How to survive the next bear market

As stated before, I'm working on a retirement plan that can allow me to survive well during the next bear market. I have specific key components that must be satisfied for my retirement plan, which include:

• First and foremost, it must be supper safe as my family will rely on it if the end of world crisis unfortunately hits us and lasting for 10-20 years 
• It must be an efficient wealth growth strategy with compounding effect, i.e. the longer I hold it, the fast the value of the asset will grow, translating into more money I can use when needed
• Importantly the strategy should only grow without much downside risk, even if all my bet on the future of the financial world is totally wrong
• It must be tax-efficient. Not only it has to grow tax-free, I also want it to be tax-free when using it
• It also should have the legal protection feature so that the asset won’t be impacted even if I get some legal troubles during my life
• The strategy should also be flexible enough so that I can use it any time for any purpose without much limit
• It should also have an estate planning function to the effect that, if not used up during my life, it can be safely passed on to my heirs tax-free

You may think I may have lost my mind to look for such a strategy that sounds like impossible to exist. Indeed it took me several years before I finally found it. Thanks to my contacts with some top financial gurus who have deep knowledge in this field, I was introduced to this unique strategy a couple of years ago. While I have full faith and trust in them, I still could not believe it as it really sounds too good to be true. So I spent a lot of time to research and study it via different sources and contacts and finally I’m fully convinced, so much so that I have started to put in a lot of money into the strategy. So what is it? It is a Whole Life (WL) insurance based strategy. I immediately hear the burst of laugh from many of you: are you kidding me? What’s unique with WL, a century year old insurance type that costs a lot of money just for passing some money to heirs? Indeed that was also my initial reaction to the idea but after understanding how it is set up and works, I’m totally convinced! Let me explain.

 

It is true that WL typically costs a lot of money to set up and maintain it for life. But let’s put the cost aside for now and think about all the other features I mentioned above, WL truly meets all of them: it is extremely safe, independent of the stock market.  It grows cash value (CV that is the living benefit for yourself) tax-free in compounding that can be used at any time for any purposes during your life. It is legally protected (within the state law) and if not used up, it will be passed to heirs tax-free. So the real challenging question is its cost. That’s why I mentioned the experts who introduced this to me as there is a way to substantially reduce the cost to make it very efficient for wealth growth and safely. How?  Well, this requires you to understand why a WL costs so much money. It is largely due to the commission cost that is dependent on the size of the insurance part [i.e. the death benefit (DB) for heirs] for each WL.  Typically for most people, when they think about life insurance, they are thinking about the death benefit, i.e. how much it can be generated at death and passed on to heirs. For that purpose, it indeed costs a lot and is very expensive. But how about if we turn a WL into a “saving account” by maximizing the CV portion and minimizing the DB? By doing so, we virtually turn a WL like your personal bank in the sense that you can grow the CV as much as possible and tax-free and you can use this portion for any purposes at your wish during your life time (not when you die). Since the DB has been minimized to the lowest amount allowed by IRS (yes, required by IRS to have minimal amount in order to be qualified as a tax-efficient life insurance), the cost for the policy is thus substantially reduced, by half at least. In order to reach this goal, you must find an agent, who not only can understand this strategy (believe me, most of them don’t) but also is willing to work with you for maximizing your benefit. Not many are willing to do so as it means much less commission for them. Actually this may become really a hard part for setting it up appropriately!     

Now comes with the fun part for my long-term plan.  There are two parts:

• Given that this strategy is so safe not impacted by the market in any way as long as the insurance company is solid and sound, legally and guaranteed I can count on at least 4% annual growth on a compounding basis. Although the additional 1% dividend is not guaranteed as it is based on the company performance, the company has paid dividends since its birth for over 150 years and has never stopped paying it, I don’t know why I should expect it to stop it now when the insurance business should be doing better in the next decade or longer (more below).  So personally I think the 1% dividend is also a minimal that I can count on. In other words, I’m growing my wealth in the policy at least at a rate of 5% compounding annually, which for me is the worst case scenario.  Based on this base scenario, I will easily have a couple of millions dollar cash value after 10 years that is available for me to use for any purpose in a tax-free manner. And more CV for me with longer accumulation.  While I’m not saying it will happen, but let’s just assume the worst case indeed happens in the next 10-20 years that I have lost everything in my risk assets due to market crashes or some other crises attacking me.  Even in such kind of end of world situation, I will still be able to stand firmly and live comfortably in my later part of the life with the cash money stored in my life insurance policy. Of course, most likely I won’t lose everything and will still be able to rely on the money from the risk assets. If so, the unused part of the big amount of wealth accumulated in the policy will just become my estate for the heirs and is tax-free as well. That’s kind peace of mind I want to have and I think it is good and necessary for everyone if he or she is serious about their financial future.  In summary, this is a wonderful wealth building strategy that is extremely capital efficient since I don’t need much money to maintain. Yes, I need to put in premium every year but this is just like saving money in the bank as starting from 3^rd year, each premium dollar put in will become part of CV 100% that can grow 5% annually. So the premium in most part is not cost at all if you truly understand how it works. And it is totally hands-free without me doing anything else. I virtually hire the world best bond investors to manage my money safely in a legally bounding manner with a guaranteed return.

• The second part is really exciting for me to anticipate, although it is still like a dream for now. As I have alluded to before, I firmly believe we are getting into a high interest rate era in the next 10 years or even longer. We are already starting to see the first inning of the rate increasing,  which may likely accelerate in the years ahead. If the economic basic is still working in this world, then we will likely see a huge inflation crisis that could be worse than anything we can imagine for now.  The last high inflation we saw triggered the interest rate to go up beyond 15%. We may see more than that this time. This will be very bad in most part of our life but it will be great for businesses thriving on high interest rates. Insurance companies are typically doing great in the high interest rate environment. I include a screenshot here for your information regarding how much dividends insurance companies paid for Whole Life policies during the high interest rate era back in 1990s. As you can see, 5-10% dividend rate was commonly seen across the board. So how much more money will be generated in my policy if the floating dividend goes to 10% or even higher in the next 10-20 years? Just use your imagination! It could double, triple or even more my base scenario above. It may sound like a fiction but it has happened not too long ago in our life and may recur with a reasonably high chance. No it is not guaranteed but I bet it will happen to some degree at least.

 

It took me quite some time to finish this blog but I’m glad I did. I enjoy writing to share good investment strategies. And now I can easily share this not-so-easy-to- understand  wealth building strategy to friends when they ask as from time to time I got such questions from them.  Let me finish this writing with some final thoughts:

• Since this strategy is largely dependent on the safety of the insurance company, it is critical that you need to work with a solid company with long and proven track record, ideally over 100 years at least to ensure they have gone through all kinds of crises and disasters but still survive well. Not all companies are created equally as you can easily understand. In general, consider non-listed private insurance companies, since listed companies have to meet the investors’ demand, for which they often have to do some risky businesses as we saw during the 2008 crisis.
• Agents can help you a lot to educate and screen for good companies and products but unfortunately it Is not easy to find agents who are willing to put your interest first. Try to find an agent either you know well or referred by someone you trust who has got first hand experiences.  For this strategy, you better find someone who is specialized in it and knows all the aspects very well. Not many can say that unfortunately.
• It may sound like a strategy only good with big amount of money. Actually no, it can work with any amount, small or big. Due to the compounding effect, even a small amount can generate a big amount given a sufficient time period. While it is generally the early the better, it can still be great for people already in 50s or 60s+. The premium rating is largely dependent on the health status, not so much on the age per se.  So even a relatively old person may still enjoy a perfect premium rating.
• This is especially a great strategy for young people due to their long life span that will allow the compounding to show its greatest magic. For this reason, I have helped my son in 20s to also start with his own plan. With relatively moderate amount of money put into work, he may very well be financially free in his 40s simply based on this strategy.  In this context, time is money!

I hope this blog can open your mind to think about something you may have never thought about before. I have wasted quite a few precious years with no action for further learning and studying when I was initially introduced this strategy as it sounded too good to be true. But at least I have got it done with great satisfaction and peace of mind. I hope you are smarter than me and will take immediate action to learn and explore.  Remember, we have enjoyed nearly 4 decades long of a gigantic bull market. Statistically and also in reality with all the financial messes we have seen to date, the chance is very high we are going to see another gigantic bear market that may last for 10 years or even longer.  This strategy can prepare you for the worst but will still reward you dearly even if no long lasting bear market ever comes again.