The investment case for life insurance

life insuranceLife insurance is constantly compared to an investment and more specifically the stock market, yet most conventional financial wisdom says that as we age you should move more of your portfolio to bonds.

The comparison from life insurance to stocks is that life insurance will underperform, but shouldn’t we be comparing life insurance to the bond sleeve? What if the bond sleeve in your portfolio could never go negative? What if as interest rates rise, your life insurance paid bigger and bigger dividends? What if the tax protection and liquidity of the life insurance were more predictable and less taxable to your portfolio and income tax liability?

Furthermore, many talk about municipal bonds and their tax-free nature, but isn’t that a pretty concentrated risk? Look at Puerto Rico, who is having major debt struggles and is not able to repay municipal bonds or look at the indebtedness of the city of Chicago, Illinois. According to, Chicago is behind $13 billion in paying their bills and has accumulated close to $250 billion in additional debt and unfunded liabilities.

With states around the country talking about the pension problem and our national debt approaching $20 trillion, I am not sure that that debt is where I would want a portion of my portfolio.

Conversely, look at major mutual insurance companies around the country that have been in place for over 100 years paying dividends – a guarantee for policyholders. Most are paying in excess of 5% dividends and those accrue within the life insurance policy tax-deferred. If accessed via a loan, that income can also be leveraged while your cash-value still accrues interest and you don’t pay any tax. In addition, many whole life contracts have a 4% guaranteed rate of return.

How many people would move their cash if they could earn 4% tax-free guaranteed and your money is still liquid and accessible. I don’t know any banks or fixed annuities offering those kinds of returns with liquidity.

Looking at the historical performance of these large, mutually owned insurance companies you can see dividend rates competitive with bond portfolio returns over the last three decades in particular. You may not realize it, but major insurance companies loan out 80% of their general fund to garner interest payments on their principal. Those loan portfolios are managed very well and have been for decades.

So really, the cash-value of a whole life insurance policy is a better alternative to a loan portfolio in the market. It’s guaranteed, you can obtain a death benefit if something were to happen and your family would inherit more than they would from your bonds or mutual fund bond funds. Also, some companies are offering a long-term care rider or access which further ensures you multiple uses and protection for your money. As you age your desire to have more assets in cash and more tax-free liquid money will increase. The historical advice says more of your portfolio should be in bonds. Many people as they age are more focused on legacy and what they are leaving behind as opposed to the growth of their money as their lifestyle slows down.

Wouldn’t your money growing compounded and tax-free, year in and year out, allow you to take more risk in stocks and achieve higher rates of return? The studies coming out are saying that seniors should stay more invested in equities or alternative investments with rising interest rates. That has a negative correlation between bond prices and portfolio values.

Cash-value life insurance allows you to achieve the diversification, liquidity, tax flexibility and legacy decisions all within one instrument with returns that have been more consistent for decades than bond funds.

Japan’s baby boomer generation is one generation ahead of the United States’ baby boomer generation. As their population approaches 60-90 and ours approaches 50-80, what can we glean from their economy, interest rate policy and national debt?

They have been near zero interest rates for 30 years, their national debt is soaring, now approaching 200% of annual GDP and their economy is stagnant as the largest segment of their populous is on a fixed income.

We are obviously much bigger and different culturally than Japan, but low-interest rates for three decades could pose many problems for seniors that watched their parents live off CD’s at the bank paying 5-6%. Bond portfolios in the 80’s through 2000’s acted like stocks as the country loaded up on debt and drove interest rates from 23% in 1981 to 25% in 2016.

Those tactics will not be there for our boomer and retiree generations over the next 30 years and alternative strategies and uncommon ideas will help our seniors keep pace with inflation.