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Cash Value Life Insurance May Provide Safe Harbor in an Economic Storm

When equity markets are up and the economy is running smoothly, it’s sometimes easy to overlook the value of downside protection.

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:

  1. 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.  
  2. Insurance Carriers are not Allowed to use LeverageUnlike 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.
  3. Insurance Carriers are Heavily RegulatedInsurance companies can become insolvent. However, these scenarios are historically rare.  This is because the states that regulate insurance companies take poor performing insurance companies into receivership if/when their assets drop to approximately 90% of their liabilities.  At that point they have approximately 90 cents on the dollar to pay off their liabilities.  In contrast, most financially challenged corporations are left with an extraordinarily small amount of assets/value when they go bankrupt and creditors are typically fighting for a much smaller 10 cents or 20 cents on the dollar.  Insurance companies have failed in the past, but due to the state oversight and intervention, the companies and the industry ensure that payment of guaranteed obligations of the company are made to policyholders

, It is in an environment like we have today that these policies are often most appreciated because their value is unlikely to be impacted in any significant way by the volatility that is currently battering the rest of the economy.  


This article was co-authored by SCHECHTER’s Marc Schechter, Senior Managing Partner, and Jordan Smith, JD, LLM, Vice President, Advanced Design.

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