Whole Life Insurance: A Unique Asset Class

“Don’t put all your eggs in one basket.”

This old saying reflects a common-sense approach to long-term asset accumulation. Even if current returns from a particular investment are quite profitable, there’s wisdom in not putting too much of your savings into a single financial asset or product, whether it’s in the stock market, real estate, certificates of deposit, or countless other items.

Because each class of financial asset possesses unique characteristics, a wellrounded financial portfolio typically includes a mix of asset types. Some may be valued for their guarantees or liquidity, while others may be prized for their steady income or potential for long-term appreciation.

Where does whole life insurance fit as an “asset class”?  It’s an interesting question, one for which the answer seems to be changing. One long-held conventional perspective regarding asset classification has been that “insurance is insurance and investments are investments, and the two should not mix.” In this line of thinking, insurance (of any type) is a different type of asset. Insurance provides protection against loss, which is an important part of a well-rounded financial program. But insurance is not an accumulation asset – you cannot accumulate insurance, then “spend” it when you retire.

Whole life insurance blurs this distinction between protection and accumulation, in that it provides both an insurance benefit and accumulation in the form of cash values. This has led some financial commentators to evaluate only the cash value accumulation aspect of whole life, usually in comparison to other accumulation products. While life insurance cash values can deliver stable, conservative long-term returns, the accompanying life insurance costs have prompted some to proclaim “permanent life insurance is a poor investment.”

But what if whole life insurance is neither insurance nor investment, but a unique asset class on its own? That’s the position advanced by Richard M. Weber in a recent paper titled, “Life Insurance as an Asset Class: A Value Added Component of an Asset Allocation.” In this 106-page document, Weber, an MBA and founder of an insurance consulting firm, concludes that whole life insurance (along with other versions of cash-value life insurance) is an asset with singular characteristics.

In the May 2009 issue of Financial Advisor magazine, an article featuring Weber’s ideas, writer Mary Rowland comments on how the investment in a permanent life policy “matures” at the insured’s death, rather than a specified date or market event. While the timing of one’s death is uncertain, the certainty of financial settlement at that moment can make estate and inheritance plans much more effective and secure, as well as establishing values in business plans.

In the period prior to death, cash values accumulate on a tax-deferred basis, yet policyholders can access funds through either loans or withdrawals at any time. According to Rowland, these characteristics mean that whole life insurance is “uncorrelated with nearly every other asset class.”

Not only is whole life insurance different, Weber further states that owning it can “produce a return that is just as favorable, with less risk, than the same portfolio without life insurance.” He provides an example where interest from an income-producing bond portfolio is used to pay the premiums for a permanent life insurance policy, as opposed to being reinvested in additional bonds. In the early years of the comparison, the reinvested bond account produces a greater asset value (but contains no insurance benefit).

However, as the time goes on, the combination of cash values and bond values exceeds the bond-only account – and provides a guaranteed insurance benefit as well. In other words, having whole life insurance doesn’t necessarily require a decrease in your total asset value – in the long run, you can have your cake and eat it too.

Weber goes on to make another interesting observation about whole life insurance: It is an asset that needs regular management. With its unique “maturity” features, a whole life insurance policy is a long-term holding in someone’s financial portfolio – once you buy it, you are planning to have it for your whole life. But during your lifetime, the policy’s design flexibility, which may include various riders and options1 as well as the liquidity of cash values through loans or withdrawals2 may prompt you to make adjustments to align with your current goals.

To take full advantage of these possibilities, a whole life insurance policy requires regular review and management: it is not a “set-it-and-forget-it” financial product.

1 Riders may incur additional costs.

2 Policy benefits will be reduced by withdrawals, loans and loan interest.