Today, clients who are nearing retirement age face a climate of uncertainty.
With inflation at historic levels, climbing interest rates, and market whipsawing, it's a tumultuous time to plan for the long term. The markets did well in the second quarter, but who knows what will happen in the third quarter? Or the fourth quarter?
To reassure their clients and provide ballast as part of thoughtfully constructed portfolios, advisors would be wise to consider permanent life insurance, a tax-advantaged vehicle for protection that fits a number of client needs.
While not an all-purpose solution, permanent life insurance can be a meaningful part of a financial plan to help convert yesterday's market gains and today's careful savings into tomorrow's safe and reliable retirement.
While life insurance isn't an asset class per se, there is a ripe opportunity for advisors to use it as a potent planning tool.
A Beacon of Hope
As the Fed has continued to raise rates, depressing the yields of otherwise safe investments, many retirement savers are understandably worried.
Last year, investors struggled to find a safe haven as bond markets experienced their "worst annual performance since the inception of Morningstar's fixed-income indexes."
Equities performed similarly, with analyst Meb Faber declaring that 2022 was "likely to be the worst year ever for a traditional 60/40 stocks and bonds portfolio."
But even as the S&P fell nearly 20% last year, the cash value of virtually all permanent life insurance products remained fixed or had a positive return, preserving capital for investors.
Holders of these policies were better able to adhere to their plans, even as the value of their other investments fell.
The flexibility offered by these supplemental funds offered savers the ability to weather the storm.
One counterintuitive impact of higher interest rates is that, as traditionally safe investments face headwinds, the features and returns on life insurance policies become more competitive.
Rising rates lead carriers to increase benefits (such as no-lapse guarantees), as well as increase the crediting rates that cash value in life insurance policies grow, offering better risk-adjusted returns for many investors.
The Flexibility Edge
Like any financial planning tool, advisors must consider their clients' individual situation and strike the right balance when recommending an insurance strategy.
Clients with straightforward protection needs may benefit most from the comparatively lower initial premiums that term insurance offers.
For clients with more complex needs, though, term insurance's lack of cash value accumulation and the potential for higher premiums upon renewal can be limiting.
In these cases, permanent life insurance offers clients death benefit protection, cash value accumulation and flexibility for their retirement planning and emergency needs.
Clients can also fund a permanent policy upfront with a lump sum payment, building immediate cash value and potentially unlocking savings and estate planning benefits.
Not only can permanent life insurance be structured to protect savers from some downside risk, but the last few years have also shown that life paths are less linear than they were a decade ago.
There is no longer a one-size-fits-all (or most) model for planning for retirement.
Instead, as retirement timelines become more divergent, flexibility can be just as important as security.
