Most Americans today know precious little of their country’s history, besides things like certain U.S. presidents and big wars. For example, most Americans don’t know that because of Constitutional concerns, the Eisenhower Administration had to cite the need to quickly move tanks and troops around to fend off an invasion, as a national security justification for building the interstate highway system. Can you possibly imagine someone challenging the federal government’s authority to fund highways in today’s political climate?
Another example is our nation’s monetary and banking system. Americans are vaguely familiar with the fact that the dollar used to be backed up by gold, though hardly anybody could speak for more than a moment about how this system actually worked, and what its rationale was. Yet if few Americans know about the gold standard, fewer still understand that there were large stretches when the U.S. operated just fine without a central bank. And for those who, somehow, manage to recall from a high school or college class that the Fed was founded in 1913, their teachers almost certainly never pointed to the awkward fact that the stock market crash of 1929, and the ensuing Great Depression, happened deep into the Fed’s watch.
Along with inconvenient facts such as these, another tidbit swept into the dustbin of history is that Americans used to rely on life insurance as a major savings vehicle. This sounds perhaps shocking at first, but remember the scene from It’s a Wonderful Life, when George Bailey (played by Jimmy Stewart) is down on his luck and runs to the greedy Mr. Potter for help. What does Bailey bring to Mr. Potter as an asset? Why, his life insurance policy.
This scene seems odd to many modern viewers; I remember being puzzled when I first saw the movie. This was because I only thought of term life insurance, rather than permanent (or cash-value) life insurance. The modern financial gurus, such as Dave Ramsey and Suze Orman, counsel their listeners unequivocally to avoid permanent life insurance as a terrible investment, if not an outright scam.
Yet it was not always so. Here is the great economist Ludwig von Mises, writing matter-of-factly in his 1949 treatise Human Action:
For those not personally engaged in business and not familiar with the conditions of the stock market, the main vehicle of saving is the accumulation of savings deposits, the purchase of bonds and life insurance. (p. 547)
and later on
[Under capitalism, even] for those with moderate incomes the opportunity is offered, by saving and insurance policies, to provide for accidents, sickness, old age, the education of their children, and the support of widows and orphans. It is highly probable that the funds of the charitable institutions would be sufficient in the capitalist countries if interventionism were not to sabotage the essential institutions of the market economy. Credit expansion and inflationary increase of the quantity of money frustrate the “common man’s” attempts to save and to accumulate reserves for less propitious days. (p. 834)
The notion of life insurance as a savings vehicle was displaced by mutual funds, which had become more accessible to the average household, and looked very attractive by the late 1970s. The high interest rates and inflation of this era—the result of government manipulation in the financial markets—suddenly made conservative life insurance look boring and sluggish. Americans were steered by the “experts” into Wall Street, and federal tax laws—which levy large penalties on all assets except the ones exempted by the IRS—only reinforced the transformation of the conventional wisdom.
But is the stock market really a safe place to put one’s genuine savings, as opposed to the funds one considers as investments? In terms of economic theory, this distinction fades away, because there is no such thing as a perfectly safe investment. But in everyday practice, there is a definite difference between wealth that is supposed to be bedrock savings, versus more speculative investments that offer the chance for higher return but come with greater risk. With this framework in mind, how should one classify the average American’s 401(k) or other tax-advantaged retirement vehicle based on “the market”?
Beyond the wild volatility of allegedly “diverse” stock market holdings, is the fact that government regulations put your assets virtually in prison until official retirement age. With few exceptions, there are severe penalties for early withdrawal, and you can’t even use such “advantaged” funds as collateral for loans.
If the stock market, whipsawed about by Federal Reserve policy, is too risky for one’s genuine savings, the commercial banking sector nowadays is useless as well, with interest rates at historic lows—again because of the Fed. Moreover, what little interest you do earn on CDs or savings accounts, is then taxed at “progressive” rates.
In this bleak environment, many have flocked to the precious metals—the market’s original money, before they were driven underground by government measures—as the last refuge. I myself have urged my readers to acquire stockpiles of gold and silver, and I continue to do so. However, although the precious metals provide an excellent hedge against inflation, they too are subject to price volatility, they don’t generate an income stream, and they are subject to capital gains taxes. (Plus, there was that incident in 1933 when the federal government forcibly seized everybody’s gold under threat of fines and up to ten years of imprisonment.)
After several years of study—reading textbooks, interviewing actuaries, and attending seminars—I have come to believe that the old-timers were on to something: Life insurance, especially with its currently favorable tax treatment, is an excellent savings vehicle. Not only does it allow you to conservatively store your wealth in a relatively safe place, but you can instantly access it through “policy loans” from the insurance company (with your policy’s underlying “surrender cash value” serving as collateral).
I realize there are many knee-jerk reactions to this proposal, including the catchy slogan, “Buy term and invest the difference.” In future posts I will tackle these objections, because I have spent much time on them and believe they are spurious. For now, let me close with these thoughts from one of the world’s current experts on monetary and banking theory, economist Huerta de Soto:
The institution of life insurance has gradually and spontaneously taken shape in the market over the last two hundred years. It is based on a series of technical, actuarial, financial and juridical principles of business behavior which have enabled it to perform its mission perfectly and survive economic crises and recessions which other institutions, especially banking, have been unable to overcome. Therefore the high “financial death rate” of banks, which systematically suspend payments and fail without the support of the central bank, has historically contrasted with the health and technical solvency of life insurance companies. (In the last two hundred years, a negligible number of life insurance companies have disappeared due to financial difficulties.) — Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles (Auburn, AL: The Ludwig von Mises Institute, 2009), p. 590.