Life Insurance as an Investment Class
Here we will discuss how participating life insurance works as an investment. There are two parts to many life insurance contracts. The first is risk protection, payable as a death benefit. The second is an investment component – the cash value of the contract.
The risk protection aspects of life insurance are generally well-known, so here we will focus only on life insurance as an investment asset. Why is the investment component relevant to you? Quite simply, it’s another tool to help you build wealth faster and with less risk. Let’s look at an example from the last 30 years.
Investors everywhere are after the highest rate of return for the lowest possible risk. Since 1990, participating life insurance dividend scale interest rates have provided a high rate of return, roughly in-line with the return of the stock market. And usually, investors seeking higher rates of return need to take on more risk. Yet, participating life insurance has historically provided that high rate of return in the same neighborhood as equities, with the risk of a government bond or a GIC, when measured by annual volatility.
So, when an investor allocates capital in their investment portfolio to participating life insurance, supplementing their usual mix of stocks and bonds, they can achieve higher returns with less risk.
So we just reviewed how participating life insurance has historically been an attractive and stable asset class. But you may be wondering how does it happen? First, it’s not magic. And it really comes down to how participating life insurance contracts are written:
1. Long-term investment horizon – par investment accounts are mostly made up of bonds. But also other fixed-income types, including commercial real estate, infrastructure projects, and equities. And these investments usually have a long-term horizon. Why? Because life insurers are insuring liabilities many years into the future. There’s a structural long-term outlook within life insurance that allows the fund managers to take a more patient, long-term focus than other fund managers.
2. Participating design – participating insurance is called that because much like a credit union or co-op, the profits generated within the account go to the policyholders – not to the insurer. That is where the ‘participating’ part of participating life insurance comes from. By law, more than 97% of profits of participating life insurance policies are re-directed to dividends for policyholders.
3. Guaranteed portion – most of the cash value in a life insurance contract is guaranteed. So irrespective of how the investments perform, that cash value cannot go down. That’s written into the contract. Not to mention, each year, dividends paid to grow your cash value are vested. Meaning they’re guaranteed, too. So the growth in your cash value works like a ratchet. It goes up. But it cannot go down.
4. Smoothing – investment gains and losses in a participating life insurance contract are spread out over several years. So your rate of return on the cash value of the contract is stable and predictable. In fact, many contracts have contract limits on how much the dividend scale interest rate can be changed from one year to the next – so you can set your watch to those returns.
As you can see, adding participating life insurance into your investment mix allows you to add a new asset class. One that has offered high rates of return, with low risk. Talk to a Unity advisor to learn more about how participating life insurance can work for you.