Ask an advisor about how best to manage one's investments and you're likely to hear an earful about modern portfolio theory: choosing from a diversified set of asset classes to maximize investment return for a given amount of risk, or to minimize risk to achieve an expected return.
Ask the same the advisor about whether one should apply modern portfolio theory to the purchase and servicing of life insurance, and you're likely to draw a blank, for life insurance is generally not managed in the same way. That needs to change–and soon.
Most advisors who do comprehensive financial planning for clients use a capital needs analysis to the insurance component of the plan. They determine the appropriate type and amount of coverage based on the current and future living expenses of those who would suffer a financial loss.
The product recommendation, as my feature article on policy reviews beginning on p. 20 describes, will take into account such factors as the client's health, family situation, budget, risk tolerance and desired benefits. The recommendation will usually be buttressed by an illustration that projects the policy's performance over time given certain assumed rates of return.
But policy illustrations–as so many holders of variable life contracts learned to their misfortune during the recent recession–don't often conform to expectations. Hence the need to build and manage a diversified portfolio of uncorrelated insurance products that can weather market fluctuations and optimize cash value and death benefit returns.
The long and short of it is that a client with sufficient financial resources should buy a combination of permanent insurance policies, including universal, variable and whole life contracts, to have the best chance of securing long-term goals and objectives.
That's a message being advanced by Richard Weber, the founder and principal of The Ethical Edge, Inc., Pleasant Hill, Calif., and co-author of a new research study, "Life Insurance as an Asset Class: Managing A Valuable Asset." The report was commissioned by The Guardian Life Insurance of America.
