Using Permanent Life Insurance to Enhance a Portfolio

Understanding Permanent Life Insurance as Part of an Integrated Asset Strategy

Permanent life insurance, which includes products like whole life, universal life, and variable universal life, is designed to provide lifelong coverage with a death benefit and a cash value component that has the opportunity to grow over time. Unlike term life insurance, which expires after a set period, permanent life insurance can build cash value that can be accessed during the policyholder’s lifetime, making it a dual-purpose financial tool: protection first and cash value accumulation.

The cash value in permanent life insurance is guaranteed to grow tax-deferred (in whole life policies) or tied to market performance (in variable or indexed universal life policies). This cash value can be borrowed against or withdrawn, offering supplemental income flexibility (It should be noted that accessing the cash value will reduce the available cash surrender value and death benefit). and flexibility. When viewed through an investment lens, permanent life insurance can be  a low-volatility asset with unique features offering both death benefit protection and cash value accumulation guaranteed to grow that can be accessed throughout your lifetime.

Lowering Portfolio Risk with Permanent Life Insurance

The efficient frontier is all about optimizing risk and return. Permanent life insurance can complement traditional low-risk assets like bonds or fixed-income securities in helping to reduce portfolio volatility.  Permanent life insurance, particularly whole life insurance, offers a compelling portfolio componenet for risk-averse investors seeking to lower their overall risk profile while also needing death benefit protection. Here’s how:

• Low Correlation with Traditional Assets
  Permanent life insurance has a low or negative correlation with stocks and bonds. The cash value growth in a whole life policy, for instance, is tied to the insurance company’s general account, which is often invested in high-quality, fixed-income securities. This growth is insulated from market volatility, providing a non-correlated option when equity markets decline. By adding permanent life insurance to a portfolio, investors can reduce volatility.

• Wealth Preservation
  Permanent life insurance allows you access to the cash value as your need for life insurance death benefit decreases.  This can be very helpful in times of a down market in retirement.  Instead of selling shares of your equity accounts in a down market, the cash value in your life insurance can be accessed instead.  Allowing those assets to recover, not locking in a loss via sale in a down market.

• Tax-Advantaged Growth
  The cash value in permanent life insurance grows tax-deferred, and if the policy is structured properly, loans or withdrawals can often be taken tax-free up to the policy’s basis. This tax efficiency enhances the after-tax return in a diversified portfolio, this tax advantage may improve the risk-adjusted return, aligning with the goals of the efficient frontier.

• Guaranteed Returns and Predictability
  Whole life insurance policies often provide guaranteed growth of cash value, offering the opportunity for predictable income stream as the policy matures and your priorities change. This certainty is particularly valuable for conservative investors or those nearing retirement, as it reduces reliance on volatile assets like equities. By anchoring a portion of the portfolio in a stable, predictable alternative, investors can take on slightly more risk elsewhere without shifting the portfolio off the efficient frontier.

Practical Considerations

While permanent life insurance offers compelling benefits, it’s not a one-size-fits-all solution. Investors and advisors should consider the following:

• Costs and Fees: Permanent life insurance policies often have higher upfront costs, including premiums and administrative fees, Working with a reputable insurer and tailoring the policy to the individual (e.g., through paid-up additions) is critical.

• Supplemental Income Needs: While cash value is accessible, withdrawals or loans will reduce the cash value and death benefit or incur penalties. Investors should ensure the policy aligns with their needs.

• Time Horizon: Permanent life insurance is a long-term commitment. The cash value takes time to accumulate and the insurance fee structure, makes it less suitable for short-term investment goals.

• Underwriting and Health: Premiums and policy terms depend on the policyholder’s health and age. Younger, healthier individuals typically secure more favorable terms.

A Strategic Tool for Wealth Management

Permanent life insurance is not a replacement for traditional investments but a complement that can enhance portfolio diversification and risk management. By incorporating the cash value component into a portfolio, investors can reduce volatility, improve tax efficiency.

For high-net-worth individuals, retirees, or those who are very risk adverse or those seeking a balance between wealth preservation and growth, permanent life insurance offers a unique value proposition. Financial advisors can leverage this product to craft tailored strategies that align with clients’ risk tolerance and long-term goals. In an era of market uncertainty and low yields, positioning permanent life insurance as a low-risk, tax-advantaged asset is a strategy worth exploring for those aiming to optimize their place on the efficient frontier.