Many of the financial advisors I speak with dislike life insurance. Not that they advise clients not to buy it. Adults with dependents need it. Every financial advisor knows that. Yet they don't like anything about the way the industry operates, specifically the high costs, lack of disclosure and use of policy illustrations that illustrate anything but the policy. Finally, these advisors argue: Life insurance is never an investment, yet it is frequently marketed as if it is. I agree with all of these points.
But a recent conversation with Richard M. Weber, MBA, CLU and founder of the Ethical Edge, an insurance consulting firm in Pleasant Hill, Calif., persuaded me that life insurance might be an asset class useful in portfolio design for some clients. Surely I've heard the argument before and ignored it. So why listen to Weber? Because he is one of a growing group of analysts and consultants willing to work hard to acquire a knowledge of insurance that he can sell for a fee, in his case, $350 an hour. As financial planners did some 20 years ago in their own industry, a handful of life insurance fiduciaries like Weber have broken the old formula of the insurance industry: insurer plus agent first, customer last.
First there was James H. Hunt, an actuary and former insurance commissioner of Vermont, who provided objective policy evaluations for consumers from Concord, N.H. I associated Hunt with the consumer first movement heralded by people like Ralph Nader. Then came Glenn Daily, a fee-only insurance consultant in New York, and Peter Katt, who was doing the same thing in Mattawan, Mich. To me, these contrarians never amounted to a market force. They helped as many customers as they could, but their ranks never seemed to grow. That has changed. Now I see them as a force the insurance industry must reckon with, just as the mutual fund industry was forced to deal with objective advice from Morningstar in the 1980s.
Weber is certainly no insurance apologist. He agrees costs are high and disclosure is low. He also agrees that insurance is not an investment. However, he does believe that life insurance can be an uncorrelated asset class. And if a client buys life insurance, it must be managed like any other asset class, he says.
He makes this point in his paper, "Life Insurance as an Asset Class: A Value Added Component of an Asset Allocation." This lengthy document (106 pages) is worth reading, particularly for advisors who lack confidence in their understanding of life insurance but would like to educate themselves. Weber discusses the basic questions: How much life insurance do I need? What should it cost? What are the options? Why are policy illustrations of so little use? He concludes that if a client needs life insurance for 30 years or less, he should buy term. But if life insurance is a lifetime need, the client should buy permanent insurance, manage it and make it part of his investment portfolio.
Here is the case Weber makes for life insurance as an asset class:
The death benefit is paid on the event of the policyholder's death rather than because of a market event.
The living benefits, or cash value, take on the asset class attributes of the policy itself.
A permanent life policy offers unique characteristics that make it uncorrelated with nearly every other asset class: The proceeds are free of income tax, cash value builds up tax-deferred, proceeds can be shielded from creditors, the policyholder can draw on cash value, and the life insurance allows him to turn periodic premium payments into a capital sum.
Of course, the life insurance marketplace is more complicated than ever, with myriad products and new uses for them-to provide living benefits, for example. Weber makes some sense of this confusion. Assuming that a client has a lifetime need for insurance, Weber says the best values with the least market risk are the universal life with a no-lapse guarantee and participating whole life insurance. For clients with a limited budget for premiums and no need for living benefits, the universal life with a no-lapse guarantee is the best choice. Participating whole life best suits clients who need a death benefit that increases over time and who might also need substantial living benefits. Variable products provide considerable upside potential for cash value but require higher risk tolerance and more investment sophistication. Has an agent ever explained the differences so concisely? If so, did anyone believe him?