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Many clients look at life insurance and investments such as bonds and equities as distinct concept with the former not meant to mix with the latter.
Fortunately, advisors can add needed clarity regarding implementing life insurance under the umbrella of a broader investment portfolio. After all, life insurance is an asset class unto itself – something many clients aren’t aware of.
When discussing with clients the role of life insurance in a portfolio, it pays to remember what a client’s primary motivations are for buying a policy in the first place. Those reasons often include one of or a mix of the following: paying estate expenses and taxes, ensuring the family is provided for in the event of premature death and limiting the chances of inheritance spats among heirs.
Think of those conversations as the foundations for discussing life insurance’s investment advantages, which include diversification.
Life Insurance: The Great Diversifier?
Advisors endeavor to build diversified portfolios for clients, but in recent years, some asset classes have become increasingly correlated with one another, diminishing portfolio’s diversification traits in the process. Sure, some old favorites have held strong on this front, but achieving diversification isn’t as easy as it used to be.
Life insurance can help and because this is arguably a boring asset class, it can also serve the objective of reducing portfolio volatility. That’s checking two boxes with one concept.
“The rate of return on life insurance death benefit is typically not correlated to the stock market or interest rates,” according to Nationwide. “A set death benefit is paid at the time the insured dies, regardless of the national or global economic conditions. Life insurance death benefits may be a key component in income replacement, mortgage protection, tax efficient asset transfer, and business succession planning.”
Another positive attribute of life insurance as an investment tool is that it offers clients a variety of tax advantages, confirming its utility as a part of broader estate planning.
“Furthermore, proceeds from a life insurance policy owned by a properly drafted and maintained irrevocable life insurance can be income and estate tax free. The beneficiaries may receive a higher after-tax rate of return from a portfolio including life insurance than one with only taxable assets,” adds Nationwide.
Considering Various Policies
When implementing life insurance into a portfolio, clients should note advisors are invaluable because they’re knowledgeable of the various forms of life insurance policies. For example, a cash value policy may be attractive to some clients, but it might offer less in the way of reduced correlations to other asset classes.
A permanent policy offers fixed rates of returns or the ability to participate in risk assets, meaning clients should certainly discuss this option with advisors as well.
“A term policy has no cash value component and is only in force for a certain period of time. An insured who is interested in accessing future cash value income tax free may prefer a permanent policy. The value of a permanent policy typically grows as time goes by and premiums are paid, and the death benefit won’t expire as long the policy is kept in force,” concludes Nationwide.
Bottom line: Life insurance can be a valid portfolio diversifier and it’s one many clients aren’t yet thinking of in that positive light.
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