By Byron Udell
There is not a financial advisor on the planet worth his salt that does not recommend diversification.
Diversification among asset classes. Diversification WITHIN asset classes. “Never put all your eggs in one basket,” so they say.
Why? Because it minimizes risk and smoothes out bumps in the road by reducing the volatility in the value of a portfolio.
So what’s missing?
LIFE insurance. Life insurance is a financial instrument unlike any of the above. It’s an asset class that has characteristics that perform infinitely better under certain circumstances than any of the above. And while an otherwise perfectly balanced, perfectly allocated portfolio may protect you against certain types of risks, it completely fails to protect you if it has no time to perform.
Take Bob, 50, who has no life insurance, but has stocks, bonds, real estate, and cash. The experts say Bob and his wife will have plenty for retirement when he turns 65. But if Bob dies tomorrow — no matter how well diversified he thinks he is — his financial plan will have failed.
Life insurance is the only way to protect against the possibility that you might not be around to see your investments blossom, and not including life insurance exposes your portfolio to significant risk.
What asset class, other than life insurance, would guarantee to turn pennies into dollars? The fact is, the odds of death are 1 out of ONE… that’s 100%! We just don’t know when. And if it happens before the rest of your portfolio has time to do its job, your financial plan didn’t succeed, at least with respect to your spouse, children, and grandchildren.
Adding life insurance to a portfolio—looking at is as an asset class that provides what I call TIME DIVERSIFICATION—is the ONLY way to protect against the very real possibility that you may not have time to finish the job. NOT including life insurance in a portfolio exposes that portfolio to significant risk that could otherwise be entirely eliminated. I’d go so far as to say that, based on the statistics in the marketplace, and my almost 30 years of experience, it may be the biggest oversight of our time.
Take a look at this link, http://www.investopedia.com/university/risk/risk2.asp, which discusses the various different types of risk and diversification. They totally ignore time as a risk and speak nothing about time diversification. It’s amazing to me that the well accepted diversification paradigm could overlook this critical risk factor. But then again, it wasn’t THAT long ago that everyone thought the earth was flat, and that the sun revolved around the earth. It always takes time and significant energy to change a paradigm.
Fact is, if you happen to die before your time, life insurance is an asset class that delivers an ROI at death that is impossible to match. And even if you happen to die when you’re supposed to (at your actuarial life expectancy), then its returns are STILL better than long term zero-coupon bonds. In fact, the ROI at death, at life expectancy, is actually HIGHER than the insurance company earns on the premiums.
Life insurance is, unfortunately, the most universally misunderstood financial product on the planet. But when you actually look at the numbers, it’s really not that hard to understand.
I ask you, do you think it’s likely, or even possible, that you or I will live long enough to make a bad deal out of a life insurance policy? I don’t think so.
And when you die, while you will likely leave behind lots of different assets, life insurance is by far the cleanest. When set up properly, the life insurance proceeds are paid in cash within days, are income and estate tax-free, are not subject to the costs and complications of probate and, as such, can immediately be deployed for living expenses or other investments.