Someday, we’ll look back at 2008 as a watershed for life insurance producers. It was then that the near collapse of the global financial markets shook up old ways of thinking about life insurance and reinforced its role as a core component in a well balanced investment portfolio.
Investors had no choice but to revise their view of participating coverage as a static safety net, a “stow-it-away-until-the-end” death benefit and little else. The reason: The cash value of whole life coverage held steady at a time when both equity and fixed income investments took a nosedive.
In short, the financial world got a very strong reminder that, even in volatile markets, whole life insurance was capable of augmenting a portfolio two ways – through its provision of a death benefit unequaled by any other investment class (and unaffected by volatile market value adjustments) and its generation of cash values that can be used to create a steady increase in asset value equal to that produced by high quality bonds.
Now, three years later, the time has come to take the argument in favor of whole life’s fundamental place in financial portfolios a step further: to refine its role as the core of your clients’ portfolios – guaranteed protection that simultaneously generates a return.
Honing the Message
First, producers need to sharpen their message to consumers. We must continue our efforts to clear up pervasive myths about life insurance and the way your clients choose a policy to meet their long-term goals. Take the popular “buy term and invest the rest” mantra that came into vogue in the 1990s. Scratch beneath the surface, and you see that term life might yield short-term savings but isn’t really a cost effective solution over the long haul.
Another example is the thinking that clients should cash out life insurance policies when they retire. That’s equally unfounded in an era when retirement seems to be pushed further into the future and life expectancy – and its related costs – keeps rising. The cash value of a whole life policy is indispensible at retirement: It can help generate funds to bolster retirement savings, pay for long-term care or more. Second, it’s just as critical that we promote life insurance coverage as an actively managed asset. Life coverage needs to be assessed regularly to ensure that clients have the right policy or mix of policies to meet their objectives, budgets and risk tolerance. A periodic review can be triggered by any number of events – a life change such as marriage or the birth of a child, a major promotion on the job accompanied by a large raise, or a shift in the financial markets and impact on one’s investment portfolio.
The Numbers Don’t Lie
Modern portfolio theory – the blueprint we use to manage client assets – champions diversification. Put into practice, investors’ principal is divided among asset classes – traditionally cash, equities and bonds – that often react to economic conditions differently and tend to increase overall gains and cushion the risk investors ultimately shoulder.
Modern portfolio theory also validates that whole life should be the centerpiece of a real world financial strategy – one that recognizes that actual returns aren’t what you gain, but what you get to keep! To demonstrate this, we rely on Thornburg Investment Management’s annual study that takes 30-year historic returns in various categories of assets and then subtracts management fees, dividend taxes, capital gains taxes and inflation. The result is the “real real return” for each investment included in the study.