Whole Life Insurance: The Unique Asset

Family made of leaves held between set of hands. Unique asset class.

“Don’t put all your eggs in one basket.”

This is a common-sense approach to nearly any endeavor you can imagine in life. Putting all your eggs in one basket, after all, may leave you with nothing if there ends up being a hole in the basket, so to speak. So, too, can this idea be applied to long-term asset accumulation. In an economy that loves to boast about the stock market, it’s wise not to funnel too much money into Wall Street. 

In fact, there’s wisdom in not putting too much of your savings into any single financial asset or product, even including real estate, certificates of deposit, or countless other items. A truly diversified portfolio won’t just include stock picks, it will also include a range of asset types. That way there’s a variety of liquidity, cash flow, growth, and certainty. 

What Asset Class is Whole Life Insurance?

It’s an interesting question, one for which the typical answer seems to be changing.

One long-held “typical” perspective regarding asset classification has been that “insurance is insurance and investments are investments, and the two should not mix.”

In this line of thinking, insurance (of any type) is a different type of asset. Insurance provides protection against loss, which is an important part of a well-rounded financial program. Yet many people, in their understanding of insurance, don’t view insurance as an accumulation asset. In many cases, it’s not. And yet, there’s a unique type of life insurance that IS designed for accumulation.

Neither Insurance Nor Investment–A Unique Asset Class

That’s the position advanced by Richard M. Weber in a paper titled, “Life Insurance as an Asset Class: A Value Added Component of an Asset Allocation.” In this 106-page document, Weber, an MBA and founder of an insurance consulting firm, concludes that whole life insurance is an asset with singular characteristics.

After all, the cash value component of whole life insurance “matures” upon death, rather than a specified date or market event. While the timing of an individual’s death is unknown, the certainty that there will be a financial settlement upon that date can make estate and inheritance plans much more effective. In fact, those wishing to pass on an inheritance can be certain of it happening, so long as they keep a policy in force. 

And, in the meantime, cash value accounts accumulate like other tax-deferred vehicles. Through policy loans, policy owners can access the cash value at any time for any reason. 

An asset with less risk

Not only is whole life insurance different, Weber further states that owning it can “produce a return that is just as favorable, with less risk, than the same portfolio without life insurance.” He provides an example where interest from an income-producing bond portfolio is used to pay the premiums for a permanent life insurance policy, as opposed to being reinvested in additional bonds.

In the early years of the comparison, the reinvested bond account produces a greater asset value (but contains no insurance benefit). However, as time goes on, the combination of cash values and bond values exceeds the bond-only account—it provides a guaranteed insurance benefit as well. In other words, with time you can have your cake and eat it too. 

Weber makes one other noteworthy observation about whole life insurance: It is an asset that needs regular management. With its unique “maturity” features, a whole life insurance policy is a long-term holding in someone’s financial portfolio—once you buy it, you expect to have it for your whole life. Yet during your lifetime, the policy’s design flexibility, which may include various riders, as well as use of the liquidity, may prompt you to make adjustments to align with your changing objectives.

To take full advantage of these possibilities, a whole life insurance policy requires regular review and management: it is not a “set-it-and-forget-it” financial product.

Whole Life Insurance: Hedging Inflation Since the Beginning

Furthermore, whole life insurance can provide a compelling hedge against inflation because of the uninterrupted compounding interest. This type of accumulation and savings strategy has performed well through every inflationary even over the last hundred years or more. After all, there can be no loss on the account unless there’s a withdrawal or default on the loan. Otherwise, it keeps growing and earning interest. 

On the other hand, stock market accounts have performed poorly in the face of economic storms. And while many investors will tout returns above 20%, one bad year requires a lot of “catch-up.” It’s hard to outpace inflation when you’re also trying to make up for lost time. 

Here’s why whole life insurance works when Wall Street does not:

  • Whole life insurance is a non-correlated asset. This means you won’t lose money if the market crashes. 
  • No-questions-asked access via policy loans. When you can’t count on banks, you can count on your policy. 
  • Uninterrupted compounding. You’ll earn interest on your full cash value, even if some of it is collateralized. 
  • A built-in estate planning component, with 100% tax-free wealth transfer upon death. 
  • Income for retirement, with no age restrictions, penalty, or taxes.

Diversify Your Assets with Life Insurance

If you truly want to diversify your portfolio, adding some whole life insurance to the mix can help. You’ll ensure that regardless of what your other assets are doing, your cash value is growing, and safe from the stock market. Doing so can increase your liquidity and flexibility.  And, in times of economic upheaval, you’ll know that you’ve got at least one thing for certain.

If you have questions, or want to know how life insurance fits into your current financial portfolio, contact us. We can put you in touch with a Prosperity Economics™ Advisor who can help you find a unique solution for you. 

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