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The Cash Value Inside Your Family Bank Strategy A Safe Harbor in Today’s Chaotic World

Family Bank Strategy

In light of COVID-19 and the related stock market turbulence and uncertainty, many of our clients have asked how the cash values in their Family Bank Strategy policies are faring.

It is with comfort and assurance that I am pleased to report that Whole Life and Indexed Universal Life policies are actually humming along smoothly. Performing perfectly, just like they were designed to do.

When equity markets are up and the economy is running smoothly, it’s sometimes easy to overlook the value of the downside protection one gets from using cash value life insurance as an investment. Life insurance will never be your best-performing asset when things are good – it’s not supposed to be. But in times of turbulence, it can provide a stabilizing influence on your overall portfolio and a potential source of cash that can be drawn upon without having to incur market loses. When structured and funded properly, Family Bank structured policies are designed to provide moderate, steady growth with extremely low risk of loss.

To comprehend the true implications of the safe harbor created with permanent cash value life insurance, it is important to take a look at a few key differences between life insurance companies and other corporations, including banks, during times of market volatility.

1) Investment risk.

  • Insurance companies invest the premiums they collect from policyholders in long-term assets, such as bonds, to ensure that they can pay out insurance claims as they occur over time. The vast majority of the life insurance company assets are required to be used for high-quality investments, with approximately 85% invested in investment-grade corporate bonds and U.S. Treasuries, both of which traditionally perform better than stocks when corporate finances weaken.

    This means that insurance company investments are generally less risky when compared with the investments made by banks and their affiliates, whose structure and regulations do not limit their investment of lender deposits in a way that corresponds to their anticipated liabilities.

2) Insurance carriers are not allowed to use leverage.

  • Unlike they do with banks, investment funds and operating companies, government regulations prohibit insurance companies from using leverage to enhance their performance. This prevents any losses from being compounded during market downturns.

3) Insurance companies are heavily regulated.

  • Insurance companies can become insolvent. However, these scenarios are historically rare. This is because the states that regulate insurance companies take poorly performing insurance companies into receivership if or when their assets drop to approximately 90% of their liabilities. At that point, the insurer has approximately 90 cents on the dollar to pay off their liabilities.

In contrast, most financially challenged corporations are left with an extraordinarily small amount of assets or value when they go bankrupt, and creditors are typically fighting for a much smaller 10 cents or 20 cents on the dollar. Insurance companies have failed in the past, but due to state oversight and intervention, the companies and the industry ensure that payment of the company’s guaranteed obligations are made to policyholders.

In challenging economic times such as these, our clients are even more appreciative of the slow and steady 4% to 7% tax-free compounded long-term returns that Family Bank policies offer. Many of the dollars that our clients have allocated to their Family Bank policies are longer-term dollars that would otherwise have been invested in stocks or bonds.

Some of our clients own these policies inside their estates (incases where they intend to access tax-free dollars during their lifetime), while others have invested dollars that they had already transferred to an Irrevocable Trust for the benefit of their children or grandchildren (where the life insurance benefit component of these policies will ultimately enhance the amount of wealth that passes to the next generation).

In either case, it is in an environment like we have today that these kinds of policies are most appreciated because their value is unlikely to be impacted in any significant way by the volatility that is currently battering the rest of the economy. While these are uncertain and turbulent times, our clients can rest assured that the cash value inside their Family Bank policies are secure in an industry that has secured such assets for hundreds of years.

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