Where to classify cash value life ins in asset allocation?

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scaredmoney
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Where to classify cash value life ins in asset allocation?

Post by scaredmoney »

My wife and I are mid 30s and have whole life policies with NW Mutual. I understand the arguments against whole life insurance as an investment, etc. and I'm not looking to go into that in this post. The policies were originally purchased by her parents from close family members in the business. Right now, the cash value in the policies are approximately 10% of our investment assets. Where should I classify these funds in our overall asset allocation? Similar to bonds/fixed income? Does it make sense to be more aggressive in our retirement/taxable investments considering we have these policies? For example, I'm considering updating our retirement accounts from target dates funds to 100% equities because I don't want to have too much bond-like exposure this early in life...
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Steelersfan
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Re: Where to classify cash value life ins in asset allocation?

Post by Steelersfan »

I include the cash value of my life insurance in the personal net worth statement I do every year, which also includes equity in my house. I don't include it in my asset allocation.

Since it only represents 10% of your assets I don't think that should make a material difference in your asset allocation. That percentage will likely go down as your equity assets increase in value faster than the cash value of your life insurance.
Lastrun
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Re: Where to classify cash value life ins in asset allocation?

Post by Lastrun »

scaredmoney wrote: Mon May 29, 2023 7:39 am Where should I classify these funds in our overall asset allocation? Similar to bonds/fixed income? Does it make sense to be more aggressive in our retirement/taxable investments considering we have these policies?
Let me give both sides:

If the purpose of the life insurance is income replacement in the event of early death, then the argument is not to include the cash value in your asset allocation as you have essentially just funded the cost of insurance over life.

If the purpose of the life insurance is an "investment" coupled with insurance, and has a guaranteed return, then the argument is to treat the it as a fixed income investment.

Also just a note, I would not include cash value but cash surrender value, sometimes these are different amounts.

I have a GUL policy and list the cash surrender value as an asset when I did financial statements (no more) but never treated it as part of my asset allocation.
Rex66
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Re: Where to classify cash value life ins in asset allocation?

Post by Rex66 »

Cash value will be the same as cash surrender value for whole life. Universal life insurance has surrender charges. To be technical there is no cash value number for whole life. It’s actually called cash surrender value but people abbreviate it to cash value.

For the OP most use it as a bond like but keep in mind you can’t really use it like a bond meaning you can’t easily rebalance or things like that with it. It will likely perform at the lower range of bonds over time but just bc the return is bond like doesn’t mean you should change your asset allocation. The question becomes why do you own bonds.
Normchad
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Re: Where to classify cash value life ins in asset allocation?

Post by Normchad »

I don’t include life insurance anywhere in my asset allocation. I would include the cash value in my net worth though.
alex_686
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Re: Where to classify cash value life ins in asset allocation?

Post by alex_686 »

Asset assignments should make sense to you, be informative, and actionable.

On that, I would have the sane inclination. They act bond like, thus mathematically you should increase your equity allocation.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
smooth_rough
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Re: Where to classify cash value life ins in asset allocation?

Post by smooth_rough »

NW whole life insurance cash value growing approx. 4% per year? You can include it as part of bonds in your AA, provided you avoid the penalty. If you are vanguard investor there is way to add to your page of holdings, but you must manually update the cash value of your policy as it changes over time.
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Stinky
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Re: Where to classify cash value life ins in asset allocation?

Post by Stinky »

As others have said, the cash value of whole life should be counted as part of your fixed income allocation.

If you’re concerned about the level of fixed income assets, you could slow the growth of the whole life cash value by using dividends to pay premiums.

Finally, one poster above (since deleted) mentioned a tax penalty if a whole life policy is surrendered before age 59.5. That’s incorrect - there is a 10% tax penalty for surrendering a taxable annuity before age 59.5, but that doesn’t apply to life insurance.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
exodusNH
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Re: Where to classify cash value life ins in asset allocation?

Post by exodusNH »

scaredmoney wrote: Mon May 29, 2023 7:39 am My wife and I are mid 30s and have whole life policies with NW Mutual. I understand the arguments against whole life insurance as an investment, etc. and I'm not looking to go into that in this post. The policies were originally purchased by her parents from close family members in the business. Right now, the cash value in the policies are approximately 10% of our investment assets. Where should I classify these funds in our overall asset allocation? Similar to bonds/fixed income? Does it make sense to be more aggressive in our retirement/taxable investments considering we have these policies? For example, I'm considering updating our retirement accounts from target dates funds to 100% equities because I don't want to have too much bond-like exposure this early in life...
I made the mistake of purchasing whole life insurance. By the time is realized that, though, it had been 17 years. The annual return is about 4.4%, on par for long bonds. I have no doubt that NWM will outlast me. So, I consider it part of my fixed income allocation.

I'm evaluating it yearly. If I get an opportunity with a similar duration and safety, I will surrender it.
Rex66
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Re: Where to classify cash value life ins in asset allocation?

Post by Rex66 »

It is good to evaluate yearly or at least every couple but it’s not possible for you to get similar duration. Currently mygas have higher yields which I’d say have similar safety but of course limited duration. If you get old enough and are happy with it or health declines so that you feel death is sooner than it certainly makes sense to keep regardless of intentions. If younger then you have to try to be honest with yourself if you are going to keep in force until death since that avoids income tax on gains. If you just know you are going to surrender bc you have zero interest in death benefit or whatever then it’s harder to know if worth still keeping. Only guardian increased its dividend last year and they had fallen a lot even though interest rates improved. In the past some companies have increased their rates on cash held after death to sort get you to keep it with them a while. To my knowledge which isn’t complete on this none have done so. They are around 4% at the moment. It’s a soft sign that they aren’t sure they will be raising further but soft sign as I mentioned. I think this year will be very interesting to see if finally companies really increase dividend rates.
exodusNH
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Re: Where to classify cash value life ins in asset allocation?

Post by exodusNH »

Rex66 wrote: Mon May 29, 2023 12:29 pm It is good to evaluate yearly or at least every couple but it’s not possible for you to get similar duration. Currently mygas have higher yields which I’d say have similar safety but of course limited duration. If you get old enough and are happy with it or health declines so that you feel death is sooner than it certainly makes sense to keep regardless of intentions. If younger then you have to try to be honest with yourself if you are going to keep in force until death since that avoids income tax on gains. If you just know you are going to surrender bc you have zero interest in death benefit or whatever then it’s harder to know if worth still keeping. Only guardian increased its dividend last year and they had fallen a lot even though interest rates improved. In the past some companies have increased their rates on cash held after death to sort get you to keep it with them a while. To my knowledge which isn’t complete on this none have done so. They are around 4% at the moment. It’s a soft sign that they aren’t sure they will be raising further but soft sign as I mentioned. I think this year will be very interesting to see if finally companies really increase dividend rates.
As I just turned 49, there are currently no mygas that will take me to 59.5. The yield curve has the 10, 20, and 30 year Treasuries below the non-guaranteed rates. NWM has been consistent with the dividend payout percentage, at least over 2-3 years. Based on an illustration from April 2023, they're expecting 4.4-4.5% over the next coue of years.

My 401k has mediocre bond fund choices. If I surrender, I don't have tax-advantaged space in which to hold that fixed income money.
Rex66
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Re: Where to classify cash value life ins in asset allocation?

Post by Rex66 »

By your post, you plan to surrender at some point then?

NWM hasn’t done that well as of late comparatively.
Pretty much all the other big name mutuals illustrate better so yes they are consistent but similar to guardian bc they fell so much comparatively. I’d see what they do in November if it were me. Treasuries are of course safer but I’m not saying NWM isn’t pretty darn safe bc it is. If they can’t raise for 2024 then I’d take the 7 year mygas available and take my risk on where the final 3 years are at. In the end, you seem to know what I’ve doing so it’s a personal choice. As I mentioned above it’s harder to know.
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