Life Insurance as an Investment

The most overlooked financial planning instrument in your portfolio

September 26, 2014

If you are like most successful professionals, over the last 10 years you may have refinanced or purchased a residence or real property, purchased or leased several cars, applied for or changed various credit cards, and perhaps even reinvested your portfolio. Yet most professionals seldom have taken the time to review or “refinance” their life insurance.

While there are many reasons to avoid this product, there is little question that life insurance represents one of the most important financial planning instruments of security for professionals. It assures lifestyles, educations, and retirements, and ultimately provides families with financial stability when an individual dies prematurely.

One of the reasons for the lack of attention these instruments get is a perception that they are static and do not need management. There is also a sense that the analysis has remained outside of the “commoditized” world of the Internet, where virtually every other product could be benchmarked and compared. What should be a rather “simple” analysis or transaction has remained extremely complex.

Unfortunately, a life insurance policy left unattended and not reviewed may be subject to premature lapse, diminished performance, or loss of coverage when it is most needed. There are many reasons that now is the right time to pull out these policies, review, and consider why so many insurance policies may be replaced in favor of newer, better contacts. In short, there’s a potential “renaissance” in the life insurance marketplace for consumers:

Improvements in Mortality. In simple terms people are just living longer. Since 2001, the average lifespan for a woman has increased by an average of 1.2 years and for a man an average of 1.5 years. People are simply living longer and this has created lower pricing for life insurance.

Modern Technology. Improvements and innovations in medical technology and advancements in testing have led to earlier treatment and more aggressive and effective care of diseases. When coupled with advancements in pharmaceuticals, there has been a significant improvement in the way insurance companies assess risk.

Just a few years ago, a candidate with diabetes or cancer history would have been a substandard or possibly “uninsurable” risk. Yet today, many people with medical impairments can receive “preferred” classifications in insurance outcomes.

Interest Rates and Policy Crediting. There has been a significant reduction in interest crediting, impacting life insurance performance adversely. These reductions are not well communicated and not easily discernible to the general public. In a sense, insurance policy holders are rather uninformed about the long-term impact of the reduction in crediting to their policies.

When coupled with the possibility of increased policy charges, long term cash-value, and death benefit performance on every permanent insurance policy should be reviewed and audited. These policies should be benchmarked against newer guaranteed contracts and in many cases newer policies can provide guarantees that never existed in insurance policies bought years ago.

Need. Many people might have thought they would be retired or have accumulated the dollars they need to slow down, work less, or travel more.  Many have failed to achieve financial stability and the accumulations they would need to retire, and so the desire and purpose of maintaining insurance is now a necessity – not a luxury – as they age.

 Living Benefits. Back in the 1980s, people diagnosed with AIDS and HIV sold their policies in a “black” market. Changes to insurance laws have provided people suffering with critical illnesses, chronic injuries, and other diseases can now access the death benefit while they are still living. Newer policies can “spring to life,” creating added planning opportunities for people suffering from financial problems associated with medical or long term care expenses. This feature makes many newer policies effectively better and many older policies effectively obsolete.

To give you an example of what a “living benefit” can do within an insurance contract, consider this: We are all in-effect “self-insuring” long term care (LTC) risk – which certainly is likelier as we get older. The impact of the costs associated with even the shortest period of assistance can be financially devastating for families and quickly erode assets.

One type of unique “living benefit” contract creates leverage, guarantee, and certainty. The client transfers a lump-sum of money (e.g., $50,000) to a specially designed, insured, and guaranteed insurance contract. They earn a nominal rate of interest on the lump-sum. Assuming they never use any LTC benefit, their heirs receive a tax-free death benefit of approximately two-times the lump sum. Assuming they need and use LTC benefits, they get approximately six-times the lump sum in benefits over a 6-year period. There is a death benefit – regardless- if you consume the entire LTC benefit.  Plus, the client can liquidate any time and get 100% of their money back.

In sum, there is a quiet resurgence of opportunities for “buyers” of life insurance – a convergence of significant changes in the insurance industry, low interest yields on “safe” money, and the impact of longevity created by medical advances – plus some very “consumer oriented” insurance products.

Give your life insurance professional a call and have a conversation. The results may be surprisingly favorable and the analysis worth the time. After all, it’s your money, and your life.

Martin Levy, CLU/RHU

Martin Levy, CLU/RHU

Principal | Corporate Strategies, Inc.

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