I own shares. This should not be a big revelation to anyone. I think I have been quite transparent about my belief that full life insurance and indexed universal life insurance are complements – not benefits – to shares. Some – very much in fact – of my personal stock choice would probably be considered a bit exotic – with great risk. And it has worked pretty well to my advantage.
So as a thought exercise, I decided to do one of the dumbest things I could do and plug some of these stock symbols into the Portfolio Visualizer and see what would have happened if I had skipped an entire life insurance purchase I made a decade ago and bought the said shares instead.
The shares performed better
Get ready for some amazing news … the stocks performed better – in theory. The reported value of the shares right now is higher than the cash repurchase value for the entire life insurance I have. So I guess I get a point or two for BTIDs.
So do I regret my decisions? No.
10 years ago I had no idea what was waiting in the market. It’s super easy to look back at actual results with money you never invested and fantasize about what could have been if you had only earned that decision; it is something completely different to actually do it and deal with the consequences of the fluctuation in the meantime. Here is the historical growth chart with values for the best option in the group:
Noticed very early on that there was some disappointment. Then a decent period with fairly constant growth, but then in 2019 and during the first half of 2020 a huge fall in value. In fact, the growth chart here is logarithmic in order to adequately capture the magnitude of changes when the overall account balance changes, and the large decrease in 2020 represents a decrease of 50% of the account value. This is a reduction that occurred in about a 30-day period. Would I have had the iron will to keep the course? I can not honestly say yes.
But there is more to this story than just the hypothetical investments that end the randomly selected period with the highest account balance.
Timing is everything
What if somewhere in between I needed some of the money? Remember we are talking about a general brokerage account and not something like an IRA where access to the money would be a no-go. I would sell some of the shares and take the cash. But would it be a good or bad idea to sell at that very moment? If I needed the money in March 2020, it would have been a terrible time to liquidate the position.
In addition, it will liquidate a position in a general brokerage account with a capital gains tax. This adds additional complexity to the easy task to take my money and use them when I want / need.
Cash value life insurance does not care about any of these considerations. There really is never a wrong time to access cash from it. Because it does not fluctuate in value, it does not care what happens more broadly in the market. Loans generally provide the opportunity to continue to earn both guaranteed interest and dividends or index interest, so even though I have actually taken out some of my money by taking out a loan against the insurance, I do not lose the income on the insurance.
In addition, I can take money from the insurance without tax liability. This allows me to manage cash needs without complicating my life with future tax debts.
I do not want to make this one versus the other discussion because I seriously do not think there is ever a right way to look at this. Full-life insurance and / or indexed universal life insurance are phenomenal tools that work excellently as a low-risk portfolio diversifier. Owning what I do actually gives me the peace of mind I need to hunt for extremely risky stock options. Market fluctuations do not really bother me because I know that I have a large low-risk position that is growing very competitively against its similar risk profile counterparts. The two not only have a low correlation to each other; they have zero correlation to each other. My life insurance cash value does not care what the Fed ultimately does with interest rates, how long Vladimir Putin will be a jerk to the Ukrainians, or what happens to the price of heating oil in the meantime. My stock choices seem to care … a lot.
I am long-term optimistic about the US economy and the stock market. I believe it will continue to expand and I also strongly believe that equities will ultimately outperform life insurance with cash value. The problem for me is when specifically stocks will perform well and not well. It is the critical component of my need for diversification.
It is easy to overlook the importance of this diversification. It does not really sink in for most people until they experience the pain of what this is trying to avoid or minimize, and then it is too late.
I do not want to pretend that I fully understood all this over 10 years ago when I started buying life insurance for myself. But I’m sure I got at least some of that understanding explored and made the decisions I did.