Understanding the Role of Whole Life Insurance as a Non-Correlated Investment and Retirement Asset

If you’ve never heard the term non-correlated asset class, you’re not alone. Even the term correlation (and its counterpart, non-correlation) are often misunderstood—or not understood at all.

The reality is, a non-correlated asset such as whole life insurance can be among an investor’s strongest hedges against stock and bond market volatility—and for that matter, global events of all shapes and scopes that impact financial markets every day.

Consider: On election night 2016, the Dow Jones Industrial Average futures dropped almost 1,000 points. In that moment of time, a stock market investor could have seen their portfolio value decline by large double digits. While the Dow has sharply appreciated since then, the ride is rarely smooth, which compels anyone with stocks and bonds in their portfolio to seek investment options that minimize volatility—and help ensure their peace of mind before and during retirement. Non-correlated assets can be an investor’s best friend, so it’s wise to get to know them better.

The risk due to the sequence of returns against a portfolio can be the difference between leaving a legacy and running out of money in retirement. If during retirement, you are drawing down your investment portfolio through a market downturn, you are leaving fewer dollars to rebound when markets rebound. Having a stable account from which to draw – life insurance being an excellent example – during market downturns can be of tremendous value. The same holds true during years of high run-ups in the market, historically quite often the year following a downturn. Withdrawal from the portfolio stunts growth.

To that end, a quick definition is in order. Correlation, in finance and investment circles, is a statistic that measures the degree to which two financial instruments move in relation to each other. If two assets are considered to be non-correlated, the price movement of one asset has no relation to the price movement of the other asset. For example, the price movement of a precious metal – say, gold – likely will not have a direct relation to the price of, say, Facebook shares. While the precious metals market and New York Stock Exchange are subject to similar economic conditions, events and triggers, they don’t move in lockstep with each other—and therefore, gold and Facebook stock are considered non-correlated assets.

 

Most people don’t think of their investment assets as being correlated or non-correlated; in fact, many would argue that diversification among asset classes of stock is by itself adequate diversification. Yet, the reality is that too many investor portfolios are highly correlated, so when stocks and bonds fall, they get hit hard.

If you find yourself wondering how potential rate hikes, political issues or global conflicts may impact your portfolio today or in the future, a non-correlated asset diversification approach can help you reduce your risk and allow you to rest easier during stock market adjustments large or small. Just as important, it can provide an attractive and steady stream of income, regardless of market activity.

That’s where whole life insurance comes into play. Limited pay whole life insurance is widely considered one of the safest and most effective non-correlated investment vehicles for any size investor. It’s a cash accumulation/investment strategy characterized by a nontraditional risk profile- one that acts differently from stocks. By virtue of this, whole life insurance as an investment allows an investor to spread their risk and realize portfolio appreciation while avoiding the invariable speed bumps that stock market investing presents. This is a wise strategy for investors of any age; but for those planning for retirement, it absolutely is worth pursuing.

Here is an empirical example of an actual whole life performance chart for a highly rated mutual insurance company as it performed during down markets.

 

Bear Market Examples

Years

Mutual Dividend Rate

11/1980-08/1982

8.27%-8.27%

08/1987-12/1987

12.20%-11.35%

03/2000-10/2002

7.65%-7.85%

10/2007-03/2009

7.45%-7.40%

 

There’s more. Whole life insurance is one of the most tax-advantageous investment vehicles around. Some of its notable tax advantages include:

  • Tax-free policy loans
  • Income tax-free death benefit that’s guaranteed
  • Tax-deferred cash value growth – after-tax deposits grow tax-deferred
  • Tax-free withdrawals of basis
  • Tax-free loans thereafter are tax-free, so long as the contract does not lapse

Other benefits of whole life insurance as a cash accumulation strategy include:

  • It can be “predator” protected – i.e., protected from creditors
  • The risk due to the sequence of returns of a portfolio can be mitigated with whole life insurance. Empirical evidence has shown the power of not withdrawing income from equity-based assets in down markets, but rather withdrawn from non-correlated ones.
  • It can be structured in a trust for minors and distributed later
  • It serves as a dual-purpose asset for children (i.e., cash accumulation and death benefit)
  • It can be pledged as collateral

Broadly speaking, life insurance often is often viewed as a death benefit only. By definition, assets are things that essentially put money in your pocket, so certain types of life insurance (particularly whole life) truly are assets—and ones that offer sizable benefits to investors.

If you’re interested in exploring this further, where can you start? We believe the road toward “de-correlation” is one that’s best traveled with an experienced partner. The team at American Business works closely with high-end investment, accounting, legal and risk management firms and their clients to provide an array of independent and sophisticated insurance protection, college planning and estate planning solutions. Our Two Client Philosophy is the cornerstone of our business model. We can help design and deploy the right insurance solutions to meet specialized needs and serve as a valued resource at every step along the road to retirement.

Do you have questions about whole life insurance as a non-correlated asset diversification tool, or other life insurance matters? Please contact American Business at 212-359-4400 or email cpainfo@amerianbusiness.com.