This article is written as general education, and should not be considered as personal financial advice. If you would like personal guidance with life insurance, you can schedule a time to talk with one of our experts.
As we saw in permanent life insurance explained, the benefit of investing in these policies are their living benefits in form of a cash value that can produce tax free investment returns and serve as a security for flexible loans.
However, as we saw in life insurance pricing and underwriting, funding these investments works differently than funding normal investments, and the cost of insurance will increase with things like old age and bad health.
But what if there was a way to decrease your cost of insurance while at the same time helping friends, family and colleagues to do so as well?
Well, there is, and it’s all about building a portfolio of life insurance policies and investments, as we shall learn in this article.
We will break down the three most important categories of building an insurance portfolio - namely family policies, company policies, and life settlement investments.
In a life insurance policy, the insured person and the policy owner does not need to be the same person.
You can buy a life insurance on other people's lives, as long as you have what is called an insurable interest in the other person, meaning that you would be financially impacted by the passing of that person.
You can have an insurable interest in people like you spouse, children, business partners, and employees.
For a life insurance investor, this means that there are ways to build a portfolio of life insurances as a way of lowering the cost of insurance by providing family or company security, and building up more cash value.
Even though the life insurance sector is stable with heavy regulations and healthy reserves, diversification is always important, and it can be prudent to not base all of your money within one insurance policy or company.
To diversify, investors can lower the risk of investing by spreading their policies between several different insurance companies.
Life insurance for your family
One of the first choices when building a life insurance policy portfolio should be your immediate family.
Not only does it provide a good way to offer security and prosperity for your family, but in the long run, all death benefits will be kept within the family fortune.
While it works to buy policies separately, it is also possible to buy a joint life insurance policy to cover you and your spouse, or family life insurance policies to cover your whole family.
Usually, the different family members will have a different amount of death benefit, often with the majority associated with biggest earner of the household.
This makes life insurance an excellent purchase in connection to life events like a marriage, buying a new house, or having children.
In fact, there is never going to be a better time to buy life insurance for a person than right after they are born, as they have their whole life in front of them, and thus the lowest cost of insurance they ever will have.
This means that, for purposes of funding a policy to build up cash value, a life insurance policy insuring children is an efficient choice to minimize the cost of insurance and maximize the amount of additions to the cash value.
An additional opportunity with buying life insurance for your children is to offer them loans for viable business plans they present you with.
With this system, it is possible to help your kids become financially successful through learning how to take on money as debt and make it multiply.
But don’t take our word for it - the Rockefellers have been buying life insurance for their newborns for centuries, and using it as a family bank to provide loans for family projects as a way of maintaining financial discipline and success.
Life insurance for your company
Life insurance is a common asset for companies, not only for its ability to provide employee benefits and management protection, but also for its ability to maintain and grow assets on the balance sheet.
There are two main types of life insurance policies bought by companies - namely key person life insurance, and group life insurance.
Key person life insurance is meant to protect top management of companies from disruptions that might occur due to the passing of one member.
This helps the business in times of crisis management and provides a solid basis for a business continuation strategy to help replace the most valuable people.
In these types of policies, the death benefit is paid to the company upon the death of the employee, and thus the company can use it as a way of building cash value while getting extra refunds of premium in the form of death benefits to lower the costs.
The second type of life insurance is group life insurance, which could be bought for groups of employees.
As long as the group is more than 10 people, there will be no requirements for individual medical exams, and everyone will save time as the group will be underwritten as a whole.
This means that some of the members in the group who might not have qualified for life insurance by themselves or would had expensive premiums on individual policies can now enjoy access and lower premiums.
This is great to provide as an employee benefit, as it enables the employees to protect their families without going through the process of getting life insurance themselves.
With these types of policies, the employee is able to name anyone as their beneficiary, except for the employer, as the policy is meant to be established in the interest of the employees.
When it comes to the funding of the policies, it should always be at least partially paid by the employer, and could be set up to be partially funded by the employee.
A common structure is that the employer pays for the insurance coverage while the employee makes their own contributions towards the cash value.
This provides the employee with a secure and powerful way of investing while enabling the employer to provide an attractive benefits program and lower taxes with the deductible premium payments.
Group life insurance and key person life insurance is a popular choice in organizations of all sizes, from a small general partnership to big banks and corporations.
In fact, most banks keep life insurance on their balance sheet, as it is considered a tier one asset, meaning the most secure type of asset that the bank can hold, which it by law is required to always keep a minimum percentage of its assets invested in.
Life insurance in the second hand market
For terminally ill people, cashing out a life insurance prior to dying can sometimes be essential to pay for medical bills and getting the most out of the last years.
The most common way of doing this is by surrendering the policy to the insurance company, who will then hand out the cash value minus any outstanding loans and any added fees, which amounts to what is called the cash surrender value.
Instead of surrendering the policy, these people can get more money by selling the policy in a secondary market by doing what is called a viatical settlement.
In a viatical settlement, the policy is sold to an investor at a price that is higher than the cash surrender value, while still making sure that the investor will turn a profit once the insured person dies and the death benefit is paid out.
As an institutional or high net worth investor you can invest in this secondary market through viatical settlement funds as a way of achieving non-market correlated returns.
However, this form of investing does not necessarily involve the same types of tax advantages or risk qualities as direct investment does, and should be handled with care.
While this investment market is morbid, it does provide an important value to terminally ill, as well as good, non-market correlated returns for its investors.
Building a portfolio of policies is a good way of lowering the costs and risks of investing in life insurance, while at the same time providing an important value to family, colleagues, or terminally ill.
By putting money in policies where the insured is younger or healthier, the cost of insurance will be lower and the investor will be able to contribute more towards the cash value.
By buying key person policies or group life policies companies can provide attractive benefit programs while preserving and growing assets on the balance sheet.
There is also a secondary market available, called the viatical settlement market, in which investors can get returns uncorrelated to the markets by helping terminally ill people cash out their life insurances at a higher rate than the insurance company is able to offer them.