Life Insurance as an asset class

The concept of Life Insurance as an Asset Class (LIAC) is a new approach to helping people protect and value their whole lives appropriately. As careers flourish and resources allow for personal investing and long-term financial planning, participating whole life may be an ideal component of a person’s overall portfolio, complementing fixed-income assets and helping to moderate risk and volatility in the total portfolio.

Participating life insurance as an important and unique asset class and foundation of an intelligent holistic financial planning because of its immediate estate enhancement, guaranteed cash values and its growth within the policy and life insurance benefit growth. This combination of a mix benefits only offered through permanent whole life insurance which can help you meet your financial long term goals.

Whether your goal is estate preservation, offset estate taxes or having access to your policy’s cash value tax-free for retirement, leaving a larger legacy for children or other future needs, this will allow you flexibility to accomplish your personal financial goals. Unlike assets that may be exposed to market volatility, once credited to the policy the cash value (including policy owner dividends) is fully vested. Accumulated values are fully protected from downside market risks.

A participating policy shares in the financial experience of the insurance company, and policy “dividends” are declared annually and paid to policyholders. Premiums are based on conservative estimates of future expenses, claims and interest or other investment earnings. When experience is more favourable than these estimates, a surplus is created, which allows the company to credit participating policyholders with dividends. Because dividends are based on future experience, such as costs and earnings, Dividends can be paid in cash, left in the policy to accumulate, used to pay part of the premiums, or used to purchase additional insurance.

How to make the best use of Policy dividends: Dividends occur in participating life insurance policies. How you make use of them is vital to getting the best value from your participating whole life insurance. These are the most common dividend options:

  • Increase your coverage: Use your annual dividends to add extra amounts of coverage to your policy, at no cost to you. The most popular use of dividends, this option is called Paid-up Additions or bonus additions. This option also increases future cash values. Alternatively, dividends could be used to purchase one-year term insurance.
  • Enhanced protection: You can combine the two options mentioned above by using dividends to purchase a combination of paid-up insurance and one-year term insurance to provide additional protection equal to a pre-determined amount. As dividends increase over time, they are used to replace the term insurance with paid-up insurance so the additional protection becomes permanent. This can be a cost-effective way of purchasing whole life insurance.
  • Reduce the cost of your insurance: Use your dividends to reduce your premiums on the policy every year.
  • Take as cash: You can, of course, take policy dividends in cash.
  • Premium offset: This concept, also called premium offset, is a combination of the premium reduction and the paid-up additions options. Typically, after premiums have been paid for a number of years, say, 10-15 years, future dividends are used to pay part of the premiums and the balance of the premiums is paid by surrendering some of the paid-up additions. Remember that policy dividends are not guaranteed and that projections about when your premium offset date will take effect may have to be adjusted if dividends are lower (or higher) than anticipated. This option could result in tax reporting to you as the policyholder, if cumulative dividends exceed cumulative premiums paid.

Policy loans: The build-up of cash values in a permanent life insurance policy can be substantial the longer you hold the policy. It’s a fund that can be used, as just mentioned, to keep your policy in force if you miss a premium. It’s also available to you directly as a loan:

  • You may borrow any amount up to or close to the total cash value in your policy, according to your contract. It can be repaid in a lump sum or in installments. Any unpaid balance plus interest is deducted from the proceeds of the policy at the time of your death.
  • Interest is charged because the pricing of your policy assumes the company will invest those funds and earn interest.
  • One major advantage is the ease with which you can take out a policy loan. No credit checks, none of the usual hassle.

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