Study finds integrating insurance products boosts value to investors

By Doug Bailey

A comprehensive Ernst & Young analysis of retirement savings scenarios concluded that integrating insurance products into a financial plan significantly boosts value to investors when compared with investment-only strategies.

The paper by the Big Four accounting firm was undertaken in the wake of estimates predicting a $240 trillion retirement gap and a $160 trillion protection gap by 2030.

“Insurers are uniquely positioned to address these gaps with products that offer legacy protection, tax-deferred savings growth, and guaranteed income for life,” the report said.

The paper, titled “Benefits of integrating insurance products into a retirement plan,” explores how two products can be utilized to meet investors’ savings and protection needs: Permanent life insurance (PLI), and a deferred income annuity with increasing income potential (DIA with IIP), which represents deferred income annuities with persistency bonuses and non-guaranteed dividends.

The analysis considered five strategies:

Investment only
Term life plus investments
PLI plus investments
DIA with IIP plus investments
PLA plus DIA with IIP plus investments

To compare the five strategies, E&Y used a Monte Carlo analysis to generate 1,000 different scenarios, each of which contained a time series of interest rates, inflation rates, equity returns and bond returns across the planning horizon. It then analyzed two outcome metrics generated through these simulations. One was the after-tax retirement income that can be sustained at 90% probability of success, and a second which involved the legacy value or sum of the face amount of the life insurance and investments after taxes, at the end of the time horizon.

In one scenario, for a 25-year-old couple making $80,000 a year, the analysis found that permanent life insurance plus investments outperformed investment only and term life plus investments strategies.

For example, if the couple starting with a little more than $61,000 in retirement income would realize a 20% gain compared to investment only strategy when employing a 50% PLI plus investments plan. Using a 50% term life plus investments strategy would actually result in a negative 2% change vs. an investment only strategy.

“There are a couple of reasons for this,” the analysis concluded. “For one, PLI tends to provide superior returns over fixed income in long-run scenarios due to the combined effect of the guaranteed growth of cash value and dividends. Term life premiums do not boost long-term savings, instead acting as a drag on portfolio performance. The second reason is that using PLI as a volatility buffer improves returns because the investor does not have to sell and realize losses on their investments.”

The analysis found similar results when examining scenarios with 35-, 45-, and 55-year-old couples, with some exceptions and rebalancing of investments due to the age differences.

Integrated strategies 'more efficient'

“Integrated strategies are more efficient than investment-only strategies,” the report concludes, with integrated strategies providing investors with the flexibility to focus on the financial outcomes most important to them: retirement income, legacy, or a balance in between.

“Allocating up to 30% of annual savings to PLI and up to 30% of wealth at age 55 to DIA with IIP may be appropriate when optimizing retirement income and legacy value outcomes,” it said.

Integrated strategies are still better even for investors with a higher risk appetite, E&Y said.

“While the degree of improvement in income and legacy is less when anchoring the analysis on 75% probability of success,” the report said. “We note that our findings still apply. Overall, integrated portfolios still provide better income and legacy benefits relative to investment-only and term life + investments strategies.”

Looking ahead, E&Y said its analysis could be broadened for many other retirement investment strategies.

“For example, we expect that other annuities will provide value relative to an investment-only strategy, but it would still be worthwhile to incorporate them into our framework for confirmation,” the report said.

“This analysis could be conducted for households that do not use investment advisors and invest mostly in low-cost exchange-traded funds. While the fact that do-it-yourself investors tend to lag the market, which may somewhat offset the impact of lower advisory and investment management fees, it would still be interesting to investigate. What would the lift be to retirement income and legacy from an integrated strategy compared with an investment-only strategy? Would the same findings still apply?”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].