Whole Life Insurance: The New Asset Class

Whole Life Insurance: The New Asset Class

November 17th, 2009 // 12:10 pm @ Andrew Rosenbaum

In economic terms, an asset is any form in which wealth can be stored. Asset classes have three essential characteristics:

1. They embody a future benefit that involves a capacity to contribute to and receive future net cash flows.
2. They involve a resource controlled by a firm or an individual that offer the possibility from which future economic benefits (besides cash) are expected to flow.
3. They allow the owning entity control and access to the benefit.

I liken the performance of permanent life insurance to that of an investment-grade bond with a super-bonus.

The word “bond” works well here because a bond is a financial instrument that is very stable, reliably producing low-risk gain. It doesn’t offer crazy, off-the-chart returns; just safe reliable actual rates of return.

The super-bonus is the death benefit, which is payable income-tax free to the policyholder’s chosen beneficiary. More importantly, with the right strategies the death benefit can be leveraged by the policyholder  to use while living.

When used this way (which I discuss in the next chapter), whole life insurance is an asset class of substantial value that meets all the designated criteria:

• The cash value provides the policyholder with living benefits similar to a fixed account with a guaranteed minimum return that can be used for a wide range of applications.
• The death benefit provides cash when needed most.
• The tax-deferred cash accumulation can be accessed income-tax free.
• The death benefit is payable income-tax fee and, with the proper strategies, estate-tax free.
• Policy proceeds are typically beyond the reach of creditors.
• Unlike equities, with a waiver of premium rider, the policy is self-completing in the event of disability.
• The death benefit is based on the event of death — not a market event that can cause a downturn in value.
• Premiums may be funded with interest earned from other invested assets in lieu of budgeted income.
• Adding permanent life insurance to a portfolio of cash, bonds and equities can produce at least as favorable long-term result with less risk then a similar portfolio without life insurance.

Because of these factors, I view permanent life insurance as an unknown new asset class. It is even more appealing in that it still flies under the radar screen of the federal government’s tax-claw.

Here’s another example of a tax benefit using this financial contract. Imagine you put $10,000 of annual premium into a permanent life insurance policy for ten years.

Your basis on this policy would be $100,000 ($10,000 x ten years). Let’s say that over the ten years the equity in the policy grew to $110,000 of cash value. Because permanent life insurance operates with a First-In First-Out principle, you could take the $100,000 (your basis) out of the policy without creating a taxable event.

You could also borrow virtually the whole amount as a loan, using the cash value as collateral. Of equal importance is that you can do so without disrupting the cash value growth, or the death benefit  features of the policy.

Most insurers have very low net cost associated with borrowing cash values. But the most powerful features are the utility, liquidity and control you have over your money.