Cash Value Life Insurance Provides a Safe Harbor in Today's Economic Storm.

AuthorSchecter, Mark

In light of recent market challenges that have impacted the diversified investment portfolios we manage for our clients, many have asked how the cash values in their investment-oriented life insurance policies are weathering the storm. Whole Life, Universal Life, and Indexed Universal Life have traditionally maintained their values through tough economic times because they are designed with that very goal in mind.

Today is no different.

When equity markets are up and the economy is running smoothly, it's sometimes easy to overlook the value of the downside protection you get from using life insurance as an investment. Life insurance will never be your best performing asset when things are good --it's not supposed to be--but in times of turbulence, it can provide a stabilizing influence on the overall portfolio and a potential source of cash that can be drawn upon without having to incur market losses. When structured and funded properly, these policies are designed to provide moderate, steady growth with extremely low risk of loss.

It's important to keep in mind a few key differences between insurance companies and other corporations, including banks, to understand why insurance companies are generally more financially stable than banks, particularly during times of market volatility:

Investment Risk--Insurance companies invest the premiums that they collect from policyholders in long-term assets, such as bonds, to ensure that they can pay out insurance claims as they occur over time. The vast majority of life insurance company assets are required to be made in high quality investments, with approx. 85% invested in investment grade corporate bonds and U.S. Treasuries, which traditionally perform better than stocks when corporate finances weaken. This means that insurance company investments are generally less risky when compared to the investments made by banks and their affiliates, whose structure and regulations do not limit their investment of lender deposits in a way that corresponds to their anticipated liabilities.

Insurance Carriers are not Allowed to use Leverage. Unlike banks, investment funds, and operating companies, government regulations prohibit insurance companies from using leverage to enhance their performance. This prevents any losses from being compounded during market downturns.

Insurance Carriers are Heavily Regulated. Insurance companies can become insolvent. However, these scenarios are historically rare. This is...

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