Consider Life Insurance as an Asset in a Diversified Portfolio

Life insurance is generally thought of in terms of protecting loved ones in the event of premature death. While this is an important aspect of life insurance, it’s only part of the story. As an individual’s career flourishes and resources allow for personal investing and long-term financial planning, life insurance may be an ideal component of a person’s or business’s overall portfolio, complementing fixed-income assets and helping to moderate risk and volatility in the total portfolio. Consider the following facts as to why it may make sense for your clients to consider life insurance as an asset in a diversified portfolio.

Life Insurance Provides an Expected Value
Assets come in all shapes and sizes, and so do their growth and tax patterns. No one has a crystal ball that will determine what the value of most assets will be in the future. However, life insurance can provide an expected, predictable, and sometimes guaranteed value depending on the type of policy that is purchased. For the payment of a specific premium, the specific death benefit will be paid should the policy holder pass on tomorrow or 20 to 30 years from now. This can be an important portfolio feature when it’s necessary for an estate to have a specific sum of money pass on to heirs, such as when there is a need to “equalize” estate assets between business and nonbusiness heirs in the case of a family business.

Life Insurance is Not Correlated to Market Performance
Many asset portfolios are comprised of stocks, bonds, and mutual funds that may be volatile and fluctuate frequently. Unfortunately, having a strong, highly valuable investment portfolio does not necessarily mean that today’s value will eventually be passed on to loved ones. A market downturn could result in a significant reduction in its value when it is passed on at death and could jeopardize the financial security of surviving family members. Depending on the type of life insurance policy purchased, life insurance is not tied to market performance. Having an asset in a portfolio that is not correlated to market performance is tantamount to being diversified, which has always been seen as a smart move.

Life Insurance Provides Immediate Liquidity
For many individuals, the majority of their assets are comprised of their businesses, real estate properties, and other illiquid assets. This can present a huge problem when trying to cover expenses, taxes and other costs associated with wealth transfer. Life insurance can provide immediate liquidity upon death of the insured. Also, liquidity from a life insurance policy is not limited to death since, depending on the type of policy, cash value can also be accessed while alive, should the need arise.*

Life Insurance Provides Tax Benefits
Having tax-advantaged assets as part of a portfolio is usually a goal. Unfortunately, most investments do not grow tax-deferred (unless they are in a qualified retirement plan or IRA) and even if they do, they may not pass on income tax-free to your client’s loved ones. Life insurance provides both – cash values may grow tax-deferred and when the insured passes away, the death benefits are income tax-free under IRC § 101(a). Finally, properly structured life insurance can avoid estate taxes.

Life insurance can be problematic for the typical buyer. The very consideration of life insurance implies death – a topic most people would prefer spending little time pondering. Life insurance may be further discounted in the consumer’s mind when a tangible present benefit cannot be perceived. Life insurance may be better appreciated if financial advisors learn to discuss its use in the context and vocabulary for which consumers already manage their investment portfolio.

How DBS Can Help
Call your DBS Case Design Analyst to learn more about how life insurance product features can meet your client’s objective.

*Loans and withdrawals will affect the cash value of the policy and could affect the death benefit. Amounts received on withdrawals and surrenders may be subject to income taxes and/or policy surrender penalties.