If you type “insurance as an asset class” into your favourite search engine you may be surprised at how many results you get. This concept is attracting attention, specifically for advisors wishing to reduce overall investment risk or to improve the return of the fixed-income portion of their clients’ portfolios. Permanent life insurance has always been one of the cornerstones of estate planning, but only recently has its value as an alternate asset class been explored.
It’s important to note that this approach may not be appropriate for all clients and is not designed to replace an investment portfolio. The greatest benefits are realized for high-net-worth clients. The ideal client would typically hold significant fixed income assets that are not needed for other purposes, and self-identify as a conservative investor with a desire for stable growth and some allowance for liquidity. The client must have a permanent life insurance protection need that complements the need to hold this type of insurance as an asset class.
While there are many different types of life insurance, one product ideally suited for use as an asset class is participating (par) whole life. This type of insurance enjoys many benefits, including tax-preferred cash value growth, tax-free payment of the death benefit to a named beneficiary and the opportunity to earn policyholder dividends.
What does par insurance offer these affluent, conservative investors to make it appealing as an asset class? In addition to certain guaranteed features (death benefit, cash values) clients may also benefit from non-guaranteed features like policyholder dividends. With participating insurance, clients have the opportunity to receive policyholder dividends which can be used to purchase additional insurance coverage. Any dividends credited and held within the policy have an associated cash value which cannot be reduced or used in any way without policyholder consent, other than to pay policy premiums. Although not guaranteed, dividends can accumulate over time, resulting in a policy with increasing values.
The participating account is managed by the insurance company, providing the policyholder with access to the market without hands-on management or direct ownership of the underlying assets. The combination of a long-term investment strategy, a large well-established, diversified par account and a prudent management philosophy contributes to strong, stable returns for policyholders. Plus, smoothing techniques are applied to pass the effect of gains and losses in the portfolio through the dividend scale more smoothly. Using this approach can help absorb the impact of short-term market fluctuations on dividend performance. The overall result is a dividend scale that tends to be less volatile and less extreme than the market itself, offering a measure of protection against market downturns.
Finally, the policyholder has access to the cash value built up through dividend payments answering the ideal client’s need for some liquidity.
Participating life insurance from Sun Life Financial1 has a long history of stable performance. It also offers clients access to diverse assets without the need to manage investments and it can combat the uncertainty that comes along with inevitable market volatility. Can life insurance be held as an asset class? For the right client, yes.
The par account
The par account is a pool of assets specific to the insurance company’s participating life insurance line of business. The Sun Life Participating Account1 is managed to meet the long-term needs of participating policyholders with the objective of providing a superior, stable return. All premiums for participating life insurance are pooled into this account. Part of this money is used to pay for benefits such as policy-owner dividends, death claims, taxes and expenses. The remainder stays in the par account and is invested in a diversified mix of assets including bonds, equities, real estate and other holdings. The longer-term investments within the portfolio, such as private fixed income and real estate, are a good match for the long-term objectives of the participating account. Diversification and long-term investment expertise are the keys to the success of this account.
1 Participating insurance products are issued by Sun Life Assurance Company of Canada