Life insurance and other financial services sectors have some math in common.
Here’s a look at an investment and emotion risk management strategy from the financial services side, expressed in a manner consistent with how the life insurance sector works.
Negative Return Risk
Indexed accounts have become popular because they address the emotional and financial consequences of a negative return, by setting a 0% floor.
In the financial services sector, negative return risk is addressed using the Simple Moving Average management strategy.
Let’s compare modeled historical returns for three types of strategies.
- Indexed Account: A modeled 1-year S&P 500 point-to-point with a 0% floor and 10% cap.
- Unmanaged S&P 500 Total Return Index (S&P 500 TR) Fund: A fictitious fund with returns equal to returns from the S&P 500 TR Index.
- 3-Month (60-Day) Moving Average: The modeled 1-year returns from using the Simple Moving Average calculation as a crossover between being invested in the fictitious S&P 500 TR fund or earning the Vanguard Total Bond Market Index Fund (VBMFX) gross return.
The Moving Average End-of-Month Calculation and Allocation Rules:
- If the S&P 500 TR share price is greater than the moving average – Allocate assets to the S&P 500 TR fund.
- If the S&P 500 TR share price is less than the moving average – Allocate assets to the Vanguard Total Bond Market Index fund.
In the chart above, I compare the results, as of April 30, for the end-of-month S&P 500 TR share price, versus the moving average of the last three end-of-month share prices (60-day period), versus the indexed account with a 10% cap.
Both the 10-year return and the 15-year return were higher for the 3-month moving strategy than for the indexed account.
The Worst Years
Note that, during the last 10 years the worst 1-year returns were:
- 3-Month Moving Average: -10.93%.
- Unmanaged S&P 500 TR Fund: -32.57%.
- VBMFX Bond Fund: -2.76%.
- Indexed Account:00%.
Indexed accounts may be a passive method of risk management.
Simple Moving Average may achieve similar objectives in a semi-active manner for separate accounts offered in a variable insurance product.
The life insurance-financial services sector communication gap is a two-way street. Both sectors offer consumers options to address their protection and accumulation needs within the Internal Revenue Code Section 7702 pricing and tax structure.
Mark Whitelaw is head of design at Winged Foot Partners. Whitelaw specializes in investment analytics for and administration of life-insurance-funded executive benefits, trust-owned life insurance (TOLI) and individually owned institutional life insurance plans.