Understanding The Role Of Whole Life Insurance As A Hedge


One of the biggest threats to financial security in retirement is market volatility. This is true for individuals and businesses alike. Even if your clients—retail or institutional—have saved and invested diligently, a poorly timed downturn in the market can have a tremendous impact on their retirement plans. It’s a risk that became evident for people who retired following the recession of 2008 and 2009, when retirement accounts plummeted in value.

While we cannot control the ups and downs of the market, we can reduce the overall impact of market volatility by recommending other sources of income or growth be available during a downturn. The cash value of life insurance is an example of this. As a component of a financial plan, a non-correlated asset such as whole life insurance can be a strong hedge against other insurance products and market assets that are linked to stock and bond market volatility—and for that matter, global events of all shapes and sizes that impact financial markets every day.

The Whole Life Retirement Solution for the Individual Market
From an individual market perspective, the risk due to the sequence of returns against a portfolio can be the difference between leaving a legacy and running out of money in retirement. If, during retirement, clients are drawing down their investment portfolio through a market downturn, they are leaving fewer dollars to work when markets rebound. Recommending a stable account from which to draw during market downturns—life insurance being an excellent example—can be of tremendous value. The same holds true during years of high run-ups in the market, quite often the year following a downturn. Withdrawal from the portfolio stunts growth.

If you are looking for a solution to mitigate potential rate hikes, political issues or global conflicts that may impact your client’s portfolios today or in the future, a whole life insurance hedging strategy can help reduce risk and allow your clients to rest easier during stock market adjustments, large or small. Just as important, it can provide an attractive and steady stream of income regardless of market activity.

This is where whole life insurance comes into play. Whole life insurance is widely considered as a safe and effective hedging approach for any investor. It’s a cash accumulation/investment strategy characterized by a non-traditional risk profile, and it is one that acts differently from products directly linked to the performance of stocks and bonds. By virtue of this, leveraging whole life insurance as a hedging strategy allows an investor to spread their risk and realize portfolio appreciation while avoiding the invariable speed bumps that stock market investing presents. This is a prudent strategy for investors of any age.

The Benefits
In addition to providing death benefit protection, participating whole life insurance policies build cash value over time—a combination of guaranteed cash value growth and potential annual dividend payments—which grows tax deferred and becomes a source of funding that can be accessed at any time and for any reason. And with whole life insurance, guaranteed cash value is not subject to the ups and downs of the market; it is guaranteed to never decrease. Policy owners commonly use cash value to fund the down payment on a home, launch a business or pay for a child’s college. But it can also be used to supplement retirement income, particularly during a down market. Whole life insurance is perhaps one of the most tax-advantageous vehicles around. Some of its notable tax advantages include:

  • Tax-free policy loans
  • Guaranteed income tax-free death benefit
  • Tax-deferred cash value growth
  • Tax-free withdrawals of basis

Other benefits of whole life insurance as a cash accumulation hedge strategy include:
It can be protected from creditors

  • The risk due to the sequence of returns of a portfolio can be mitigated with whole life insurance. Empirical evidence has shown the power of not withdrawing income from equity-based assets in down markets, but rather withdrawing from non-correlated ones.
  • It can be structured in a trust for minors and distributed later
  • It serves as a dual-purpose asset for children (i.e., cash accumulation and death benefit)
  • It can be pledged as collateral

Why do Banks Use Whole Life as a Hedge?
Bank-Owned Life Insurance (BOLI) is a stable, dependable source of financing which provides attractive tax-equivalent yields. It is often an institutional life insurance arrangement which allows banks to generate greater cash value growth than retail permanent insurance policies. The bank purchases life insurance on a group of key employees, such as executive officers, and pays the premiums. The bank is the owner and beneficiary of the policy, which in turn becomes a bank asset.

To finance a non-qualified executive benefit plan, or to offset employee benefit liabilities, banks typically choose between two types of permanent life insurance—traditional whole life or universal life—and two choices for the investment of assets backing the policy’s cash value—general or separate account.

BOLI is another example where whole life can be leveraged as a non-correlated asset to hedge against universal life linked to stock and bond market volatility. Most often, traditional whole life BOLI provides greater value than universal life BOLI and it will always provide a guaranteed cash value. For example, SBLI offers traditional whole life, general account BOLI which currently provides a guaranteed cash value, assuming a 4.0 percent interest rate. The cash value increases each year, ultimately equaling the death benefit if the insured survives to the end of the mortality table. For investors looking for a prudent packaged solution to offset market volatility and provide consistent guaranteed returns, consideration should be given to a whole life BOLI product.

Whole life insurance is largely immune to sequence of returns risk in either the accumulation or spend down phase, as it’s uniquely designed to deal with market risk in a fashion that no other singular asset is. This is due to its ability to remain unchanged in terms of return potential and risk profile throughout its entire existence, which by design makes it particularly efficient as time progresses, and an excellent hedging instrument providing both protection and consistent growth.

This article is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. Clients should be encouraged to consult their personal tax advisor or attorney.

Senior Vice President and Chief Distribution Officer at SBLI of Massachusetts | 781-994-4266 | 781-994-4266

Denis Clifford is senior vice president and chief distribution officer at SBLI (The Savings Bank Mutual Life Insurance Company of Massachusetts). In this role, he is responsible for the company’s Independent Distribution channel which operates in both traditional brokerage and alternative distribution markets. He oversees the development of key business relationships, the growth and expansion of insurance sales, and the delivery of a market-leading customer experience.

Clifford joined SBLI in 2000 and held a variety of distribution-related management positions within Sales and Marketing. In 2007, he was named SBLI’s vice president and director of Brokerage and Independent Distribution. As the architect of the Independent channel, he was instrumental in the company’s nationwide expansion and rapid growth in the brokerage general agency and direct marketing agency marketplace.

In 2010, Clifford joined Ash Brokerage Corporation in Fort Wayne, IN, as executive vice president. In this key innovative role he was responsible for managing institutional accounts, brand marketing, and strategic projects. He returned to SBLI in 2013 as senior vice president and chief distribution officer.

Clifford is a member of industry trade associations NAILBA and NAIFA, and is a member of the board of directors of LIDMA.

Clifford can be reached by telephone at 781-994-4266. Email: dclifford@sbli.com.