Last week we met with a client who was approaching retirement. After a lifetime spent working hard, building something great, achieving success, and gaining financial stability, he viewed retirement as a lateral move at best. After all, what comes next after years spent generating income? In fact, what many people in his situation don’t always realize is that retirement can be a great time not just to preserve your money, but to have it work for you.
We believe that retirement should be seen as a chance to dedicate more time and resources to what you want to do, whether that is traveling, writing your memoir, or sustaining your favorite charities. Our client, for one, still harbored a goal of sailing around the world, but he also had grandkids to think about. This is where life insurance can play a critical role in ensuring that even when the hard work is done, you’ve protected your family and your legacy. Even some of the most financially savvy people tend to overlook certain asset classes when planning their retirement, and many of them leave life insurance untapped. But life insurance is actually one of the most efficient options for people trying to grow and preserve their wealth.
Life Insurance as an Asset Class
Many people don’t view life insurance as an asset class, which is a crucial mistake. Instead, people only think of cash, stocks, bonds, and real estate when they consider potential assets to grow their wealth. Those are all asset classes—and important ones—but life insurance also deserves a place on that list. In fact, it should be a high priority. Here’s why:
- Life insurance has the ability to generate cash in the future. The ways in which you tap your life insurance policy can vary. For some people, the policy will generate cash as a death benefit once the insured dies. For others, policies that have been in force for many years can be borrowed against, generating a stream of supplemental tax-free income while still keeping the death benefit in place. Others may sell their cash-heavy policies later on in life in the secondary market to create liquidity before they die. The point is, your policy is a flexible asset that can efficiently build, preserve, and distribute your wealth.
- Life insurance has several layers of value. Life insurance offers value by providing both peace-of-mind now and potential death benefit payments later. Now, in the rare case where you die unexpectedly, you’ve successfully transferred the financial risk that would result from your death to the insurer. This makes life insurance uniquely appealing in that it provides immediate value even before the cash accumulates or a death claim is paid, unlike more traditional asset classes. Down the road, your policy value may be derived from a combination of built up cash value and continued death benefit protection.
- Life insurance is one of the few assets with a guaranteed value and predictable cost. Most life insurance policies are issued with a set death benefit. If you buy $1 million of guaranteed life insurance, you can rest assured that, at some point in the future, your beneficiary will receive that amount tax free. There are few other assets that offer the same level of future predictability. Stocks and bonds bounce around with the market and could be worth 20 or 30% less tomorrow than they are today. In addition, the cost of your life insurance policy is predictable. If you buy a policy with level premiums, you know exactly how much you’ll pay. In some cases, you can even buy a policy that becomes “paid-up” at a certain age, such as 65. This allows you to focus on funding the policy while you’re working so you don’t have to worry about that cost during retirement. This predictability is a unique benefit of life insurance, giving you all the more reason to include your policies as an asset class in your overall portfolio.
- Liquidity. You can’t go into Starbucks and buy a coffee with your life insurance policy, but it is fairly liquid, especially when compared against some other asset classes such as real estate, a family business, or even a qualified retirement account. The cash value in your life insurance policy can be borrowed against, creating an avenue for supplemental retirement income, college funding, or whatever else you may need it for. Not only can your life insurance policy generate cash for you, but it can do so while still maintaining a guaranteed tax-free death benefit.
Why Is It Called an “Alternative” Asset Class?
We refer to life insurance as an “alternative” asset class rather than a “traditional” asset class because there are some moving parts that make life insurance tricky to categorize on your personal balance sheet. For example, exactly how or when the policy will become liquid is a flexible decision. We know that the death of the insured will trigger a liquidity event, but trying to predict that is nearly impossible. This is why life insurers price policies based on standard life expectancy tables given a person’s current age and health. Other people create that liquidity event by borrowing against the cash value or even selling the policy prematurely, which will occur at different times for different people, depending on their goals.
We Can Help You Preserve Your Wealth
One of the main tenets of building and preserving wealth is staying diversified by owning a wide variety of asset classes. Not all of your asset classes need to be as straightforward as cash or stock shares in your favorite company, and those alternative assets may be the ones that mint your retirement and create a lasting legacy for your family. Often the proceeds from a life insurance policy are the largest asset held within a client portfolio, even though the amount paid into it was only a small fraction of that amount. It is that “internal rate of return” that makes the tax-free life insurance policy so attractive as an asset class. If you want to learn more about how life insurance can preserve your wealth and act as an excellent estate planning tool, speak with one of our experts today.
