Recent volatility has renewed recession fears among investors young and old. Similar to 2008, investors are wondering if there are any safe places to put money today. Life insurance products continue to provide not only the death benefit protection consumers need, but it can also be used for a variety of supplemental funding needs.
Today’s life insurance products continue to offer flexibility and opportunities for advisers and their clients. When you consider our economy’s present volatility, it is possible that life insurance might offer clients another accumulation vehicle, above and beyond more traditional investment options.
According to the Association for Advanced Life Underwriting, over 75 million families rely on products provided by the life insurance industry and there is currently $18 trillion of life insurance covering the lives of Americans today. These facts combined with the industry’s investment of $4.6 trillion into the U.S. economy, makes the life insurance industry a solid and profitable place for Americans to find financial stability.
Why Should Permanent Life Insurance be Considered an Asset?
Today, the argument can be made that permanent life insurance is an asset along with traditional vehicles like stocks, bonds and commodities. Most importantly, life insurance policies provide clients with death benefit guarantees. However, policies may also offer guaranteed interest rates of return backed by the issuing insurance company. If growth is desired, paired with a willingness to take on risk, variable life insurance products allow for tax-deferred growth of the cash value through a variety of underlying investment options.
Death benefits from a life insurance policy can help families with their estate planning needs or replace income provided by the insured at the time of his/her death. It’s also an excellent asset to bequeath to a charity and permits grantors the ability to spend down corpus while guaranteeing legacy.
Favorable Access to Liquidity:
While cash value of life insurance generally grows slowly in the early years of the policy, it can provide the client with a significant source of funds with favorable access to liquidity in later years. Loans and withdrawals, up to cost basis, can be made without immediate tax consequences – providing the policy holder is careful not to lapse the policy. Low interest rate loans with no pre-qualification for the loan can also provide an excellent source of capital during economic turbulence or alternative expenses (i.e. college expenses). Of course, loans and withdrawals will reduce life insurance policy cash values and death benefits by the amount taken plus any applicable loan or withdrawal charges.
The Tax Advantages:
Life insurance enjoys numerous tax benefits when properly structured and funded through premium payments. Permanent life insurance is currently the only financial product that boasts the following tax advantages:
- Tax deferral of policy cash value accumulation
- Tax-free loans and withdrawals until cost basis (cumulative premiums) is recovered
- Tax-free income using withdrawals up to cost basis
- No set IRS limit on premiums (unlike qualified plan retirement savings vehicles) but must be cautious as to not over fund a policy and create a Modified Endowment Contract (MEC).
Non-Correlated Asset to Financial Markets:
Certain types of permanent life insurance are non-correlated assets that are not affected by the daily market swings that batter some investment portfolios. There are a variety of investments that are used to help negate the volatility of the market; however, life insurance too can be non-correlated to the ebbs and flows of the market and the cash value of a policy may help to supplement a client’s retirement income needs or to help fund other future expenses.
Knowing where to put money now isn’t easy. Given the turbulent market environment, more and more investors are looking for ways to insure returns inside their portfolios against the potential ravages of a bear market. Now smart wealth advisers are suggesting to their individual clients that they should strongly consider how a contract with a life insurance company can sustain a retirement portfolio (and a lifestyle) through rough times while also creating financial protection via the death benefit for the ones they love.
Stable Return if Held to Mortality:
If a policy is held to mortality it may provide a number of benefits. It offers an excellent internal rate of return on premiums paid if the policy holder dies prematurely, and could offer a very reasonable net internal rate of return at projected mortality.
Traditional Cash Values Offer Consistent Fixed Income Returns:
One must also consider that the traditional cash values offer a consistent fixed income return. Current crediting rates on universal life insurance contracts are between three and four point five percent. Whole life insurance contract total returns have exceeded five percent after dividends and yields have proven to be consistent during economic downturns.
It’s a different world today from when your parents purchased life insurance. Dynamics have changed and people are realizing the value of life insurance policies. This is a great tool for investors and a strong asset class to add to a portfolio, especially in uncertain economic times.
Adam Sherman, CLU, ChFC, CFP, is CEO of Firstrust Financial Resources in Philadelphia, Pa. He is a financial adviser with First Trust Financial Advisors, a Registered Investment Advisor with 25 years experience in the financial services field. For more information visit www.firstrustfinancialresources.com.