In 2022 stocks fell and bonds fell with them, which was not supposed to happen. Bonds were the thing you held so that a bad year in stocks didn't take everything down at once. And a lot of advisors have been rethinking that since. Cash value life insurance, whole life and IUL both, held its ground that year. On Episode 89 of the LIFE Pod, Carlo Viqueira and I got into the reason why, and it comes down to how the carrier owns its bonds.
A bond fund trades bonds. When new bonds come out paying a higher rate, the older bonds the fund already holds are worth less, because nobody wants the lower rate when a higher one is available. If the fund needs to sell, it sells at a discount. That discount is the loss you saw in bond ETFs in 2022.
An insurance carrier doesn't trade. It takes premium, buys 10-, 20-, and 30-year bonds, and holds them to maturity. The product was built around the rate the carrier bought at. So it never has to sell into a bad market and never takes that discount. That's why whole life crediting stayed steady through years of very low rates, and why some dividend rates have started moving up now: new premium is going out and buying the higher-yield bonds, and those get held to maturity too.
The same general fund is what makes an IUL's floor work. The market drops 30% and your cash value doesn't lose money. The general fund is holding steady, so the options budget stays about the same, and the annual reset gives you the chance to bounce back the following year. Carlo's way of putting it: an IUL is uncorrelated on the downside and can be correlated on the upside. A correction year might credit zero, or the low guaranteed rate, and the year after a big correction can be a big year. You can still borrow against the cash value the whole time.
Variable universal life doesn't belong on this list. If you're using the variable side, you're in the market. Some newer variable products add indexed options, and Carlo's read is that you're still exposed at some point. Mine is that you'd have to move into the indexed side before the drop, and it's really hard to time the market. When the black swan lands, most people are still sitting in the variable accounts.
Crashes come when excitement is highest, when people are overextended and using leverage, and I said on the episode that it describes right now. In a crash, lines of credit dry up. The people who bought foreclosed houses and cheap stocks after 2008 were the ones sitting on cash or cash value, because that money was still there. Carlo bought property in 2011 and still calls it one of the best investments he's made.
Whole life dividends aren't guaranteed, and index crediting above the floor isn't either. I'm a licensed insurance broker, not a CPA, an attorney, or a registered advisor, so treat this as education, not advice on what to hold.