Wealth Matters: In a Volatile Market, Some Turn to Insurance Instead of Bonds

But given low interest rates on government bonds, some financial advisers have begun encouraging clients to buy permanent life insurance — permanent because it does not lapse, like term insurance, after a set time — as a substitute for bonds in their portfolio.

Their argument is threefold: the rate of return on permanent life insurance is 3 to 5 percent, the money in a policy ultimately passes to beneficiaries free of income tax, and owners can borrow against the policy without incurring any taxes. If they do not repay the loan, it will simply be deducted from the death benefit.

But there are plenty of advisers who point to the layers of fees in any insurance policy — for the management of the underlying investments, for expenses and for the cost of covering the risk of people dying without making all their premium payments. The advisers also say that insurance policies limit the gains that someone gets on the money invested and that the gains go down the longer you live.

But given the continued volatility in the stock market and low yields on United States Treasury bonds for the foreseeable future, there has been an increase in interest in insurance policies for their steady, if low, returns.

Is this a good thing? It depends whom you ask. “As far as saying your bonds aren’t performing well right now, let’s put them all in the insurance policy, I don’t agree with that,” said Larry Rosenthal, president of Financial Planning Services, a wealth management firm in McLean, Va. “But I understand it from the perspective of accumulation, death benefits and tax deferrals.”

Bob Plybon, chief executive of Plybon Associates, an insurance agency and wealth adviser in Greensboro, N.C., took the other side. “I think where we are from an economic standpoint it makes tremendous sense to look at it as an asset class,” he said. “Right now, you have the ability to generate yields that are competitive with other investments.”

Surprisingly, some people in the insurance industry are cautious about treating life insurance as an asset class. “I believe insurance should be used as insurance,” said Ron Herrmann, senior vice president of sales and distribution at the Hartford. “Taking money out of the life insurance has ramifications to the life insurance itself.”

So what do you need consider if your adviser suggests you think about putting money into a permanent life insurance as an investment?

WHEN IT WORKS People who want to use permanent life insurance policies to build wealth do so by paying more than the premium, a practice known as overfunding. This can mean anything from increasing annual payments to making a lump sum payment.

“Overfunding could be a good use because it enables you to get a longer-term return,” Mr. Herrmann said. “If someone was doing this to take money out in one year, it’s probably not a good thing. If you’re looking 15 to 20 years down the road, it works better.”

For people with substantial wealth, above $5 million, the advantage is predictable growth on a part of their portfolio that they hope not to need.

“Over a 20-year holding period, most permanent life insurance policies have an internal rate of return of 3 to 5 percent depending on the company,” said Adam Sherman, chief executive of Firstrust Financial Resources, a wealth manager and insurance broker in Philadelphia. “Given how the world looks, is it bad to have a 5 percent tool in your investment box? It’s not going to hurt you.”

Or put another way, life insurance gives you guaranteed growth: the death benefit will be worth more than what you put in. Critics would argue that you could earn more money investing that money outside an insurance policy, but even some very wealthy people do not want to take the risk.

Mr. Plybon said he worked with a couple in their 70s who wanted to buy a large insurance policy after watching their net worth drop to $20 million from $30 million in 2008. While they clearly did not need money to live on, they wanted to find a way to get it back, since they had earmarked it for their family foundation. For a premium of about $1 million, he sold them a policy that would pay out $10 million after both spouses died.

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