Gold Didn’t Pan Out

gold tumbles

April 2013: Gold dropped to its lowest level in two years – on top of a 10% fall over the past six months.

Gold was supposed to be a secure investment in an uncertain time – so much so that an April 2011 Gallup poll found that 34% of Americans thought that gold was the best long-term investment, more than another other investment category.

Then,  two years after its price reached a new high, it plunged to its lowest level in over two years, falling 19% since late 2011. This is the greatest decline in 33 years, amid record-high trading.

According to the New York Times, the crash of a golden decade of rising prices caught many investors by surprise. Morningstar reports that $5 billion  had flowed into gold-focused mutual funds between 2009 and 2010, bringing those funds to a peak value of $26.3 billion in April 2011. These funds lost half of their value:

It is a remarkable turnabout for an investment that many have long regarded as one of the safest of all. The decline has been so swift that some Wall Street analysts are declaring the end of a golden age of gold. The stakes are high: the last time the metal went through a patch like this, in the 1980s, its price took 30 years to recover.

In a time of plunging global interest rates, why did investors flock to a traditional  inflation hedge?  Why were they willing to buy at such high prices? It seems that many investors mistook gold for a product that could provide them significant protection against economic risk – more in line with an insurance product.

What’s A Safe Investment?

It’s certainly understandable that people would seek a safe haven at a time when many are losing faith in their political and economic systems. However,  given that there are few safe investments to turn to considering the low returns that interest-bearing products have been offering, the allure of gold was perhaps understandable:

inflation-interest-rates-1945-2011

Investopedia’s “4 Safest Investments Right Now” – which includes TIPS, I-Bonds, Short Term Bond Funds, and Bank CDs –  have such modest returns that they essentially just aim to preserve principal. Investopedia states:

Any one of these options represents a low-risk low-return solution to preserving principal. You won’t earn much in returns with these securities though. In most cases it will be just enough to keep level with inflation. If you need capital appreciation over the long term, you’ll have to take on more risk.

A Different Approach to Wealth Preservation

One financial vehicle that has recently been enjoying a resurgence of interest is permanent life insurance.  life-insurance-age-range

2012 was a very big year for permanent life insurance sales according to research and consulting firm LIMRA, :

  • Total individual life insurance new annualized premium grew 6% — the third straight year of growth.
  • Total individual life premium grew 12% in the fourth quarter — the largest growth recorded since the downturn.
  • Life insurance policies sold grew 1%  — the second consecutive year of positive annual policy growth.

The fourth quarter of 2012 was the biggest quarter for life insurance sales in a very long time – in fact, there hasn’t been a quarter in which all of the major product lines experienced growth since 2006. And the last time individual life insurance policy count increased two years in a row was back in 1980-1981.

Creating Certainty In An Uncertain World

Why the sudden resurgence of interest in life insurance? LIMRA’s Product Research senior analyst Ashley Durham attributes growth to a few different factors, including a continued attraction to guarantees and growth potential. What differentiates permanent life insurance from other financial vehicles are 3 unique benefit features:

1. Competitive Return Potential

high returnIn today’s volatile markets, secure financial vehicles that provide competitive returns are hard to find.  In an environment of such low returns, permanent life insurance’s cash value provides an interesting alternative.    and  put it this way in Advisor One:

Considering the premium placed on stability in recent years, investing in a permanent life policy might be the best bargain on the market.

2. Lifetime Guarantee

In addition to providing a cash value savings element, permanent life insurance provides a feature that other financial vehicles doLifetime-Guarantee not: lifetime guarantees.

Given increased life expectancy and declining health over time, there is no guarantee that the money you put aside for your beneficiaries will ever reach them. You are likely to need it first for medical or other expenses. However, if you own permanent life insurance, you can access policy cash values without surrendering the death benefit. There is also little chance of outliving a permanent life insurance policy, because permanent life policies can remain in force to age 100, and with some policies, to age 120. And, although you may be living on a fixed income as a retiree, life insurance premiums remain fixed for life, or can be paid up in advance.

3. Potential for Explosive Growth

A Wealth Multiplier: The transfer of risk is essential to life insurance. The risk of  a payout to you at death isn’t retained by you alone, but  spread out among all policyholders that the insurer does business with. All customers contribute money to the general account, which is invested, and then claims are paid from it when an individual dies. As a result, the  annual or monthly premium you pay is a small fraction of the benefit that will be paid to your beneficiaries at death.

Chart_SideBySide

Example: The chart shows a 65-year-old man who purchases of a policy with a $1,000,000 death benefit for a $26,000 annual premium. In the year of his life expectancy the adjusted Internal Rate of Return (IRR) of his death benefit is 5.88%, or, since he is not taxed, 8.17%.
If he passes away earlier, his IRR will be higher – as high as 108.28% at age 79.  
  • In other words, you don’t have to be a big saver to leave a substantial legacy to your beneficiaries. The death benefit paid to your beneficiaries can be many times what you paid into it.
Tax Efficient Transfer: The policy proceeds bypass the often lengthy and costly probate process, and are released to your beneficiaries immediately – which is when they are likely to need it the most – without taxation.

Short on Glitter – Long on Performance

pig

This resurgence of interest in life insurance is a reminder of the uncertainty of our times, and an indicator of changing consumer attitudes. Consumers are more knowledgeable, and LIMRA research indicates that more knowledgeable people are on the subject, the more likely they are to own life insurance. LIMRA found that:

Respondents who knew the most about life insurance. citing multiple sources of information attributing to their understanding of life insurance, either owned life insurance themselves or had heard about it through work, a seminar or financial planner. Most were older, more educated and viewed life insurance as important.

It seems that the smart money is leapfrogging gold.  Life insurance may lack the psychological appeal and rich associations of gold – no pirate ship ever went down with universal life insurance contracts in their hold – but what it lacks in luster, it makes up for in substance and performance:

  • Many gold investors bought high and sold low. However, life insurance is actuarially designed to be bought low and sold high – the premiums represent just a fraction of the proceeds.
  • While the price and value of gold fluctuate subject to general economic conditions and investor sentiment, permanent life insurance usually offers a guaranteed level premium and a guaranteed death benefit.
  • For your beneficiaries, life insurance represents “inevitable gain” tax free.

A dull, plodding performer, life insurance nonetheless provides dependable benefits – it provides down payments to help young families buy their first homes, college educations to launch bright careers, hard cash to pay bills when the earner is not there to provide.

Gold certainly may have a place in your portfolio. Financial planners typically recommend that you allocate a small portion of your portfolio to it to serve as a hedge against financial risk. However, consider how much more protection investors would have by placing a portion of that into permanent life insurance.
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