Reduce Portfolio Risk with Whole Life Insurance

Over the last ten or more years, the stock market has performed incredibly well for us. The market appeared to be in a never-ending rush to reach ever-higher levels. In fact, by starting blogs and giving out financial advice that essentially repeated the now-deceased Jack Bogle’s long-standing philosophy, a huge number of amateur investors acquired unbelievable fortunes. And until very recently, they appeared to be geniuses.

Life Insurance: The True Path To Security

We have been using whole life insurance or indexed universal life insurance as a volatility buffer for a number of decades. I’m not trying to start a “us vs. them” debate or persuade someone to sell all of their stocks or investments right away and purchase as much life insurance as their budget will allow. That’s ridiculous, and at The Insurance Pro Blog, that’s never been our stance.

What I do want to argue today is that, with the correct guidance, you can successfully use life insurance as a strategy to de-risk your portfolio.

Let me start by pointing out that life insurance is a relatively low volatility product when it comes to year-over-year account values (that is, excluding variable life insurance products). It’s designed to provide a loss guarantee, and you can take advantage of many advantages from this. We can’t go into each and every one of those advantages today, but as we continue to explore this topic, I want you to keep that thought in mind.

Furthermore, I will use some instances to more clearly highlight the benefits of life insurance because it is quite challenging to fully understand the advantages of any financial product when it is only explained theoretically.

Transferring Assets To Life Insurance Can Help You De-Risk Your Portfolio With Whole Life Insurance

Let’s examine the subsequent circumstance. A fifty-year-old man with several million dollars in assets. In terms of being ready for retirement, he’s got it all together, but he’s concerned that losses could deplete his funds. He realises that stocks and bonds cannot ensure that his portfolio will always be worth the same amount or more simply because he has reached a specific balance thus far.

He plans to sell assets valued at $500,000 and transfer the funds to a full life insurance policy. This policy minimises less significant services from the insurance business (such as the death benefit) while maximising the amount of cash value accumulation through a number of sophisticated design adjustments.

It’s evident that after ten years, he received a 3.10% return on his investment. For an asset that has absolutely no chance of going negative, that is a very desirable outcome. By the year 20, the performance has improved even further to 4.28%. However, the rate of return is a sometimes deceptive statistic that generally has no bearing on the amount of money needed for regular living expenditures.

He can begin to draw money at the age of 20 and continue to do so until he is 100 years old (not shown in the ledger above). This income is equivalent to nearly 5.5% of the account balance. This income is totally flexible, exempt from income taxes, and not subject to calculations of Modified Adjusted Gross Income. By “flexible,” I mean that he is not obligated to take any particular amount within any given time frame, unlike what an annuity benefit or dividend investment may demand.

The asset’s low volatility allows investors to take income against it that is significantly higher than the conventional 4% guideline. The owner has more withdrawal power because this insurance will never have a year with a negative rate of return on cash value. Although the rate of accumulation may differ, the timing of negative returns has a much greater effect on distributable income.

Recall that he still has more than a million dollars’ worth of equities, which should increase in value at a pace consistent with typical stock market returns. To protect against future volatility in the portfolio’s stock sector, the entire life insurance play simply locks in a fixed level of asset value.

It’s also crucial to remember that everything is scalable in both directions. The relative outcomes would be almost the same if he had more assets and desired to contribute more to life insurance, or if he had fewer assets and wanted to contribute less to life insurance. I only bring this up to emphasise that you are still a viable candidate for such an approach even if your circumstances are different.

Creating the Conditions for Future De-Risk

Let’s now examine an other situation. forty-year-old who, as retirement approaches, is beginning to worry about the threats he might encounter. He has saved quite a bit up to this point, but he’s unsure if he should change his strategy to proactively handle any hazards in the future. Instead of taking advantage of what the market will probably create over the next few decades, he would prefer to leave the assets he now have in place.

He intends to utilise $50,000 of his annual savings to purchase a whole life insurance policy. Typically, an insurance agent would present to him a situation quite similar to this one:

This is acceptable and will be a useful asset for retirement income. As a de-risking tactic, we can adjust a few things to potentially increase the buying power of this item even further by coordinating it with his other assets.

We are aware that he would amass wealth from sources other than this entire life policy. What if, as he approaches retirement, he transferred some of those funds to a less hazardous life insurance allocation?

A number of assumptions regarding the whole life policy are made in the income forecast above. There is an assumed dividend. It is assumed that the policyholder will continue to draw income until they turn 100 years old, at which point they will cease. Additionally, it is assumed that the loan utilised to produce this revenue would accrue interest annually and that the policy owner will not be responsible for paying this interest, which will be added to the loan balance.

What if, however, he did pay the interest on the loan? What if he set aside a portion of his other assets and paid interest annually? This is the course of events:

He makes approximately $92,000 a year. The way he does this is by using loan repayment to transfer some of his riskier assets into whole life insurance, which allows him to increase the more consistent and tax-free income he receives from the policy. Observe that he earns $459,115 in income throughout the first five years while paying a total of $79,246 in loan interest. What a wonderful compromise.

Consider this: there is an exact $91,823 income delta in this situation. This means that if he decides to leave money in his other assets, he must ensure that doing so will allow him to earn at least that much annually, or whatever his comparable worth is.

Keep in mind that life insurance has very significant income-generating potential relative to other assets because it does not experience volatility. Remember that life insurance revenue numbers are net of all expenses, including taxes and fees.

He might eventually be able to make more money than the initial $106,291 even if he decided not to sell off other assets in order to pay the interest on the life insurance debt. This is where a lot of people get stuck trying to figure out the exact ideal combination. When I get older, how much of my other assets should I reinvest in life insurance to increase my income? It’s not a known answer, so stop torturing yourself with it. This thought experiment isn’t meant to establish beyond a shadow of a doubt which course of action is best in every situation. It serves to highlight what is offered. to make consumers aware of all the alternatives available to them when adding life insurance to their portfolio.