Is Life Insurance an Asset?

"Life insurance as an asset class was a novel and perhaps even controversial idea 10 years ago"

- Richard M. Weber MBA "Life Insurance as An Asset Class" (2014)

So, what type of asset class is a life insurance policy?

Financial advisors say life insurance is like cash or fixed income. It depends on how it is being used.

Let's take a look at how life insurance works like fixed income.

Fixed Income
A premium from a policyholder gets invested by insurance companies into fixed-income assets.

Insurers invest 85%+ of policyholder premiums in investment-grade fixed income. This offers high levels of capital protection and steady income from interest payments.

High-grade fixed-income investments also give insurers liquidity. In other words, insurers can turn their investments into cash on demand if they need to.

So, a policyholder can view their life policy's cash value as part of their fixed income portfolio.

But it gets better.

Life Insurance Guarantees
Life Insurance companies guarantee policyholder returns. It's worth saying again, life insurers give guaranteed returns.

The guaranteed return is often 1-2% per year. A very good return when global interest rates hovering around 0%. That's not the highest return. It's the minimum return.

And it's this guaranteed return that supports the policy's cash value growth.

Life insurance has lower risk and lowers volatility compared to a fixed income portfolio.

"life insurance is attracting attention among investors looking to improve the return or reduce the risk of the fixed-income portion of their investment portfolio."

- Life Insurance as an Asset Class by Miller, Arruda and Ng

Now let's take a look at how life insurance is like cash.

Cash

A life insurance policy's death benefit gets paid out in cash. The cash payment is guaranteed by the insurer. The fixed payout is known in advance.

This is unlike an investment portfolio. It can suffer from stock market crashes and bond market corrections. The result, fluctuations in a portfolio value.

Depending upon market conditions, some investments may be hard or impossible to sell. Liquidating investments into cash may be disadvantageous.

Compare this to a life insurance policy. It guarantees to pay out a cash lump sum whatever the market conditions.

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The Role of Life Insurance in Your Portfolio

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Life insurance can produce better rates of returns than fixed and cash.

"life insurance intended for a lifetime can produce at least as favorable a long-term return with less risk within a portfolio of equity and fixed components than a portfolio without life insurance"

- Richard M. Weber MBA "Life Insurance As An Asset Class" (2014)

It provides a very useful investment option for clients and their financial advisers.

Asset Allocation
When building an investment portfolio, diversification across asset classes is important.

Diversification is when investors buy different assets. Asset classes include equities, bonds, property and commodities.

How you put these together and how much you have of each will determine your investment risk.

The other factor is investment correlation. In other words, do these asset classes go up and down in value together. Or do they rise and fall at different times.

Most investors want a diversified portfolio. They want some assets rising, whilst accepting that others may fall or not rise as much. This approach smooths out returns and makes it easier for investors to sleep at night. Especially if we are already living off our investments or retirement planning. This principle of investing is known as Modern Portfolio Theory.

Having a blend of asset classes produces higher expected returns and lower volatility. So taking this one step further, we add life insurance as an asset class. We know this increases returns and reduces risk.

But it also provides a death benefit. After your lifetime, the policy's death benefit cash payout will increase your portfolio value. This can pass to your family or the next generation.

Life insurance is a powerful tool in any investors portfolio.

Types of Cash Value Life Insurance

The following types of life insurance policies have a cash value.

• Universal life insurance (ULI) – Part of the premium gets invested. Policy owners can choose how this premium gets invested. A popular type of policy is indexed universal life insurance. The insurer credits the policy based on the underlying performance of the investment. Once returns are added, they cannot be taken away.
• Whole life insurance (WOL) – Part of the policy premium is invested by the insurer. It goes towards growing the guaranteed cash value. Once added, this cash value cannot be removed. Whole life insurance is the most secure type of life insurance policy.
• Variable universal life insurance (VUIL) – The policy premium gets invested into shares, bonds, property and commodities. Values fluctuate in line with market returns. Policyholder cash values can fall, as well as rise. Variable universal life insurance can have an asset allocation that meets an investor's exact needs.

Life insurance policies have other attractive features that make them a unique asset class.

How to Leverage Your Life Insurance as an Asset

Life insurance isn't just a safety net for your loved ones—it can also be a valuable financial asset. Leveraging your life insurance policy can enhance your wealth-building strategy and help maximise the value of your investments. Below, we'll explore how to use your life insurance policy effectively, turning it into a strategic asset contributing to your financial growth.

Borrow Against Your Life Insurance Policy

One way to use your life insurance as an asset is by borrowing against the policy. This involves taking a loan from the life insurer that issued your policy, using the policy's cash value as collateral. You pay interest to the insurance company, which then credits back your policy with a portion of that interest while retaining a spread.

At Capital for Life, clients often use a policy loan to buy rental properties, as this loan facility tends to be more flexible than traditional bank financing. Using your life insurance policy to access capital, you can diversify your investment portfolio and make strategic financial moves without tapping into other savings.

Use Your Life Insurance Policy as Collateral for a Bank Loan

Another powerful way to leverage your life insurance policy is by using it as collateral for a traditional bank loan. When your policy is collateralised by the bank, you gain access to a secured loan, which can be used for purposes such as investing in real estate or making other significant financial moves. High-net-worth clients have frequently used this strategy to finance their policy premiums through premium financing. While current interest rates have made this form of premium financing less common, they remain valuable when rates are favourable. When used effectively, leveraging your life insurance policy as collateral can be an excellent way to enhance liquidity and maximize financial growth.

Withdraw from the Policy's Cash Value

You can also make direct withdrawals from your policy's cash value. Unlike a loan, these funds do not need to be repaid, offering a flexible way to access money when needed. At Capital for Life, many clients have found this option helpful in providing secondary retirement income, supplementing their other retirement savings, and ensuring a more comfortable financial future. Withdrawing from your cash value provides immediate access to liquidity, but it is essential to understand that any withdrawals may reduce the death benefit available to your beneficiaries.

Surrender the Policy (Cash Out)

You can surrender your policy if you no longer need life insurance coverage. Surrendering means cancelling your policy and cashing out the accumulated value of a cash-value life insurance policy. This can be useful if your financial needs have changed and you require the funds for other purposes. However, it's crucial to remember that surrendering your policy will end your life insurance coverage entirely, which may leave your beneficiaries without financial protection.

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All of these features make life insurance a unique asset class. It is unlike any other conventional asset class.

How safe is life insurance as an asset class?

Financial Strength

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Investment into shares and bonds is only as safe as the company in which you are investing. The same is true with life insurance.

The guarantees insurers provide are only as good as the company giving them. So you should always choose an insurer with a very high financial strength rating. Ratings are given by credit rating agencies like Standard & Poor's, Fitch and Moody's.

You can check the websites of insurers to see how safe they are. Or read more about the importance of life insurance company financial strength.

Conclusion

There is growing acceptance that life insurance is its own asset class. It can bring extra benefits to a high net worth clients investment portfolio. But this article is not about an investment portfolio vs. life insurance. It's about using a combination of these assets to create a better result. Adding life insurance to your portfolio is a powerful way to add more value during your lifetime. And perhaps above all, it's about creating a far greater legacy value for those who follow us.

At Capital for Life, we specialise in helping clients understand the full potential of their life insurance policies, positioning them as a valuable part of a well-rounded financial strategy. To learn more about how to maximise your life insurance as an asset class, get in touch with us or explore our comprehensive resources.

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