Alright today we are going to discuss
the topic of inflation
and rising interest rates
and how that can impact
whole life insurance policies
when maximum cash value is the goal.
So the topic of inflation
and rising interest rates
is a hot topic right now because it's real
we're shooting this video in early May
and if we go back to April even March
interest rates are higher today
than they were 2 months ago.
Inflation
we don't even need to read anything about it
we can just go to the store and shop for food
and we know that it's real right now
so how will this impact
whole life insurance policies?
Will the rise of interest rates continue?
And depending on what expert
I read or listen to
I hear mixed opinions.
Here's what I do know
and what I have more confidence in
and I'm going to back this up
with some history
and conversations and data points I have
from insurance companies
some of the major
mutual life insurance companies
which are in my opinion
some of the smartest institutions in the world
when you look at how they have
their finger in the pulse
of the financial markets.
I had a conversation this was December 2019
or early 2020 before COVID hit
with MassMutual
this was right after they had updated
their life insurance product portfolio
to comply with the new
mortality table updates
this was back right around
the beginning of 2020
and they made a comment
the comment went like this
the new product portfolio
is a bit more dividend sensitive
the reason why Steve
is we feel
so this is MassMutual
we feel that the low-interest-rate environment
is going to remain low
for at least another 10 years
we don't see interest rates coming up
over the next 10 years.
Now this was pre-COVID
obviously COVID hit and accelerated things
in so many different ways
when COVID first hit
interest rates went down
even lower than they already were
at a very very fast pace
now they're starting to come back up.
Now we're in 2022 May 2022
what recently went into effect
was the 7702 change
this was an update
in the life insurance industry
it mainly impacted
whole life insurance products
where there has been a reduction
of guaranteed rates
the guaranteed rate used to be 4%
it's been at 4%
with whole life insurance products
really from 1980 through 2021
2022 now
all new whole life insurance policies
have a guaranteed rate
that ranges anywhere between 2% and 3.75%
the lower guaranteed rate
really allows insurance companies
to shift some of the risks
away from themselves
back to the policyholder
not to say a whole life insurance policy is risky
but what it does
is allow a lower guaranteed rate
allows a life insurance company to guarantee
a lower death benefit to a policyholder
there's more upside potential
based on dividends
but I've got a lower guarantee
so why did that change happen?
Well a big reason why that change occurred
is (1) interest rates and the environment
had been very low for a long time
that was putting a lot of pressure
on life insurance companies
remember when they go to acquire assets
they're looking for competitive returns
for their portfolio
but they're also looking for aaa rated assets
they can't just go dump a bunch of money
into the stock market
so when you look at their overall portfolio
you will see companies
have a very small percentage
of their general account portfolio
invested in the market
but for the most part
they're looking at aaa rated investments
it's got to be safe
so it does not negatively impact
their safety ratings.
So again that 7702 change
why it occurred is (1)
interest rates have been low for a while
but that conversation
I mentioned I had with MassMutual
in early 2020
that's a big reason why as well
companies anticipated
that the interest rate environment
was not going to increase
for a long period of time
they felt it was going to stay low
not too long after that
literally several months after that
inflation begins
hyperinflation we could call it
and then also what do we have?
Interest rates are coming up
so my question as I try to stay calm
let's look at everything
if I'm flying a helicopter
I can look at it from above
rather than be in the storm
and then I panic
is this just happened right now
if I rewind the clock
back about a year and a half or so
or closer to 2 years
what happened when COVID first hit?
Interest rates were hiked down
even lower for a short period of time
now the opposite has happened
will it continue to go up?
Will it flatline for a while?
Who knows
we've got all the different predictions and such
but really who knows?
I don't know
and I'm not going to try
and pretend that I know
but from insurance companies
and what they know
that's really what I like to look at
as far as an indicator is concerned.
So if interest rates do continue to go up
if we have another
period of time like the 1980s
what will happen?
Specifically with dividend interest rates
is the question
because this is a good question
well when we look at history
what happened in the 80s and 90s?
Fortunately, I majored in history in college
I was not alive long enough in the 80s
I was born in 1988
so I was born during
a high-interest rate environment
that doesn't mean I remember
what was going on because I was a baby
but what happened
with dividend rates back then?
Let's take a look, shall we?
So here is MassMutual's
dividend interest rate history
going back to the 1980
the guaranteed rate
was 4% at this point in time
and depending on the product now in 2022
the guaranteed rate will vary with MassMutual
between 2% and 3.75%.
Now back to the point
1980 dividend interest rate 8.27%
what happened throughout the 80s?
What could you get a CD for back then?
How much was a mortgage back then?
Much higher than these dividend interest rates
but interest rates went up
dividends followed
now when an interest rate hike occurred
there was a lag
between when interest rates actually went up
and then we saw dividends follow
the reason why
is because an insurance company
must acquire assets that are available
that can allow them to participate
in the interest rate upswing
what they did back then
this was very easy for them
they could just buy long-term bonds
and hold on to the things.
If I could buy a 20 or 30-year bond
that was paying 16% or 18%
and hang on to the thing
how easy does that make my life
in order to turn around
and credit a competitive dividend?
Very easy
now if you fast forward to today
and really what's happened
in the over the past decade
is bonds are really not that attractive
it's difficult for insurance companies
to purchase bonds in bulk
and still pay dividend
or be competitive there
so we've seen that their bond allocation
has gradually come down.
If you were to go back to the 80s
you would see a lot of insurance companies
have close to about 80% of their portfolio
invested in bonds
if you look at it today
so here's several companies
but if you look at your 4 major mutuals
this gives you a nice snapshot
of where they're positioning their money
so invested assets
MassMutual they've been just
gradually decreasing over the years at 53%
you've got Guardian here 77%
then you've got Northwestern Mutual
and New York Life
all of those allocations were higher
I said Northwestern and New York Life
New York Life then Northwestern Mutual
all of those allocations were much higher
a decade ago
I have to go back
and reference the exact reports
but they've been decreasing
and they've been allocating funds elsewhere
where can they go that still provides
an attractive return?
That's the question
this way they can turn around
and pay a dividend to policyholders
from being competitive.
So here's the dividend history
let's actually go back
have some fun here
dividend rates
80s and 90s interest rates went up
dividends increased as well.
Interest rates though
what was the highest dividend you saw there
if we go back to this guy?
The highest dividend 12.2%
if we look at Guardian's
dividend interest rate history
let's take a look here
what do we see here
going back to the 80s
on the other side of the screen?
I have to scroll down a little bit
there we go that's better
we stuff it all in one chart
which I don't mind actually I like that
but 13.25%
not bad
but if I can get a CD
or mortgage back then for 18%
is that competitive
or would I look elsewhere and say
that doesn't really do it for me?
So it was at this point in time
where life insurance companies said hey
whole life insurance
it can't really keep up
with the interest rate environment right now
how can we become competitive?
Well what happened
is insurance companies came out
with what's called universal life
and variable universal life insurance
because whole life insurance
could not keep the pace
and what you would see
with the universal life policy back then
is the illustrations looked phenomenal
the reason why
is that these illustrations could be based
on the current interest rate environment
so if I could see
a universal life insurance illustration
with an 18% credited rate
how good is that picture going to look?
It's going to look phenomenal
so what the illustration depicted here
is I had a premium I would pay that
the cash value would grow over time
we've got that over here in green
and then if I'm at 18%
even 11% to 18%
what happens with the universal
life insurance policy
I've got costs that are associated with it
with universal life policies
I've got built in what is called
annual renewable term insurance
no matter what happens
with the universal life policy
as I grow older
the cost of insurance increases
with the universal life policy
the expenses will always exceed
the guaranteed rate on a policy
so I have less guarantees
with the universal life
but more upside
more potential.
On an illustration the gains
would always outpace the actual expenses
so it looks great
hey look at all this money should have
because interest rates are high right now
and the illustrations
assumed that interest rates
would remain high forever
now the reality
what happened a lot of lawsuits popped up
with life insurance companies
particularly with universal life
and variable universal life policies
here's why
rates came down
the policies delivered less
than what was illustrated
people were expecting
to have all of this money
you got to set expectations properly
it did not happen
so in short the expenses exceeded the gains
on the universal life insurance policies
and the policies blew up
policyholders did not have the money
they expected to have
they either (A) saw their policies lapse
or (B) had to pay more premium into the policy
to prevent a lapse
people that were using those policies
and taking income from them
really got into trouble
that's where some big tax bonds occurred
my point is
this is not an attack on universal life
that's not the point of this video
is a product was created back then
to keep up with inflation
and with rising interest rates
now with all that said
we've got all this stuff going on
new products
what can I use as an alternative
the industry's trying to keep pace
what stayed the same?
Or you've got the hair in the race here
zooming out of the gates
but then it just burns out
and loses the race
and then you've got the tortoise
the whole life insurance product.
Policies that were issued
back in the 80s and 90s
produced a net internal rate of return
somewhere between 5% and 6%
that was the net internal rate of return
so what I mean when I say that
is if we look at some historical policies
here are policies that lived
this is a 20-year study period
these are actual performance results
this is from a Blease report
which is an independent study
you've got Mass, Guardian
New York Life, Northwestern Mutual up top
there's the actual internal rate of return
this is on a 55-year-old male 4.2%
4.35%
Northwestern very strong back then 5.38%
depending on what time period you look at
here is a policy issued in 1980
from MassMutual
this study period runs through 2015
there you go
the annualized IRR is about 4.84%
I don't have the average here
but at this point in time
it was just over 6%
now these policies lived through
a high dividend rate environment
high-interest rate environment
that's a nice advantage there
today we're not in a high
dividend interest rate environment
so that's why I like to state 3% to 5%
regarding the net internal rate of return.
My point is
there's always ups and downs
that's always always going to happen
where people often make mistakes
is we get caught up in the noise
all of the commotions
I have to make a move right now
because I saw someone
really time things nicely
whether it's with the stock market
or they invested over in this other asset class
and I'm stuck over here
in this boring whole life insurance policy
that's where I say hey
things are really good elsewhere right now
whole life might not be a fit.
The same thing happened back then
as everything calms down
as the storm passes
there's my whole life insurance policy
that just kept moving along
now this is not to say whole life insurance
is the only area we should put money
no, it is a great asset class
the core benefits
of the cash value are as follows
safe, liquid
tax-free area to position money
just continues to move over time.
So I hope this helped
as far as providing a little bit of history
as to what has happened with inflation
and interest rates in the past.
In the future
who knows what will actually happen
but what we can bank on
is a whole life insurance policy
we've got the guarantees
associated with the product
and it'll continue to appreciate over time
we've got that safe
liquid
tax-free reliable asset.
I hope you enjoyed this one
if you did please hit the like button
subscribe for more
and as always I hope this helps.
Hey guys Steve Parisi here
if you enjoyed the content you just saw
please subscribe
like
and hit the notification bell
for future videos.
If you'd like more information
or to see some
custom policies for yourself
feel free to call
or email our offices
at the contact information below.