Whether it is life insurance or investments, our clients always want what may be working now rather than keeping their focus on the future. It's called the fear versus greed curve.
? As markets rise, the typical investor believes everyone is making money. These values will continue to increase. Their greed steps in and they buy high. However, they usually catch on to the rising market as it is about to end.
? When markets decline, typical investors believe the sky is falling. Of course, they wait until it is near the bottom before their fear kicks in. Then, they get out. They sell low.
When the XYZ Mutual Fund is being touted for gaining 20%, this is not the time to buy it. It's simply the time to wish you had purchased it a year ago. That's buying high. See, it's all about freshman physics. What goes up must come down. Nothing goes up forever. And for today, it's good to remember that nothing goes down forever either. Economies, like physics, look for equilibrium.
Today, whole life insurance looks like the greatest thing since sliced bread. Especially after the 2001 mortality table adjustments, the product looks fantastic right now, given declines in interest rates (universal life) and stock markets (variable life). However, this is not necessarily the best time to buy whole life.
Remember, "those who do not study history are doomed to make the same mistakes over and over again."
Remember the 1970s. We had two products: term (with premiums increasing annually); and whole life. The investment elements of whole life (cash value and dividends) are based on the general account of the insurance company, which was invested primarily in long-term, investment-grade debt (bonds and mortgages). As interest rates increased, the value of long-term debt instruments decrease.
Life insurers were hemorrhaging cash. Owners were borrowing cash value at 6% or 8% and buying CDs at the bank in the teens and low twenties. I moved to New England in 1980 and closed my mortgage on New Year's Eve at 18%. I felt really good about that when interest rates crossed over 20%.
The 1980s brought a proliferation of universal life policies. The investment element was based on short-term interest rates. We were paying in the teens and showed a conservative alternative return at 10%, since we thought that interest rates were never going to go below double digits again. Universal life would have been a great product in the early 1970s, before interest rates increased. However, people bought it when interest rates were at their highest–once again, buying high.
In the 1990s, asset allocation seminars were taking place everywhere. The 401(k) plan was touted because it gave investors the opportunity to make their own decisions about long-term debt, short-term debt, and equities. The insurance companies' response was variable life insurance. Those products worked pretty well through the roaring 90s–until September 11, 2001.
