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April 20, 2008 at 04:00 PM
In today’s turbulent market environment, more and more investors are looking for ways to ensure returns inside their portfolios and protect their investments against the ravages of a bear market.
Life insurance policies are quickly becoming that “security blanket” for investors, offering a safe bet and a guaranteed return. That’s because a contract with a life insurance company can sustain a retirement portfolio (and a lifestyle) through difficult times.
Today, many people are reaping the monetary and investment benefits of policies they didn’t think they would live to see paid out.
In previous eras, when people decided to buy life insurance, they typically wanted the policy to serve 2 main purposes: to protect a family/business relationship and/or to function as a mechanism for the affluent to transfer wealth from generation to generation to avoid estate tax.
Those are still the main reasons behind purchasing life insurance policies. However, the recent volatility in the stock market has helped people see more value; life insurance policies are emerging as an asset class in their own right and a smart investment.
The most significant change in this has occurred over the last 4-5 years. Today, once a policyholder has reached age 70 or 75 and may no longer need the policy, the owner can dispose of the contract in a secondary marketplace. Institutions bid to buy the policy and then add it to their own portfolio as an investment vehicle. The seller can receive anywhere from 25% to 30% of the current face amount.
This new way of disposing of a life insurance policy that is no longer needed has changed the way life insurance is bought and sold. Today, a potential buyer enters into that transaction saying, “Okay, if something happens and I need money for after retirement, I have my insurance.”
That’s a good thing.
For example, let’s say John purchased his life insurance policy to protect his business and that over the next 10 years his small business has grown by leaps and bounds. Now, he is liquid with $20 million cash on hand and no longer needs the $2 million policy. John can sell his outdated policy and get 25%-30% of the face value of $2 million–even if that policy has very little cash in it.
