Life Insurance as an Asset Class

If you have a substantial investment portfolio, including funds that you will not need during your lifetime, a life insurance policy can provide a very favourable rate of return for a smaller portion of your investments. In particular, using life insurance as an asset class will compare very favourably to bonds in terms of both guarantees, and rates of return.

How it Works

We assume that you have a fixed income component to your portfolio (i.e. bonds) and that you will not use these funds during your lifetime. We then treat life insurance premiums as the investment, and the death benefit as the overall return between now and your passing. Using a life insurance policy in this fashion will typically offer lower volatility, higher returns, and better guarantees than assets such as bonds.

1

Accumulation Phase

During your lifetime you purchase a guaranteed life insurance policy with a focus on the highest death benefit instead of cash values (because the death benefit will provide our ‘returns’).
2

Guarantees

Over your lifetime, bonds are actually not guaranteed. While you may have a bond that produces a guaranteed return over the next 5 years, in year 6 you are once again exposed to the volatility of the bond market – we don’t know what they returns will be at that time.
A guaranteed life insurance policy however does have guaranteed returns over your entire lifetime. At policy issue, we can calculate the rate of return should you pass in year 1, year 2, or year 50. And because the death benefit is guaranteed, that means that for a given timeframe, the return is guaranteed. Thus a life insurance policy will have better guarantees than a bond investment.

As noted, you are routinely exposed to volatility in bond markets. With a life insurance policy we know at policy issue what the returns are for any specific year. Thus for any given timeframe, there is no volatility at all with a life insurance policy. Over your lifetime, the returns on a life insurance policy will start absurdly high (if you pay one premium and then pass, your return is spectacular) the slope down gradually as you get older.

Rates of return are expected to be noticeably higher than fixed income investments for two reasons. First, death benefits are paid tax free which helps the final return substantially in comparison to bonds. Secondly, the returns are generally very favourable well past your average life expectancy.

3

Measuring Returns on a Life Insurance Policy

We measure the return on a life insurance policy each year, by looking at the rate of return on premiums that produce the death benefit. If you pay $1 for a $100 death benefit and die at the end of the first year, your return is 9900%. if you pay $1 in year 1 and $1 in year 2 and pass at the end of year 2, your return is 851%.
We can thus compare these guaranteed rates of return to bond returns, and should confidently find them higher.
We can also weight these returns with your probability of death in each year to end up with an average rate of return (a mortality weighted rate of return) over your expected lifetime and compare that with the expected return on bonds. Again, we should expect the life insurance returns to be noticeably higher.

Example:

Male 50 NS, premiums of $50,000 for 10 years. Guaranteed death benefit of $1,245,000.

AgePremiumRate of Return if Death at End of Year
5050,0002390%
5150,000351.5%
60013.9%
6508%
7005.61%
7504.3%
8003.48% (average life expectancy)
8502.93%
9002.52%

Note: These are after tax returns; if you’re comparing to other asset classes, you should use after tax returns as well.

Our advanced insurance specialists can provide you full details of how this can apply in your specific circumstances. Our first consultation starts with a detailed explanation of the strategy and information gathering. We’ll schedule a second consultation to provide and explain proposals. Lastly, we’ll step you through the application process. Start with an initial consultation.

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