work for you while you use it for current needs.

This is the way to have compound interest work for you, put your money in a place where you can still access it without removing it from where it is being compounded yearly!

Look at the following example. Your Cash value is earning 4% for you on one side while you take out a loan from the insurance company at 5% on the other.

If you had $20,000 built up in the cash value of your insurance policy and borrowed $20,000 from the company with your cash value as collateral, after paying the loan back with interest, basically to yourself, you would be ahead over $1600.

Try getting your bank to do that! This effectively allows you to create your own personal bank, some people use the phrase privatized banking or infinite banking, whatever you call it, it should be working for you.

Take the Advantage, for Now, and Later…

During times like these everyone gets a huge dose of reality however history shows us that we forget the painful moments very quickly. That is why I want to write and post this now and not wait because emotion is the energy of action. I am not advising rash action, but stepwise action that can help many families and individuals be better prepared, 5, 10 or 15 + years from now when we go through this (or some version of this) again.

Have your savings account, have your money in the markets, but also have your own personal bank that you have access to when times get rough. It is great that the government is stepping in this time, will they do it next time, will your next time be one that they even do it for?

Having the right kind of cash value insurance vehicle covering your family is the way legacy wealth is built. It is a tool that can be used to fight debt. It is a hedge against taxes, as you may never have to be taxed on the gain in the policy. And it is protection from creditors and lawsuits in a company where I’m going to sue you is heard from the poor house to the white house all too often.

I could go into more and I will expound on this in the coming weeks, along with talking about a powerful investment management company called API Financial Advisors and how their portfolios have taken only a slight hit in this downturn while having participated in all the gain of the recent bull market.

In the meantime, you can learn more about the advantages of your own personal bank powered by the strength and security of some of the best in the insurance world here.

Edward Pritchett

Edward Pritchett is a Senior Partner with Symmetry Financial Group, Founder of the Pritchett Agency and a partner at API Financial Advisors among other entrepreneurial endeavors. He is a father of four and he and his wife enjoy living between their hometown of Asheville, North Carolina and their new home in Dorado, Puerto Rico. He firmly believes that the proper application of knowledge can change the financial outcomes of families across America, this, in turn, will change America, restore hope, and keep it great.