How Permanent Life Insurance Affects Your Investments

Good financial planning is about more than just growing your wealth for the future. A good financial plan will also include strategies to protect your wealth from known risks so that you can feel more confident that you’re on track to reach your goals, even if life throws a curve ball.

That’s why financial advisors will typically talk about more than just investments when they begin working with someone on a financial plan. Life insurance is often a part of a financial planning conversation because the death benefit will help your family if something happens to you. And if you decide to add permanent life insurance to your financial plan, you’ll get additional benefits that you can use during your life. Unlike term life insurance, which only provides a death benefit for a set period of time, permanent life insurance pays a lifelong death benefits and includes cash value, which grows on a tax-deferred basis and serves as a source of money you can tap during your life for any reason (although doing so will reduce your death benefit). A permanent life insurance policy becomes a growing asset that you own. And because the cash value of most permanent life insurance doesn’t decline with the market, it can be an important asset that works well with other aspects of your financial plan like investments.

Here’s how permanent life insurance can work with your investments to strengthen your financial plan.

Permanent life insurance may allow you to take more risk with investments

The goal of any investor is to grow money over the long-term. But the level of return you’re able to generate over time typically hinges on how much risk you’re willing to take. When you take more risk by allocating more of your investments toward riskier investments like stocks, you have the opportunity for more gains over the long-term. However, you're exposed to more ups and downs along the way.

Determining risk tolerance and the appropriate asset allocation (the blend of stocks, bonds, cash and other investments), typically involves asking questions about how soon you will need your money and how much you could handle fluctuations in the value of your overall portfolio.

When you’re young and have a long time for your investments to grow, you might build a portfolio that allocates 80 or even 90 percent of its value toward stocks. As you get closer to retirement, you might reduce your stock holdings to 60 percent or less with the rest in cash, bonds and safer investments. If you need to pull money out to live, you want to have enough allocated to stable assets so you won’t have to sell stocks at a time when they have declined in value.

Permanent life insurance is a safer asset

A good financial plan considers your whole financial picture vs. looking at your investment portfolio in a silo. Let’s take a target-date fund as an example. The fund will slowly change your allocation over time so that you take less risk as you approach retirement. That’s great if it’s your only investment, but the approach the fund is taking is siloed. When you factor other assets like permanent life insurance into your overall picture, a target-date fund may leave you taking too little risk as it shifts its allocation over time..

When you factor in your insurance with other assets, instead of dropping your stock allocation to reduce your risk exposure as you get closer to retirement, you may be able to keep a larger portion of your savings in stocks. That’s because you could access your cash value in the event of a market decline rather than sell stocks or funds at lower prices to raise cash. That also means you’ll hang on to more shares that will benefit from a potential recovery later.

Basically, having permanent life insurance as part of your financial plan may allow you to take more risk with your investments and avoid selling at steep losses

Independent research confirms the value of combining life insurance with investments

An analysis from the professional services firm Ernst and Young analyzed thousands of financial scenarios and found that people who combined permanent life insurance and an annuity with their investments outperformed those who took an investment-only approach. The result of combining the financial tools was the ability to generate more retirement income and have more money to leave behind.

Northwestern Mutual financial advisors can work with you and tailor a solution based on your needs. By using the right mix of products, our advisors can help you maximize income over legacy, legacy over income or get you somewhere in between. Our advisor will get to know you and what’s important to you and can build a financial plan that shows you how the difference pieces of your financial life can work together to help you reach your goals.

The primary purpose of permanent life insurance is to provide a death benefit. Utilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event.