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How do you handle municipal bonds and the private reserve strategy?



I reviewed the choices for a Private Reserve Strategy, although there is a selection for a margin account on stock portfolio there is no option for municipal bonds. In some cases, bonds may be a better alternative to life insurance.  Have you encountered this situation before, and if so, how did you handle it?


Coaches Response:

Municipal bonds are certainly an option... and I would include those under the sub-heading of "Margin on Stock Portfolio...  There are still quite a few things to consider with municipal bonds as the core vehicle of the Private Reserve Strategy:

  • The loan certainly isn't guaranteed
  • More times than not is a "callable" loan at any time and typically has a window of time for it to pay back
  • It doesn't have creditor protection
  • While muni bonds are generally considered safe...there is some risk...default risk (unlikely) and interest rate risk.  As we are seeing now, a rising interest rate environment decreases the value of bonds.  Of course, the bond could be held to maturity to mitigate that risk...but in that case, the muni interest rate isn't as competitive as it was at the time of issuance.  So that hurts the "competitive rate of return" benefit listed under Private Reserve.
  • Lastly is the "Other Benefits"...namely the Death Benefit that life insurance provides.  I also include a Waiver or Premium as a benefit.  There is no waiver of premium on the purchase of municipal bonds.
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