Beyond the death benefit: Whole life as an asset class

Understanding life insurance and how various life and annuity products fit the financial plans of all kinds of clients is imperative for any financial professional. Most of us are well versed in life insurance as a risk-protection product that provides income replacement, mortgage protection, estate liquidity and peace of mind to families. Life insurance also, of course, can figure into retirement, education funding, charitable giving, generational wealth and business continuity planning.  

I am particularly interested in whole life insurance as a potential asset class within a broader wealth-management strategy, although clients are often less likely to think of life insurance in this way. To enhance their understanding of the concept, I find it helpful to compare whole life insurance as an asset class to something they better comprehend: real estate.

Comparing assets

People fundamentally understand the value of real estate. Many of them (and perhaps nearly all if we are dealing with more affluent clients) have experience obtaining and maintaining a mortgage and possessing real property. Life insurance may seem less tangible, making it more mysterious as an asset class than a home or land, but there are ways that we as advisors can take the mystery out of whole life.

What are some characteristics shared by whole life insurance and real estate?

» Both feature contractual guarantees.

» Both may be set up so the purchaser knows up front how long they will be paying for the asset (the term of a mortgage and a premium payment schedule for life insurance).

» Both may accrue value, although in the case of whole life it’s guaranteed (property equity and whole life cash value).

» Neither is likely to cost less in the future than it does now.

Real estate ownership offers control, potential appreciation, equity accumulation, potential rental income and certain tax advantages. However, ownership also carries continuing expenses, including property taxes, insurance and maintenance. Real estate investors also face potential risks, such as market fluctuations, interest-rate changes and liability issues. A mortgage borrower remains obligated to make payments even if the property declines in value or the owner dies or becomes disabled. Accessing accumulated equity can depend on creditworthiness, market conditions and lender approval.

With a properly designed whole life policy, the premiums and the payment period may be established at issue, guaranteed cash value increases over time and the policy can provide additional upside through dividends or other nonguaranteed values. Once the scheduled premium period ends, no additional payments are required to maintain the policy. Policyowners may also have access to a substantial portion of cash value, potentially through tax-free loans or withdrawals regardless of credit rating or income. Cash value growth is generally tax-deferred, and death benefit payments are tax-free.

Crunching the numbers

Consider a hypothetical situation involving a client with a 30-year $500,000 mortgage at 6.125% interest. Total mortgage payments would be approximately $1.094 million, excluding ongoing property expenses, but the property’s future value is uncertain. Meanwhile, a hypothetical 45-year-old Select Preferred Non-Tobacco male purchasing a 20-year-pay whole life policy at the same $3,038.05 monthly cash outlay would pay total premiums of $729,132 and receive a $1.082 million initial death benefit, $779,278 of guaranteed cash value after 30 years and $1.756 million of illustrative cash value. (Note: These figures are presented as illustrations rather than guarantees and should be evaluated against the specific policy contract and carrier assumptions.)

By comparing whole life insurance to real estate, advisors can demystify the product for clients and show how it can serve as a viable asset class. It can potentially serve multiple planning functions simultaneously: death-benefit protection, guaranteed cash-value accumulation, liquidity, tax-advantaged access to capital and supplemental financing. Suitability depends on the client’s objectives, cash flow, insurability, time horizon, tax circumstances and ability to sustain premiums. 

There is obviously a lot more to life insurance than covering final expenses. Financial professionals must keep abreast of the developments, innovations and trends shaping the future of income and financial security. I’ll expand on the concept of using whole life insurance as an asset class at the Protectors, Powered by NAIFA conference in Las Vegas, Nov. 9-11. This will be a gathering of the producers, carriers, wholesalers and innovators shaping the future of the life and annuity industry. It’s another opportunity for financial professionals to grow their knowledge and learn to better serve their clients.

John W. Wheeler Jr., CFP, CLU, ChFC, CRPC, LUTCF, CLTC, LACP, CPFA, is president-elect of the National Association of Insurance and Financial Advisors. Contact him at john.wheeler@innfeedback.com.