Using Life Insurance as an Asset Class

life-insurance-as-an-asset-classWhen advisors think of asset classes, they usually think of equities, fixed income, cash equivalents, and maybe real estate and commodities … but certainly not life insurance. Until recently, very few would consider life insurance to be an asset class. However, in the last eight years or so, financial thought leaders like Stephan Horan, CFA, CIPM, and Christopher Hause FSA, MAAA, have been making the case to add life insurance to the list of asset classes.

Consider the advantages of adding life insurance as an asset class to a client portfolio. Whole life insurance does more than just mitigate risk. It provides guaranteed cash value accumulation, income tax advantages, and a unique versatility that meets objectives as they change over a lifetime. When viewed as an asset within a portfolio, whole life insurance demonstrates usefulness for each of these five life stages.

Protection stage

The client who is building a future, a career and family needs death benefit protection, for all the traditional reasons. Initially, term insurance may represent the majority of the total coverage however your plan for the client should also include an affordable whole life policy for at least some amount of coverage, intending to incrementally convert term insurance to whole life over time, as discretionary income grows.

Add waiver of premium to the whole life policy and it provides even more powerful protection. Waiver of premium keeps the policy in force for as long as the insured is disabled. The cash value continues to grow as guaranteed even without premium payments. Few, if any, portfolio assets promise guaranteed growth when the planned contributions do not materialize. Certainly not CDs, money markets, equities, or retirement accounts.

Accumulation stage

When maximizing retirement contributions becomes a client’s primary financial objective, a whole life policy offers asset accumulation options unavailable to high-income earners. The allowable contribution to retirement accounts, as a percentage of income, decreases as income grows.

Let’s look at a 45-year-old earning $50,000. The maximum allowable contribution to a 401(k) in 2016 is $18,000 or 36 percent of income. The same maximum applies to a 45-year-old earning $150,000 limiting the contribution to only 12 percent of income. Both 45 year-olds want to replace 80 percent of their income in retirement but the high earner is severely limited to how much income can be put aside in a tax-deferred instrument.

When whole life is positioned as an asset within the portfolio, the client has an additional way to allocate more funds to future retirement assets by paying the policy premium. As a retirement asset, whole life cash value will grow over time, and the increased value is tax deferred. At retirement, whole life insurance can be used as an alternative source of retirement income, to pay long-term care expenses, and to transfer wealth to heirs.

Retirement Income stage

Whole life insurance in a portfolio protects other asset holdings. The cash value of a whole life policy is guaranteed. It is not subject to market volatility and will never decrease. The growth in value is tax-deferred. When markets are declining and a fixed amount of income is expected, rather than sell equities at a loss, whole life cash value can provide the required income through the means of a policy loan and with more favorable tax treatment. As long as the loan is repaid without using other policy values and while the policy is in force, the loan is tax-free. If the loan is unpaid at the time of death, the tax-free advantage can be protected if the death benefit distributed to beneficiaries is reduced by the amount of the loan.

Long-term care stage

Many whole life policies offer a long-term care rider that can be added for a small additional cost. Underwriting approval for a LTC rider is usually much less onerous that for a long-term care insurance policy. As distributions are used to pay long-term care expenses, usually tax-free, the remaining death benefit decreases. Most riders use the same eligibility criteria and definition of ADLs as a standalone policy.

Legacy stage

The only asset class that can promise tax-free wealth transfer is life insurance. The death benefit is not subject to probate, making it available quickly. The death benefit amount is guaranteed; the value of the death benefit will never decrease. Even in situations where a portion of the death benefit is advanced to pay long-term care expenses or living benefits, the total benefit distributed is the guaranteed amount. The life insurance beneficiary designation permits an infinite combination of beneficiaries, providing confidence that funds will be distributed quickly and as instructed. Other assets in the portfolio may not be as easily transferred.


Making the case to your clients

Including a whole life insurance policy as part of the complete financial portfolio reduces the risk of market volatility, provides unique guarantees not available with any other financial instrument, and offers tax advantages not available to other assets. Especially in these uncertain economic times, recommending whole life insurance is a wise move. Make it easy for clients to see the value of your recommendation by downloading our free report, “5 Reasons Your Retirement Plan Should Include Whole Life Insurance.”

Life insurance products can be complicated and there are several factors to consider when choosing the right product and combination of riders for your client. Brokers Central provides the expertise you need to confidently make client recommendations. Call us at 845-495-5000 to talk more about the value of a whole life policy in a diversified portfolio.