Brandon Roberts

Market neutrality à la diversification is a subject that often baffles the average financial or investment consultant. My sneaking suspicion has been that this is a result of training focused specifically on fixing a problem with a finite basket of tools at your typical investment salesman’s disposal coupled with most people’s tendency to consider good enough is good enough.

The Financial Industry Regulatory Authority (FINRA) claims there are about 11 different types of risk that an investor faces, and when you box in the conversation to simply the type of risk that your goods for sale may be subject to that’s an accurate statement. But unfortunately life is about much more than just the potential pitfalls that a stock or bond might face, and about all of the nasty gotcha’s that exist elsewhere.

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It’s September, which means it’s also Life Insurance Awareness Month aka LIAM. When asked what we planned to do for LIAM we just sort of laugh. We talk about life insurance on a daily basis, so we’re not likely going to make any changes to our plans for one month as we spend all year advancing the discussion on life insurance.

But I do suppose we could take a minute and alter the focus on life insurance just a little bit when it comes to the way we traditionally discuss life insurance. For the most part, our fascination with life insurance is grounded in its incredible ability to generate cash and its complementary nature to overall portfolio design. The death benefit portion is leverage-able, and that’s cool, but by and large we do admittedly skip over one of the most crucial aspects to this product: the fact that is does pay a death benefit.

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Cash value life insurance and taxes is a conversation that usually goes hand in hand. You see, life insurance and taxes are old friends—kind of like how Alexander Hamilton and Aaron Burr were old buds.

So life insurance has often been touted as a no brainer idea for those who dislike the April 15th. Some agents might even suggest that only those so patriotic that they’d willingly open up their check book to payoff he national debt if they had the money would pass on the tax benefits that cash value life insurance affords.

While we certainly don’t prescribe to the notion that paying taxes has anything to do with patriotism, we do note that cash value life insurance boasts an impressive lineup of attractive attributes when it comes to tax considerations.

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Cash Value Life Insurance provides an array of various benefits and one unique benefit it brings to the table (for some people) is the fact that cash values are often protected from creditor and liability claim. So unlike the money in your bank account or general brokerage account, the cash values in a life insurance policy can often be concealed from individuals who sue you either in an attempt to force you to indemnify them from a loss they claim is your fault or those who claim that you owe them money under contract and have failed to pay.

Additionally, if you take money out of a life insurance policy and spend it (e.g. using it for income) this method of accessing money doesn’t create taxable income and is therefore typically untraceable to those making a claim against you.

But, we do want to be very clear about this benefit as it’s often overstated and certainly not bullet proof. For some people, it’s not even available so care needs to be taken when approaching life insurance from this angle.

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For years talking heads have been very clear about the use of life insurance in retirement. And still today, despite macro economic events that have shaken a lot of conventional wisdom to its core and caused it to seriously question the validity of axioms used to develop both its most basic and advanced edicts, there is still one subject upon which most of the commentators still agree. You don’t need life insurance when you retire.

Surely this sage advice, which many in the financial media (and investment industry) have reasoned time and again, holds true–despite recent economic woes that should have caused most us to rethink things a bit.

Might we now be discovering that the problems life insurance seeks to rectify are indeed permanent problems?  Nah, everyone knows that suggestion was just dreamed up by life insurance company home offices across the nation as a cleverly disguised ruse to bring in more premium dollars.

Maybe…or maybe not.

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Throughout the next six weeks we’ll be rolling out our top reasons for owning cash value life insurance. We’ll be releasing these posts during our Friday post. Today we start with reason number six on our list, the probate skipping process that life insurance uses when the death benefit is paid.

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If you spend anytime around a traditional life insurance agent/broker discussing which type of life insurance you should own, then you’ve undoubtedly been told to opt for whole (or universal) life over term life insurance. And one of the most commonly used statistics to build the case for owning permanent life insurance over term life insurance is the fact that less than 1% of term life insurance policies ever pay a claim.

Sounds like a waste of money to pay all those premiums to an insurance company knowing there’s a 99% probability that your policy will expire before you do…right?

In fact, the old follow-up point to presenting this statistic to a prospect was to note somewhat glibly, “of course it’s so cheap, when you design a product to almost never work you can pretty much give it away.”

No manipulation in that statement at all (can you feel me rolling my eyes?).

So much time is spent focusing on the slim odds of a death benefit payout probability that most people forget to ask the naturally obvious follow up question:

What percentage of whole life insurance policies pay a claim?

This statistic isn’t widely quoted by life insurance agents, and I’ll propose a theory later on that might shock a few people.

So what’s the answer? A lot lower than you might imagine.

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