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.

Since each class of financial asset possesses unique characteristics, a diversified 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 typical answer seems to be changing.

One long-held “typical” 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. Yet many people, in their understanding of insurance, don’t view insurance as an accumulation asset. In many cases, it’s not. And yet, there’s a unique type of life insurance that IS designed for accumulation.

Neither Insurance Nor Investment–A Unique Asset Class

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 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 cash value 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 meantime, cash values accumulate on a tax-deferred basis, and policyholders can access funds through either loans or withdrawals at any time and for any reason. 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 time goes on, the combination of cash values and bond values exceeds the bond-only account–it 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 makes 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...

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