Owning Permanent Life Insurance as an Asset Class in Your Portfolio

When most think of life insurance they immediately go to widows and orphans, but I am of the school that life insurance is more than that. It can be an important tool in the toolbox of your portfolio.

While life insurance has the ability to keep those widows and orphans in their familiar financial position even after the bread winner has passed away, let’s never forget that, it also offers compelling advantages as a legitimate asset class. Think of your portfolio as a collection of different tools, each designed for a specific purpose and time horizon. Stocks offer growth potential, bonds provide stability, and real estate can build long-term equity. Permanent life insurance, with its unique characteristics, adds a layer of diversification and potential benefits often overlooked.

Here are some reasons to take a closer look at permanent life insurance as an asset class in your portfolio:

Tax-Deferred Growth: With any asset, the deferral of taxes is a vital benefit to the long-term growth of the asset. Permanent life insurance has a cash value component besides the death benefit that will grow tax deferred while the cash is with in the policy. By being able to defer taxes, you allow more of the asset to grow, rather than giving principle to the IRS every year. Similar to the benefits of tax deferral within an IRA or qualified plan.

Living Benefits: Unlike term life insurance, permanent policies accumulate cash value.This cash value can be accessed through policy loans or withdrawals.This cash value offers a potential source of funds for emergencies, opportunities, or even a way to supplement retirement income. It is important to remember that loans and withdrawals will impact the death benefit, make sure to speak with your insurance professional when contemplating using the cash value in the policy. 

Portfolio Diversification: In a world of volatility, permanent life insurance can offer a degree of stability. The cash value is not correlated to stocks or bonds, making it a valuable diversifier. When other asset classes are down, cash value in your policy may provide a buffer, helping to smooth out overall portfolio fluctuations. Permanent life insurance with a mutual life insurance company has two components of cash value.Guaranteed cash value as well as dividends. The guaranteed component will only increase, as it is contractually guaranteed to equal the original death benefit at age 100.Dividends are based on the mutual life insurance companies’ profitability and are not guaranteed but do help over the life of the policy to accumulate cash. 

Estate Planning: Beyond providing for beneficiaries, permanent life insurance can be a powerful tool for estate planning. The death benefit can be used to pay estate taxes, ensuring that assets are passed on to heirs as intended, without forcing the sale of valuable possessions.

Potential Tax-Free Income: If structured properly, the withdrawals from your cash value in retirement can be tax-free. This can be a significant tool when trying to mitigate the drag that taxes cause on retirement income. A tax-free income can help avoid higher marginal brackets and keep the assets you have grown for the purpose of spending in retirement in your pocket, not the IRS’s. Always remember to consult with your tax professional when using this strategy. 

Peace of Mind: Beyond the financial benefits, owning permanent life insurance provides invaluable peace of mind.Knowing that your loved ones are protected, regardless of when the unexpected happens, allows you to focus on other aspects of your life with greater confidence. 

Important Consideration:It is crucial to understand that permanent life insurance is not a “one-size-fits-all” solution. It is essential to work with a qualified financial advisor who can consider your unique goals and financial situation. They can develop a policy that will match your specific situation.

While the primary purpose of life insurance remains protecting your loved ones, it can offer much more.The potential for tax deferred growth, living benefits, and portfolio diversification makes it a compelling asset class worth considering. By understanding its unique advantages and working with a financial professional, you can leverage permanent life insurance to build a more secure and prosperous future.