Life Insurance, Muni Bonds, and Rising Rates - YouTube

Hey guys this is Hutch with BankingTruths.com.

Today we're going to talk about bond not James Bond

but Fred bond.

And Fred stands for Federal Reserve economic

data and they've provided this nice graph on

a municipal bond index that is discontinued

but gives us a pretty good sample size here starting sometime

in the 1950s go into the mid to late 2000

teens and we can go ahead

and talk about a subject that a lot of my clients are interested

in. Why do I have to use life insurance can I use municipal bonds?

And the truth is you can

but after you watch this you may not want to.

So oftentimes the people that recommend municipal bonds I

noticed are baby boomers because they experience this.

I mean he really couldn't miss.

So what you're looking at here is the

X excuse me, the Y access is the percent

yield so this is the interest rate that you could earn tax

free or at least federal income tax free from

municipal bonds and if you bought them from your state their state income tax free too.

And when bond interest rates

go down existing bonds go up

and I'm going to draw it free here

with my little teeter totter because I think this best

describes it so there's an inverse relationship

between yields

and principal value in bonds.

And the reason why is because of this: when

interest rates go down what

happens is the new bonds aren't

as attractive as your old bond

and so your old bond goes up in value.

Right? If somebody wants to buy your old Bond on the secondary market it's yielding

more than the current bonds they can buy.

So they're going to pay you a premium.

Now conversely when interest rates go up

what happens to the price of existing bonds?

Well they naturally go down

and that's because why would I buy your old junk bond

at those low interest rates that you got in 2018

whatever whenever you bought them when I could buy these new bonds

that are paying a higher interest rate why would I even mess

with your old bond? So if you want me to take it off your hands I'm going to do so at a discount.

So when I asked most people which way to interest

rates have to go.

Almost everybody says they have to go up.

Now we don't know at what point

or what trajectory

but they're probably definitely going to go up probably definitely

that's uh yeah they're probably going to go up.

As you can see here if we go all the way back to the 50s I mean we're

very near historic lows here.

So they might stay low for a while

but I think everybody agrees that this is like a coiled spring

that is going to pop at some point.

So let's take a look at what we can get today.

If I pulled up these different tickers now even though you could

buy individual bonds for your municipality it's just easiest to use

nationally recognized tickers as a proxy.

So these bond funds buy a whole bunch of individual

municipal bonds from all over the country.

If you're in a state where there's state tax you pay tax

on the yield of this too

but let's just assume for the moment that you're not.

And this is totally tax free.

So really the yield here is

two point two nine percent.

And let's just say you get every bit of that tax free.

What I want you to see here is the amount of risk

or fluctuations that you're taking

and it has not only it does mean

it has to do with interest rates

and it also has to do with risk.

So sometimes as you've probably heard in the news,

there are municipalities that go broke.

Some of them here in my home state.

And so what I want you to see are the swings here.

So this fund was trading in the mid 105s.

It happens to be 106 at the peak if you look over

here. And you know not too long later

is trading at 96 right in the high 90s.

So for something that's safe

and not really providing much of a yield you know if

you go from 112 or even just 110

down to the low 102 103

104 is even 105.

Right. That could take a couple of years like if you bought all your bonds

here and you dealt

with these swings and now it's down here.

You kind of gave up some of your yield to these fluctuations.

And even if we look at the Vanguard

Intermediate Term Fund it's got more history by the way

notice it was paying two point seventy nine.

So it's pain a little bit more.

They have a little bit higher yielding bonds.

But if we go Max I don't know what was happening here in

1980 to 1982

with the municipal bond market was just

a wee lad. She was a little bit older than we last

but I certainly wasn't trading bonds.

You can see here that this bad boy was trading up in the twelve's

and it fell to down in the nines.

Actually all the way down to the high rates

but let's just call it the nines.

So this thing lost 25 percent of its value.

If we look at non-municipal bonds so Investment

Grade Corporate Bond Funds Well that sounds good.

Investment grade all that means is

they're higher rated corporates.

There are corporations that are less likely to go broke

and pay their bills on time.

But notice that during the Great Recession

of 2008 going into 2009

that this fund was trading at 106

and it fell all the way to 80

the high 80s mid 80s actually all the way down

to 105 at one point.

And when we talk about using life insurance as your own private bank:

I want you to remember this concept that the best deals

the fire sales on real estate

and the fire sales on businesses are business equipment

or inventory are had way down here.

But what you're probably not going to do is you're probably not going to cash out

your bonds when they're down to go into

these other and if you do fine.

Maybe you'll get more pop off these other investments

but you're still going to take a hit on your way out,

whereas if you choose life insurance

with some principal protection measures you don't have to.

You can borrow against your asset that will be compounding

or have the opportunity to compound

and still get into these assets.

What I want you to see is for these investment grade corporates

they did have more risk than the Muni's

and let's see what kind of yield you would have got.

And just remember that there is a direct correlation

with risk and interest rate.

So if you see that a bond is paying more like these bonds

are paying three point three instead of something in the 2s

there is more risk and obviously there's tax involved too.

There are things called high-yield bonds.

They used to be called junk bonds

but nowadays they've dressed themselves

or they've reinvented themselves as high-yield bonds.

These babies are paying five something

in the fives low fives right now.

Now remember this five is taxable.

It's not a municipal bond.

So the five might feel like four

or three or two

and a half by the time you pay your taxes depending on where you are.

And let's just see how much risk we're taking

on this front.

So yeah if you look at this fund

it started right before the Great Recession here in 2007.

And so this puppy was trading at 105.

And that was in June of 2007.

By June of 2008 it was down in 98

and by October

October and December of 2008 it was down in the 70s

and 60s

and the following June

it was back up to the 70s

and the following June was

back up to the 80s and it really got scraped in the low

90s and hasn't really rebounded.

And what I want you to see is just some of these smaller

hiccups or fluctuations going from 90

right to 77

even if it rebounds to 85.

If you bought it for 90 you need a few years

of that 5 percent just to be breaking even on this thing.

And the same thing is true with the investment grade corporates if we go back

and just revisit that the hiccups won't be quite as

volatile but there are still hiccups nonetheless

and they don't necessarily equal the yield.

You could see it was trading up here in the 120s

and then it falls down to like the low one teen one 110

and it kind of channels between that even the municipal bonds.

Right. This is the.

It's at 113 and it falls to 104 103

101. More recently 113 down

to 109 108. Remember you're only making two point

two percent or two point seven percent whatever it is these fluctuations

could eat up your annual yield.

So for that reason I strongly recommend you take a look at what

life insurance can do for you

with your safe money because not only may

it provide a better yields.

Like a lot of times these hurdle rates of twos

or threes or even five taxables aren't

that hard to beat. But remember there's also a death benefit

possibly some chronic

or critical illness benefit.

Now you don't want to cash in those benefits if you can help it meaning

you'd like to stay healthy

but they are there are these benefits

and the main one is liquidity we actually can create

pure principal protection around this money so that when the

bottom falls out of the stock bond

and real estate market again

and there's this temporary dip

and there's a fire sale you can use your liquidity to

cash in on this opportunity without having to take a

major hit.

Take a look. And we hope to talk to you soon.