I've been meaning to do a piece on Cash Value Life Insurance as an Asset Class. And this discussion will stem several additional posts to address how placing cash value life insurance in your personal portfolio can significantly improve your financial situation, by leaving numerous options on the table that most people forfeit because they pick up and hold onto really bad financial advice. Approach the following with an open mind, and be prepared to have your outlook on personal finance changed forever.
For those of us who have been through FINRA licensing, we know that FINRA believes Systemic Risk is the one form of risk that no amount of diversification can avoid. We rarely run into situations where Systemic Risk is a hot topic, but we've recently seen the word thrown about quite frequently, the “meltdown” from 2008. When entire financial systems begin to fail and the effect crosses asset classes, we start to realize the effects of Systemic Risk. And FINRA is correct, with respect to the products over which it has direct supervision. Truth is, there are products that can survive declines in the face of Systemic Risk.
In 2008, while the major media was reporting about the crash of the U.S. Economy and financial vehicles everywhere were getting slaughtered, there was one industry having a field day noting it's success with continued appreciation. The Life Insurance Industry went wild marketing the fact that cash value life insurance products where up for the year (just like all the years before that) and sales of these products took off even more rapidly. Whole life insurance, a once declared moribund product, came back in a huge way. A once heavily criticized product for it's inability to match stock market returns suddenly returned to glory as not such a bad idea, even the major Wall St. infatuated financial media outlets where placing the product in the spot light. Whole life wasn't the only product to enjoy the lime light. Indexed Universal Life insurance continued it's huge success as the fastest growing permanent life product in the industry. Sales of IUL shot off even higher than in prior years.
Why? Because people started to recognize that cash value life insurance was one of the few up assets in a down market. It didn't produce the huge upward swings in the good years, but also didn't participate in the huge down swings in a bad. Suddenly people started to remember that for years cash value life insurance was used as a safety asset, and 2008 was the year that brought about a reality that reminded us all that this strategy works and works well.
I once had the pleasure of meeting Andrew Rosenbaum. He gave a speech where he declared whole life insurance perfect. Andrew is a career agent with the Guardian, so we'll keep that in mind to understand where he's coming from and modify his statement slightly to cash value life insurance. The point behind his declaration was that no other asset class delivers consistent reliable returns with the same features and benefits of cash value life insurance. He pointed out, as I have numerous times, that if we want a higher rate of return, we have to be willing to take on more risk. So why does cash value life insurance deserve so much praise as a great asset in your portfolio. I like lists, so here comes another:
The risk adjusted rate of return of cash value life insurance is rivaled by no other asset. The even more beautiful notion behind this is its simplicity. You don't need a wide mix of complex financial derivatives to hedge your bets with cash value life insurance, the insurance company will take care of that. As an asset, it has consistently ranked highest in return relative to risk according to the Treynor Ratio.
Not only does it grow very consistently and not go backwards, it can also ensure that financial goals are achieved. It can self complete through use of a disability waiver rider (it can pay for itself if you are sick or hurt and can't do it yourself). And let's not forget that this is life insurance. If you don't make it as long as you'd hoped, this is the one asset that can guarantee a pool of money if you turn to the wrong page in the choose your own adventure book of life.
Life insurance is an asset that skips around a lot of the paces other assets go through. It bypasses probate, meaning it gets to your beneficiaries (in most cases tax free no less) probably before the attorney even opens a new file to probate your estate. In a lot of states it's creditor protected. It's traditionally not included on asset sensitive forms like the FAFSA. And then there's the big one, it can distribute cash tax free. This last one has a lot of implications people tend to not even think about. Not only does a potential tax free distribution augment it's real rate of return, it also potentially increases your social security check, decreases the bill you get from your accountant, and could potentially make you eligible for certain other tax/benefit breaks that are income sensitive.
Cash value life insurance comes with lots of benefits and interestingly few strings attached. When designed right, you can contribute when convenient for you. You can take money out whenever for whatever reason, and this won't even impact the growth of your cash value when using the right product (it's probably one of, if not the, least liquidity risk prone products out there), and it leave more options for you at every stage in your life (I'd love to touch every point related to this, but that's a separate post in itself).
A couple of years ago someone came into the Insurance Agents Forum and asked, “why sell whole life insurance?” We had a rather lengthy discussion, but it pretty much ended when I made the following point (which applies to all cash value life insurance):
WL is the boring piece of a financial plan, the foundation, the safety net, the annoying/nagging piece of your life that reminds you when times are good that life isn't always this way.
But when you discover you didn't really save enough money, shouldn't have been that exposed to equities at your age, and/or that maybe just maybe the people who seemed sensible when they proclaimed there was no need for life insurance after you retired weren't exactly right, you look at that statement that came in the mail just the other day for that ridiculously “expensive” life insurance policy you didn't want in the first place. You look at the current cash value column–it's gone up this year, just like every year since you got it. You look at the dividends paid this year. You note that you have more death benefit than you did when you originally purchased the policy yet your premium has remained the same. You notice something, it's grown with you. As you become more financially vulnerable, it becomes stronger.
Why Whole life Insurance? Because no other financial product will protect your client's financial well being quite as well. No other product offers as many guarantees, with as many benefits. It's not the 100% solution, but it is an integral part of the overall plan.
We've created a new category call Cash Value Life Insurance as an Asset Class, and we're going to begin placing additional posts in there as an entire series. This is a very large topic and needs deeper exploration in order to do it justice. Cash Value Life Insurance as an Asset Class is a topic that lies at the core of the Salus Agency, and has greatly improved the financial lives of not only numerous clients of the Salus Agency, but personally my financial life.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.
Indexed Universal Life Insurance Pros and Cons
Will Your Indexed Universal Life Insurance Policy Produce an 8% Average Return?
IPB 107: When Interest Rates Go Up, Bonds Go Down. What Does It Mean for my Life Insurance?
IPB 105: Is Indexed Universal Life Insurance Worth it even if the Interest Rate Assumptions are Wrong?