As we wind down the laid-back summer months and return to a peak productivity frenzy in preparation for the end-of-the-year, our associates are looking ahead at the impact that interest rates will have on client’s portfolios. Since September 2017, the 2-year Treasury has more than doubled to 2.6% and the 10-year has crossed the 3% threshold, with the Federal Reserve forecasting two more hikes this year and three in 2019. Although these rate increases are a testament to the projected growth of the economy, higher interest rates will impact our clients in a variety of ways. As we discussed in last month’s overview of asset allocation practices, a diversified investment strategy can protect clients by providing low-correlation among asset classes. Astute advisors can provide their clients with ranging maturities, such as bond ladders, to ensure that even as the price of longer-term bonds are negatively affected by the increasing interest rates, the client can invest in new issues paying higher rates.
However, the importance of the effect of rates on the client’s insurance portfolio should not be overlooked. On the one hand, we expect that as the Fed rate continues to inch upwards, carriers will also revise their dividends positively. This change tends to be gradual and does not respond abruptly to short-term changes in interest rates, but it will certainly provide a cyclical advantage to long-term policyholders of dividend-paying whole life policies. On the other hand, though, clients who elect to borrow from their policies might find themselves at a disadvantage due to increased pressure on the cost of borrowing.
Due to the low-rate environment we have enjoyed for over a decade, clients have turned to affordable liquidity from their life-insurance policies, but is this golden opportunity nearing its end? At Kensington Financial Associates we don’t believe the upward trend of interest rates needs to spell disaster for clients who want to access their cash-value through a policy loan. Instead, we work with our partner advisors to identify clients who can benefit from refinancing their higher-rate loans, or those who can obtain further tax benefits by using a direct-to-business loan strategy. We invite you to contact us today to discover how Kensington can save your clients money on their interest expenses.