See what permanent life insurance does to a portfolio.
Most portfolios hold two things: stocks for growth and bonds for stability. Published research treats the cash value of permanent life insurance as a third holding inside the stable side. Set your mix, move part of your fixed income into cash value, and watch the expected return and the standard deviation respond.
Start from a sample, then make it yours
Pick a starting mix, or set your own numbers below.
1
Your portfolio today
The value of your invested assets and how they are split between stocks and fixed income such as bonds, short-term holdings, and cash.
$
Stocks and fixed income
All fixed incomeAll stocks
2
Move part of fixed income into cash value
Your stock allocation stays where it is. Only the stable side changes: a share of it becomes permanent life insurance cash value.
Share of the portfolio in cash value
None30%
Without life insurance
With life insurance
StocksFixed incomeLife insurance cash value
3
Your time frame
How long the portfolio stays invested. The research behind this reading assumes a policy held for the long term.
Years invested
5 years40 years
Cash value builds slowly in the early policy years. The research assumes a 30-year holding period, so a reading under 15 years overstates what cash value contributes. Ask your advisor for a policy illustration before relying on a short time frame.
In dollars
The same change, measured on your balance.
Why it works
Steadier, and loosely tied to stocks.
Standard deviation falls when you add a holding that swings less than the one it replaces and does not move in step with the rest. The grid shows how closely each pair of holdings is assumed to move together: 1.00 is lockstep, 0 is no relationship.
The whole balance sheet
Your largest asset is not in the portfolio.
Until retirement, most of a household's wealth is human capital: the present value of the income still to be earned. A portfolio cannot diversify it. A death benefit hedges it exactly, because the policy pays in the one scenario where the paychecks stop.
4
Your earning years
Your financial capital carries over from step 1. Add the income side.
Your age
Retirement age
$
$
Share of income you save
How your pay behaves
Human and financial capital over your working years
Human capitalFinancial capitalDeath benefit
The research
Three studies, one direction.
This reading rests on published work from an asset allocation research firm, a retirement income scholar, and a peer-reviewed finance journal.
The portfolio
Cash value inside the fixed income sleeve
Ibbotson Associates modeled a moderate portfolio of 46% stocks and 54% fixed income, then replaced part of the fixed income with whole life cash value. At a 20% cash value share, expected return rose and standard deviation fell at the same time.
+26 bpsexpected return, 6.02% to 6.28%
−45 bpsstandard deviation, 10.14% to 9.69%
Ibbotson Associates. Study of the expected return and standard deviation of a mutual life insurer's general account, for investors.
Retirement income
More income and a larger legacy
Wade Pfau compared buying term and investing the difference against an integrated plan of investments, whole life insurance, and an income annuity. For a 35-year-old couple at the median outcome, the integrated plan paid more retirement income and left more behind. In 65% of simulations it left the larger legacy at age 100.
+40%retirement income at age 65
+228%legacy wealth at age 100
Wade D. Pfau, Ph.D., CFA. Optimizing Retirement Income by Combining Actuarial Science and Investments. A couple starting at 50 saw +45% income and +451% legacy.
Human capital
Two decisions that belong together
Your future earnings are usually your largest asset, and life insurance is the hedge against losing them. The authors show that how much insurance to carry and how to invest are one decision, because each changes the right answer to the other.
−100%correlation between insurance proceeds and lost earnings
6×income: optimal coverage in the authors' base case at age 45
Chen, Ibbotson, Milevsky, and Zhu. Human Capital, Asset Allocation, and Life Insurance. Financial Analysts Journal, volume 62, number 1.
What this means for you
Your reading in plain language.
Three questions to bring to your advisor
1
How much permanent coverage does my household need before the policy is asked to play any portfolio role?
2
What does the policy illustration show for cash value in each of the first 15 years, guaranteed and non-guaranteed?
3
Which part of my fixed income would fund the premiums, and over how many years?
Talk with an advisor about this reading
An advisor can replace these long-term assumptions with an actual policy illustration and your actual holdings.
What we send with your request:
Assumptions behind the reading
The defaults are long-term capital market assumptions set so that this model reproduces the published Ibbotson Associates example to the basis point. They are gross of fees, taxes, policy expenses, and the cost of insurance. An advisor can change them to reflect a different outlook; the reading updates as you type.
Important information
This site does not sell insurance. It is informational and is not an offer or solicitation of insurance or securities in any state. No coverage is bound through this site. Insurance is offered only by licensed individuals in states where they and the issuing carrier are licensed. Any figure, rate, illustration, or example on this site is educational. It is not a quotation, not an offer, and not a guarantee of availability, cost, or outcome.
This is a hypothetical, educational illustration. It is not investment, tax, or legal advice, not an offer or recommendation to buy or sell any security or insurance policy, and not a projection of any specific policy or investment. Actual results will vary and may be better or worse than shown.
The reading uses a three-holding mean-variance model. Default assumptions are calibrated to an Ibbotson Associates study of one mutual life insurer's general account. That study estimated returns from a model portfolio built to approximate the gross asset class returns behind that insurer's whole life policies. It used gross returns, ignoring policy expenses and mortality costs, which vary by age, underwriting class, and years held, and it assumed a 30-year holding period. In early policy years, before significant cash value accumulates, the internal rate of return on cash value is lower. Results differ by insurer and by policy. Two of the three studies cited were commissioned by life insurance companies.
Expected return is the average of a probability distribution of possible returns. Standard deviation measures the dispersion of returns around that average and is used here as the measure of risk. The ranges of outcomes assume returns are lognormally distributed and independent from year to year, with no contributions, withdrawals, taxes, or fees. The reading counts cash value only and does not count the death benefit.
Life insurance guarantees depend on the claims-paying ability of the issuing company. Dividends are not guaranteed. Policy loans and withdrawals reduce the cash value and the death benefit, accrue interest, and may have tax consequences; tax-free access assumes the policy is not a modified endowment contract. Cash value is less liquid than a bond portfolio in the early years, and surrender charges may apply. Life insurance requires underwriting, and the premiums must be paid to keep the policy in force. Review a complete policy illustration with a licensed professional before making any decision.
Human capital is estimated as the present value of expected after-tax earnings to retirement, discounted at a risk-free rate plus a premium for how closely earnings follow the stock market and a further discount because future earnings cannot be sold or borrowed against. It follows the method in the Financial Analysts Journal study cited above. It is an estimate for education, not a measure of insurance need. The right amount of coverage depends on your circumstances and is a decision to make with a licensed professional.
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