Life Insurance as an Asset Class

It’s all about diversification

Modern Portfolio Theory has a very simple premise when it comes to diversification: Look at your investable assets in their most basic asset class components of cash, equities, and fixed income – while, being mindful of your risk tolerance. Then create a customized asset allocation that combines these components in such a way as to maximize growth and minimize risk. Modern Portfolio Theory is nothing more than Modern Diversification.

Of course, there are some additional asset classes money managers may expand into: real estate, certain commodities (precious metals and petroleum, for example), and life insurance.

Life insurance? Certainly! Consider the two fundamental components of life insurance purchased for a lifetime: the underlying cash values (asset class = fixed income) support the death benefit, and the death benefit itself (asset class = cash). This is not to suggest life insurance as an investment. When acquired for the classic purposes of replacing an individual’s Human Life Value, or when used to provide liquidity to an estate, business, or charity, life insurance properly acquired can be an important part of an overall approach to asset accumulation over one’s lifetime.

Life insurance is most typically allocated into the fixed-income category for its underlying cash value, which is in turn invested in high-grade bonds to support whole life policies. At the other extreme, life insurance can earn Index Credits if policy reserves are deployed, for example, into an S&P500® Index account.

Regardless of asset class attribution, cash values should be viewed as a long-term asset. Life insurance is not a savings account (there’s no immediate access to your cash values in the first few years), and yet the return on its long-term accumulation value is very similar to the real returns of high-grade bonds when considering the tax advantage of tax-deferred accumulation on cash values. When the insured dies, the accumulations become part of the death benefit, for which there is no income tax – essentially, “forgiving” the tax-deferred accumulations during life.

It’s also about risk tolerance

Considerations of risk tolerance are the key to success when pursuing asset allocation’s approach to diversification. Risk tolerance is typically described by four distinct categories: Conservative, Balanced, Aggressive, and Very Aggressive. A “conservative” investor’s risk tolerance is so averse to the loss of principal that it results in less than 40% – sometimes only 20% – of invested assets being deployed in equities. The balance is in cash and fixed-income securities, such as taxable and non-taxed bonds. While this better assures preservation of value, it is often at the expense of returns, since there is a historic relationship between the amount of risk you are willing to take and the reward you may achieve for that risk. Also, when preservation of principal is the objective, purchasing power is often sacrificed and the real after-inflation value of the investment could actually be negative.

At the other extreme are the “very aggressive” investors, who will ordinarily have their entire portfolio invested in equities. While there is a possibility that such risk tolerance, properly deployed, could substantially overcome the “drag” of inflation, there’s no guarantee of a return of anything – including principal.

There are numerous subjective qualities that result in an investor’s style ranging the spectrum from conservative to very aggressive, and you should consult a qualified financial professional to help you determine your unique considerations around risk tolerance.

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Throw Back Thursday – The Power of Follow-Up

There is an unmistakable energy when a great client meeting concludes. You believe that the client is going to move forward and there is no way that this is going to stall. However, even the best client meetings have a remarkably short life if not acted upon.

After a great client meeting, how long do you think the impact lasts? A few hours? Maybe a day? Two days at the most? The quality of follow through is imperative. It serves three vital roles:

  1. It provides the information necessary to advance the relationship with the client.
  2. It enhances your reputation as a professional.
  3. It extends the “lift” or “energy” of the initial effort into the future.

Here is a good follow-up formula to use for all of your client meetings. Both good and the not so good meetings need follow-up…so make a plan and follow it.

  • One day later send them an email thanking them and recapping the details of what happened in the meeting. If you promised information or materials provide it here.
  • Three days later contact them via the phone to schedule a follow-up appointment or call
  • Seven days later follow-up by sending at least a hand written note or thank you card through the mail
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Antibody Testing is Here

Quest Diagnostics now offers COVID-19 antibody testing

Last week Quest announced they have started testing for the COVID-19 antibody using blood samples.

Antibodies developed by the body in response to a viral infection may provide potential immunity against future infection. According to the U.S. Food and Drug Administration, COVID-19 antibody testing may indicate that “the person has been exposed to the virus and developed antibodies against it, which may mean that person has at least some immunity to the coronavirus.” Antibody testing uses blood serum specimens and is sometimes referred to as serology testing. This test aids in detecting the presence of immunoglobulin class G (IgG). IgG antibody response typically develops by 14 days after symptom onset.

Antibody testing available for direct-to-consumers

Individuals can now request COVID-19 antibody testing for themselves online, without visiting a doctor’s office, through QuestDirect, the consumer-initiated testing business of Quest Diagnostics. The new service broadens access to COVID-19 antibody testing in the United States. Each test request is reviewed and, if appropriate, an order for testing is issued by a licensed physician. Individuals have the opportunity to speak with a licensed physician about their results. >>Read press release

Antibody testing available soon for life insurers

Since this is a blood test, insurance companies will be able to add it to their routine panel. Life insurance applicants will still have the option to have the paramedical exam completed at their home, or at a Quest Patient Service Center (PSC). This antibody test should be available to insurers later in May. >>Request more information

Please note: Antibody testing is not intended for use in individuals with an active COVID-19 infection, including individuals with symptoms. Patients suspected of having or confirmed to have active COVID-19 infection or disease may not visit Quest patient service centers, which are not equipped to collect the necessary respiratory specimens for molecular COVID-19 diagnostic testing. Patients who believe they may have COVID-19 are strongly encouraged to contact their healthcare provider.

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The “Next Normal”

The world is in turmoil. Our world of finance has turned upside down. We must adapt. We must transition to the “Next Normal” one day at a time.  Here are some quick tips of how to move forward.

Adapting to a Covid-19 World:

  • Identify what is in your sphere of control and where you need to shift.
  • You’re used to taking care of everyone around you; now it’s more important than ever to take care of yourself. Create consistency at home as much as possible.
  • Ask yourself questions from a different angle. What if……
  • All major changes begins with your mindset. If you don’t believe it will ever work, then it probably won’t.
  • Be innovative on how to interact with your clients now and in the future.
  • Step outside of your comfort zone, think bigger and pivot your fears into opportunities.
  • Remember the good!
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How Are We Coping?

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Wash Your Hands

Times are hard right now. Everyone is doing their best to cope with the “New Normal” brought on by the Corona Virus. Working from home. Kids out of school. Restaurants and bars closed down. Sports of all kind shut down. Isolation. It’s at times like this that I am thankful for colleagues who step up and help. One of my colleagues, Bob Seawright, writes a great Blog called “Above The Market” . Today’s article was written by Bob and I thank him for stepping up to provide us this great back story on why we need to wash our hands. Stay safe and enjoy.

Wash Your Hands by Bob Seawright

No instruction has been more consistent throughout the coronavirus crisis than the insistence that we wash our hands. Pretty much all the time. A lot more thoroughly and for a lot longer than we’re used to. The reminders are insistent, too, and sometimes annoying.

But they are important. Therefore, it is appropriate that we recall the tragic story of the patron saint of hand-washing. He’s Ignaz Semmelweis, a 19th Century Hungarian obstetrician who found lasting scientific fame, but only posthumously.

Semmelweis discovered that the often-fatal puerperal fever, sometimes called “childbed fever,” common among new mothers in hospitals at the time, could essentially be eliminated if doctors simply washed their hands before assisting with childbirth. Semmelweis observed that a particular obstetrical ward suffered unusually high instances of the disease and that doctors there often worked in the morgue right before aiding in childbirth but had not washed their hands in between. He speculated that “cadaverous material” could be passed from doctors’ hands to patients, causing the disease. He thereupon initiated a strict handwashing regimen at his hospital, using a chlorinated solution, for all who would assist in childbirth. Death rates plummeted.

Semmelweis expected a revolution in hospital hygiene as a consequence of his findings, but it didn’t come.

His hypothesis, that there was only one cause of the disease and that it could be prevented simply through cleanliness, was extreme at the time and ran counter to the prevailing medical ideology, which insisted that diseases had multiple causes. Despite the practical demonstration of its effectiveness, his approach was largely ignored, rejected, or even ridiculed. Things got so bad that Semmelweis was ultimately dismissed from his hospital post and harassed by the medical community in Vienna, forcing him to move to Budapest.

The story gets even stranger from there. In Budapest, Semmelweis grew increasingly outspoken and hostile towards physicians who refused to acknowledge his discovery and implement his protocols. Vitriolic exchanges ensued, in medical literature and in letters, and Semmelweis was eventually lured to an asylum where his opponents had arranged for his incarceration. He was beaten severely and put in a straitjacket. He died within two weeks.

The Semmelweis approach only earned widespread acceptance many years after his death, when Louis Pasteur developed the germ theory of disease (which offered a theoretical explanation for the Semmelweis findings) and Joseph Lister, acting on the French microbiologist’s research, practiced and operated using hygienic methods to great success. As a consequence, Semmelweis is today considered a pioneer of antiseptic procedures and something of a martyr.

Psychiatrist Thomas Szasz (highly controversial himself) summed things up aptly.

“[I]t can be dangerous to be wrong, but, to be right, when society regards the majority’s falsehood as truth, could be fatal. This principle is especially true with respect to false truths that form an important part of an entire society’s belief system. …In the modern world, they are medical and political in nature (emphasis supplied).”

What has come to be known as the “Semmelweis Reflex” is our tendency to reject new evidence or new knowledge when it contradicts our established norms, beliefs, or paradigms.

The Simmelweis Reflex and other decision-making biases compromised the containment of COVID-19. In classic examples of the planning fallacy, governments have consistently underestimated exposure and overestimated their control of the situation. For example, less than a month ago, U.K. Prime Minister Boris Johnson spoke of shaking hands “with everyone” and business as usual, while Italy was in disaster mode. He has since reversed course, closing schools and imposing a societal lockdown, and contracted the disease himself.

Stopping COVID-19 will require harsh and difficult measures. St. Louis Federal Reserve President James Bullard suggests that we “[f]rame this as a massive investment in U.S. public health.” It is also a massive investment in survival. Yet, in classic displays of confirmation bias and overconfidence, individuals young and old have readily latched onto narratives that suggested the pandemic might be a general threat, but isn’t much of a threat to them.

Lockdown, Manhattan style: an incredibly grim photo of all the Caviar delivery guys waiting to pick up orders of $70 veal parm at Carbone https://t.co/OWM7fDvoWB pic.twitter.com/leCtqHmzwK

— Tom Gara (@tomgara) March 23, 2020

When we grab a glass of what we think is apple juice, only to take a sip and discover that it’s actually ginger ale, we react with disgust, even when we love the soda. We quite naturally try to jam the facts into our pre-conceived notions and commitments or simply miscomprehend reality such that we accept a view, no matter how implausible, that sees a different (“alternative”) set of alleged facts, “facts” that are (conveniently) used to support what we already believe.

As C.S. Lewis wrote in The Magician’s Nephew, a children’s book that is much more than that, “What you see and what you hear depends a great deal on where you are standing. It also depends on what sort of person you are.” If you want to be the sort of person your children (real or potential) look up to, take this crisis seriously. When treatments for COVID-19 are developed and, ultimately, a vaccine produced, we’re all going to have to take our medicine, literally and figuratively. Until then, stay inside. Practice social distancing. Follow the recommended procedures.

And don’t forget to wash your hands.

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Corona Virus Concerns? Look to the Past

During the last week of February 2020, the S&P 500 lost 11.49% — the worst week for stocks since the 2008 financial crisis — only to jump by 4.6% on the first Monday in March.1 Then we saw an even more dramatic drop as the Corona Virus started to spread and the market tumbled to numbers lower than when Trump took office in January 2017. By all accounts, the drop was largely driven by ever-increasing fears about the potential effects of the coronavirus (COVID-19) and its ultimate impact on the global economy. Although many market observers contend that the market was overvalued and due for a correction anyway, the unpredictability, strength, and suddenness of the historic tumble was unnerving for even the most seasoned investors. If recent volatility is causing you to consider cashing out of your stock holdings, it may be worthwhile to pause and put recent events into perspective, using history as a guide.

A look back

Since the turn of the millennium, the market’s negative response to health crises has been relatively short-lived. As this table shows, approximately six months after early reports of a major outbreak, the S&P 500 bounced back by an average of 10.47%. After 12 months, it rebounded by an average of 17.17%. Although there are no guarantees the current situation will follow a similar pattern, it may be reassuring to know that over even longer periods of time, stocks typically regain their upward trajectory, helping long-term investors who hold steady to recoup their temporary losses, catch their breath, and go on to pursue their goals.

Epidemic Month end* 6-month performance, S&P 500 12-month performance, S&P 500
SARS April 2003 14.59% 20.76%
Avian (Bird) flu June 2006 11.66% 18.36%
Swine flu (H1N1) April 2009** 18.72% 35.96%
MERS May 2013 10.74% 17.96%
Ebola March 2014 5.34% 10.44%
Measles/Rubeola December 2014 0.20% -0.73%
Zika January 2016 12.03% 17.45%

What should you do?

First, keep in mind that market downturns sometimes offer the chance to pick up potentially solid stocks at value prices, which could position a portfolio well for future growth. Again, there are no guarantees that stocks will perform to anyone’s expectations — and decisions could result in losses including a possible loss in principal — but it may be helpful to remember that some investors use downturns as opportunities to buy stocks that were previously overvalued relative to their perceived earnings potential.

Moreover, if you typically invest set amounts into your portfolio at regular intervals — a strategy known as dollar-cost averaging (DCA), which is commonly used in workplace retirement plans and college investment plans — take heart in knowing you’re utilizing a method of investing that helps you behave like the value investors noted above. Through DCA, your investment dollars purchase fewer shares when prices are high, and more shares when prices drop. Essentially, in a down market, you automatically “buy low,” one of the most fundamental investment tenets. Over extended periods of volatility, DCA can result in a lower average cost for your holdings than the investment’s average price over the same time period.

Finally and perhaps most important, during trying times like this, it may help to focus less on daily market swings and more on the fundamentals; that is, review your investment objectives and time horizon, and revisit your asset allocation to make sure it’s still appropriate for your needs. Your allocation can shift in unexpected ways due to changes in market cycles, so you may discover the need to rebalance your allocation by selling holdings in one asset class and investing more in another. (Keep in mind that rebalancing in a taxable account can result in income tax consequences.)

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