The way some people talk about life insurance strategies these days, I sometimes wonder if I’m watching an infomercial.
You know, like the one for the Snuggie—the combination robe and blanket. Or the Hawaii Chair, an office chair that’s also an abdominal exerciser. These wacky gimmicks try to be two things at once, and end up being bad at both.
That’s how I view the Variable Universal Life and Indexed Universal Life policies that have gotten so popular. It’s my opinion that—unless you’re extremely wealthy—you should keep your life insurance and your investments separate.
Best case / worst case.
Investing and life insurance are fundamentally different disciplines.
Investing is about best-case scenarios. Whether you’re taking a flyer on a hot stock or funding a rigorously diversified college plan, you’re hoping for the best possible outcome—an excellent return on your money that will pay for things you might not otherwise be able to afford.
Of course, investing adds risk to your financial picture. If you’re smart, it’s risk you can afford.
On the other hand, life insurance removes risk from your financial picture. To protect your family’s ability to afford a home and college education, you buy life insurance that pays a death benefit if you or your spouse die. Unlike investing, where you hope for a big payoff, you hope your life insurance never pays off. Life insurance is about worst-case scenarios.
Got that? Investing adds risk to facilitate a wonderful outcome. Life insurance removes risk to protect against a terrible outcome. They’re complete opposites.
Blurring the lines.
Nevertheless, financial companies have been blurring the lines between them for decades. And that’s not always a bad thing. Whole Life Insurance is a sensible financial instrument for many people’s portfolios, combining a guaranteed death benefit with a modest yield to create a surrender value when the policy’s no longer needed.
But, as a recent Wall Street Journal article detailed, Variable Universal Life and Indexed Universal Life policies—financial instruments that link their benefits to stock performance—have become increasingly popular as the market soars. Some 2013 statistics:
- Sales of Variable Universal Life—up 24%
- Sales of Indexed Universal Life—up 13%
- S&P 500—up 32%
Of course that’s no coincidence. When the market rises, financial instruments tied to market performance become more popular. It’s always easy to look smart in a bull market.
But markets go down, too—and policyholders who invest in these risky combination instruments may not like what happens when they do.
What’s worse than worst-case?
Just as an office chair/abdominal exerciser might prove to be both a terrible chair and worthless for exercise, so a Variable Universal Life policy might turn out to be both a lousy investment and sub-par life insurance.
Remember, the primary reason to buy life insurance is to lock in a certainty against a worst-case scenario—namely, that your beneficiaries receive a guaranteed benefit if you or your spouse die.
But during the 54% drop between October, 2007, and March, 2009, many policyholders not only lost all the interest their policies had accrued—they actually had to pay in additional funds just to maintain their death benefits. The policies’ risky investment components, in other words, undermined the certainty that life insurance was supposed to guarantee.
Leave life insurance out if it.
When markets are strong, I realize it’s tempting to chase growth and income with every weapon at your disposal. Insurance companies know it, too.
So if you’re looking for more aggressive investment strategies—and your portfolio can handle the risk—I say take the funds you’ve set aside for investing and pour them into the highest beta mutual funds you can find. Buy Chinese biotech stocks, high-yield green energy bonds and limited partnerships in Chilean vineyards. I wish you the very best.
Just, please, leave your life insurance out if it.
If you’d like to know more about life insurance strategies that make sense for you, please contact us, or call 847-601-8974.