Whole Life Insurance: Part of a Balanced PortfolioChristopher Briggs, RRC®, Wealth Advisor
Did you know that life insurance may offer the potential to improve returns and reduce risk as part of a balanced portfolio? If you have excess funds not needed in retirement, “participating whole life insurance,” known as a “par policy” can provide a compelling case to achieve exposure to certain fixed income products in today’s low-yield environment.
In general, a par policy requires the policy owner to deposit premiums, either for a set duration or for life, funded with after-tax dollars. In return, the owner receives a death benefit and the proceeds from a separate participating investment account managed by the insurance company. These amounts may be received tax free by the policy’s beneficiary on the death of the life insured.
Potential for Improved Returns
No tax is payable on income in the participating investment account, compared to income from a fixed-income portfolio of investments that would be taxable in a non-registered account. In addition, part of the premiums and the income earned in the participating investment account (known as the policy dividend) are used to increase the death benefit. This provides the policy with the potential to outperform the fixed-income component of an investment portfolio.
Normally, the funds directed towards a par policy would not be required by the policy owner to fund his/her lifestyle. However, if circumstances were to change, the policy owner has options that would allow them to access the cash value, such as borrowing against the cash value of the policy to meet current financial needs. Financial institutions will usually lend a portion of the policy’s cash value and allow the interest to be capitalized. Upon death, the loan would be repaid using the death benefit.
For business owners, the par policy can provide additional tax benefits if held inside a corporate structure. At death, the par policy can be distributed to the shareholder(s); anything above the adjusted cost basis (ACB) is paid tax-free through the capital dividend account. The amount below the ACB is paid as a taxable dividend.
If you believe that a participating whole life policy could play a strategic role in your asset mix, please feel free to get in touch for a discussion.