Life Insurance as an Income Producing Asset with the Power of Leverage

 

We’ve talked a lot about using life insurance as an income producing asset. Many people stumble a bit when they first attempt to wrap their head around the notion of using “insurance” either as a place to save money or as an asset from which they can generate income. 

I raised an eyebrow or two when first presented with the idea. Today’s discussion is not an introduction to the concept of using life insurance as an income source, but rather a somewhat advanced look at why it can work so well.

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Sequence of Returns Risk and Indexed Universal Life Insurance

We’ve addressed the subject of sequence of returns risk in the past. We’ve even discussed it on the new Insurance Pro Blog Podcast. This subject has become a hot topic in more recent years as financial advisors now struggle to build retirement income plans for their clients and face the problem that few, if any, training programs touch. Why isn't their more specific training for advisors on this issue?  Speculating about that would be an interesting topic for another day.

Today, I want to talk about how indexed universal life insurance is affected by sequence of returns risk especially in the context of using a policy to generate retirement income.

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Case Study: Whole Life Insurance vs. Bond Strategy

 

We receive phone calls and emails every week from people looking to “de-risk” their portfolio and possibly add life insurance as a complement to their other investment and savings strategies.

A comment that tends to trend among these good folks notes that while we’ve done a pretty decent job explaining the more esoteric aspects of life insurance (according to the comments) it’s still somewhat difficult to understand exactly how this works and why it’s beneficial.

I can accept and agree with this comment and in an attempt to build out more comprehensive understanding I'd like to present a case study today that highlights some of the power behind life insurance when used as an asset in one’s portfolio. We’ll be publishing several more of these in the coming year. While we’ve been given permission to share these stories, names have been altered a bit to protect identity.

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Argument against Permanent Life Insurance: Lack of Fee Disclosure

In our final installment of the five most common arguments made against permanent life insurance we’ll take on fees or the lack of a discussion about fees, as high fees were already discussed.

The claim here is that life insurance contracts are very non-transparent regarding fee disclosure and you never really know what you are signing up for until long after you paid several years worth of premiums.

This argument, like several others, isn’t entirely unfounded. But it takes a large degree of liberal interpretation to the extreme.

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Argument Against Permanent Life Insurance: They Steal your Cash when you Die

This weeks edition of senseless arguments levied against whole life insurance and universal life insurance is one my very favorites.

Even though I’ve addressed this topic before, I couldn’t pass it up knowing I’d be writing a series on the most common “complaints” used to dissuade the buying public from these products.

I do have to admit right out of the gate, though, that this one has a shred of truth behind it.

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Argument Against Permanent Life Insurance: Good Returns take too Long to Materialize

Next up in our installment of arguments against permanent life insurance is the notion that returns are negative in the beginning and the good stuff simply takes too long to materialize.

If you look at a life insurance proposal ledger, you’ll notice that there is indeed a negative return during the early years. The length of this negative return depends a lot on how the policy is structured. In later years, though, returns are quite favorable compared to adequately risk exposed savings/investment options.

Here’s an example of a typical ledger for a whole life policy we would design:

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Argument against Permanent Life Insurance: Low Rate of Return

The rate of return argument against permanent life insurance focuses mostly on an irresponsible comparison of dissimilar asset classes.

Chances are good that most of you reading this understand that there is a relationship between the risk of an asset and it’s return; the two are positively correlated. This means the riskier an asset is (i.e. the more volatile it’s returns and the higher the chance you lose money if you buy it) the higher it’s long term rate of return is hoped to be.

People tend to be pretty comfortable with understanding that

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