Ask an advisor about how best to manage one’s investments and you’re likely to hear an earful about modern portfolio theory: choosing from a diversified set of asset classes to maximize investment return for a given amount of risk, or to minimize risk to achieve an expected return.

Ask the same the advisor about whether one should apply modern portfolio theory to the purchase and servicing of life insurance, and you’re likely to draw a blank, for life insurance is generally not managed in the same way. That needs to change–and soon.

Most advisors who do comprehensive financial planning for clients use a capital needs analysis to the insurance component of the plan. They determine the appropriate type and amount of coverage based on the current and future living expenses of those who would suffer a financial loss.

The product recommendation, as my feature article on policy reviews beginning on p. 20 describes, will take into account such factors as the client’s health, family situation, budget, risk tolerance and desired benefits. The recommendation will usually be buttressed by an illustration that projects the policy’s performance over time given certain assumed rates of return.

But policy illustrations–as so many holders of variable life contracts learned to their misfortune during the recent recession–don’t often conform to expectations. Hence the need to build and manage a diversified portfolio of uncorrelated insurance products that can weather market fluctuations and optimize cash value and death benefit returns.

The long and short of it is that a client with sufficient financial resources should buy a combination of permanent insurance policies, including universal, variable and whole life contracts, to have the best chance of securing long-term goals and objectives.

That’s a message being advanced by Richard Weber, the founder and principal of The Ethical Edge, Inc., Pleasant Hill, Calif., and co-author of a new research study, “Life Insurance as an Asset Class: Managing A Valuable Asset.” The report was commissioned by The Guardian Life Insurance of America.

In a phone conversation with me, Weber highlighted key findings of the research and the implications for advisors. Among them: that “human life value” must guide the determination of the proper amount of insurance for an individual; and that by optimizing different styles of products, a life insurance portfolio can produce competitive investment returns (both through the death benefit and living benefits or cash value) compared to fixed-return investments.

A typically well-diversified insurance portfolio, the study notes, would have whole life insurance at the core. Additional layers of the portfolio would incorporate other types of insurance products that 1) optimize cost and access to cash value, and provide for a naturally increasing death benefit; and 2) offset the loss of a death benefit’s purchasing power over time while building cash value to leverage trust investment opportunities.

In one case scenario, says Weber, a client requiring $300 million in insurance protection allocates 30% of the portfolio to whole life, 20% to no-lapse guaranteed universal life and the remaining 50% to variable life. Result: the portfolio produces superior long-term investment performance (albeit at modestly higher cost) than any single policy could yield alone.

Weber’s approach–determining the amount and types of policies that will produce a desired outcome for an insurance portfolio that can be reasonably managed over time–will likely be applied more widely in coming years. And the catalyst, as Weber suggests, could be the extension of the fiduciary standard under the Dodd-Frank Wall Street Reform and Consumer Protection Act to brokers.

Many financial professionals who now act as fiduciaries–and thus have to put the client’s bests interests before their own–optimize and service investment products using modern portfolio theory. It would seem inconsistent for an advisor held to the same standard to exclude life insurance products from the rigorous application of investment manage principals.

To be sure, developing and managing a diversified life insurance portfolio won’t be feasible for every client. As Weber points out, many of those in the middle market don’t have the budget to purchase more than term insurance and one type of permanent policy. Indeed, he notes that his approach is generally only suitable for clients with investable assets of $5 million or more.

But for clients who can afford a diversified insurance portfolio–those who have the “luxury of choice”–as Weber describes them, this is the optimal strategy. And it is one that sells.