In this series of articles, I want to expand on one's fixed income part of the portfolio. Traditional ideas are preferred stocks and bonds. I will leave the preferred stock discussion to Seeking Alpha author Doug K. De Lu, so I will only mention bonds now. I don't like them. But let's take a few lines to understand why, in the long run, this is the wrong type of yield to use your hard earned dollars for:
I-bonds - the only bonds I would possibly consider. They are fully guaranteed by the US government and have 2 components: an inflation rate and an actual yield rate. The inflation rate changes every 6 months to help the bond keep up with inflation. The yield rate is "the premium" or the real interest over and above inflation. So yes, you do win in the long run because your money is worth more because inflation was always accounted for, but it's not by much. You get taxed on the interest when you redeem the bond.
TIPS - also distributed by the US government and take into account inflation in the interest component. However, you are paying tax along the way versus at the very end like the I-bond. Due to the perpetual tax, I like this less than the I-bond.
Municipal bonds - bonds distributed by states, counties and municipalities for projects like water lines or schools. The interest is tax-free (a huge plus). Because it is tax-free, the municipality can have a smaller stated yield on the bond (one negative). A second negative is with budgets of all government organizations being squeezed, you have to have full faith they will pay as stated. There have only been a handful of muni bonds in existence that went worthless, but these government dollars are stretched so thin these days, it doesn't give me 100% confidence that I will be paid in full. Also, like our final bond option, corporate bonds, the money you receive will be worth less year after year because of inflation.
Corporate bonds - If you purchased a corporate bond five years ago that would pay you 6% interest a year and the company can now issue bonds at 3% a year interest, the company can call your bond in and you can purchase the new bond with half the interest or go find another company that is now riskier that will offer you that 6% interest. That and the interest from bonds are fully taxable along with the inflation consideration makes me not like this choice either.
Now we need to stretch our imaginations here and say what if there was an investment vehicle that had the following traits:
-A guaranteed interest rate?
-A variable dividend that got added to this guarantee and has been paid by some companies for over 100 continuous years? (Again, this is not constantly growing, but paid every year)
-Can access 90% of every dollar you put in at any time with a simple piece of paper?
-When structured properly, can be withdrawn tax free with no intention of ever paying it back and with no penalty?
-Protected from creditors and lawsuits (true in all but 2 states)?
-And finally, has a death benefit kicker?
The last question (along with the title) gave it away, I know, but properly structured whole life insurance can do this. Now before we get into a battle about term versus whole life, I was completely in the term life camp. This series of articles is about a different way of thinking of how to use your money, so I will take some typing on the keyboard to explain how this works. I thought I was the only one on these boards that knew about this until some comments on Rocco Pendola's 8 year old to millionaire article mentioned whole life insurance. I think now is a good time to explore over a series of 5 articles what whole life insurance is, how it should be structured to benefit you, the consumer, and the uses as well as the disadvantages of using whole life insurance as an investment.
I will do my big disclosure now: I am a healthcare practitioner. I do not get compensated in any way by writing about this. I do have 2 whole life and one term policies of my own. My goal is to give a broad view of how dividend-paying whole life insurance works. There are many companies that each have their own rules on how and when you can add money to the policy or take a loan out. I will try and specify what I know is true of the insurance company I use versus the broad stroke of ALL insurance companies. If there are any glaring errors versus technicalities between insurance companies, I apologize now because I do not have the time to look through more than 100 companies and their various policies. I have learned a ton from various authors on Seeking Alpha and am trying to help others with this series. I also know this may create a bloody battleground within the comment section and one that I am prepared for with the understanding I am unemotional in my response and impartial in giving my opinion.