Background: Clients were moving through our PathWise™ Comprehensive Financial Planning Process. After evaluating their goals and objectives, a certain level of non-retirement (or non-qualified, as industry jargon would title it) that is well diversified, but not at significant risk was called for. Their only daughter had just finished college and a small inheritance was recently received, so they had the funds to dedicate to this. The clients wanted some upside potential but were concerned about the bond market and the possibility of rising interest rates.
Our Case: This is an increasingly difficult challenge. If we enter into a rising interest rate environment, the bond market is not likely to bode well. Yet bonds are what are often relied on to bring stability or safety to a portfolio. As this is non-retirement, an annuity is not as appealing, because that would convert what could be capital gains tax on earnings to an ordinary income tax on earnings. We also find the annuity offerings and interest rates are pretty weak in general, which is not uncommon in such a low interest rate environment.
The Question: How can we help this client build the account and provide a manner to accumulate cash that will provide some upside potential in the market, but also have a bit of conservative holdings built in; yet in a program that will not be susceptible to significant impact if (which may be a when) interest rates start to rise?
The Results: There is really nothing new under the sun. Everything that seems to be new is really just a combination of already existing things. Using this premise, in an effort to achieve about a 60/40 portfolio, we combined what we offer as a rather robust equity allocation for the 60% of the portfolio desired in equities. We then positioned the remaining 40% in a conservative cash accumulation life insurance policy that also happens to have this unique and higher interest Premium Deposit Fund with a guaranteed 3% interest rate by the issuing company. The combination of the two allows for us to have a “break even” in year one and it only goes up from there…a comment we cannot make with confidence on the bond markets right now.
Let’s look at some documents and returns from the allocation on the equity side and combine this with the cash accumulation policy properly designed to meet this objective.
Bottom Line: People discount “whole life” insurance because it is confusing and clients may feel stuck. When properly designed for this objective, it can be a very appropriate tool! So where we ended with three separate accounts to get to the end goal, this strategy provided the flexibility and a solid approach to get the clients to the ideal allocation that met their objective. And every bottom line at B&E must be one that meets the clients’ objectives; after all…it is With Your Interest in Mind!
This is a hypothetical example for illustrative purposes only. The experience of this client may not be representative of the experience of all clients and is not indicative of future results. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as financial planner. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. Financial Planning and Investment Advisory Services offered through B&E Investment Advisers, Inc., a State Registered Investment Adviser, Business & Estate Advisers, Inc., B&E Investment Advisers, Inc. and B&E Pension Advisers, Inc. are separate entities from ValMark Securities.