Thinking Outside the Nine Dots: Life Insurance as an Asset Class

By Josh Gottlieb

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Life insurance is a financial instrument that I believe is significantly underutilized and understood only within certain limits that don't press the edges. I've been around the world of life insurance my entire life and have been actively involved for more than 45 years with using life insurance as a financial instrument. 

Most people think of life insurance as, “Something I pay for that somebody else gets benefits from when I die.” Oftentimes, people don't like to think about those things. Paying for something so that people benefit when I die is not a warm thought one wants to contemplate. Whether it's for a business owner in a buy-sell arrangement, as a key person that works for a business or as income replacement for my family to have more economic assets — the takeaway is that it does provide death benefits. 

Life insurance may be used for estate planning as a means to more efficiently fund the obligation that happens when assets pass between generations: from me to my heirs. But there are additional attributes that are not readily embraced and well-known, which include the ability to pay premiums in order to build cash value or assets. When I pay an amount of premium that's more than what I need just to cover the cost of insurance, it builds inside of a life insurance policy on an income tax-free basis.

It's much like if I buy a piece of real estate, and I'm borrowing some money against it — I have some portion that's equity and some portion that is paid for by the debt — I only have a certain amount of equity. If I decide to put in more money (less debt), I will have more assets. In a life insurance policy, if I need to pay a dollar amount, for example, say I needed to pay $10,000 to cover the insurance costs, but that policy allows me to pay $50,000 — I will build up $40,000 of excess, or cash value.

The earnings on that cash value will grow on a tax-free basis. And I'll be able to access that later if I choose to do so.

For more than a half a century, The Gottlieb Organization and its affiliates and predecessors have used life insurance as a wealth-accumulation vehicle. Whether it's for businesses, business owners, for the provision of benefits to key people, or just to accumulate cash, we know how to do this very efficiently. Life insurance for us has an ability to build wealth differently, to accumulate assets differently. When I look at life insurance as an asset class, it's not the same as buying equities or real estate or investing in a business — it works differently. It's a way of being able to build assets that have attributes of immediate wealth accumulation, of accessibility in which I can get to cash on a tax-free basis. I can let it sit and accumulate for a very long time; it all happens in this tax-free environment, called the shelter of life insurance.

More than 20 years ago the Roth IRA retirement savings account was established, allowing individuals to contribute money into a fund that permits qualified withdrawals on a tax-free basis. While the contributions are funded with after-tax dollars, they are not tax-deductible but accumulate with no tax on the earnings. We consider life insurance to be similar to an Roth IRA with added benefits of being unlimited in contributions and without restrictive participation. I can put an unlimited amount of money into my life insurance policy.

We use this instrument to build amazing amounts of capital that may be used as a living benefit or an estate benefit.

Unlike some other instruments, such as investing into stocks and bonds, or real estate, most of the policies that we use have a floor — that is, if the markets go down, if the world changes — I can't lose value. The worst that could happen in a year that some economic event occurs is that I will earn zero. Zero doesn't sound like an attractive return, but if I'm invested where I have some portion of my cash value in my life insurance exposed to the returns of the equity markets, and it's a year when the market drops, say like in 2008 by 39 percent, and I earn zero — zero is a pretty good return in that market.

Conversely, if I'm invested in a hedge fund and the hedge fund makes a 40 percent return, I'm likely not to get a 40 percent return in most of the insurance policies. This isn't about trying to replace all of your investments with life insurance. Rather, it's just another part of your portfolio that offers different benefits and rates of return — that's part of a balanced portfolio.

Perhaps the most unique perspective I have on “why life insurance,” as an asset class, is because I can do things with a life insurance policy that I can't do in total with any other asset class. This is an amazingly tax-efficient instrument to use in a much broader method than simply benefits paid upon death.

Joshua A. Gottlieb is the Chairman and Chief Executive Officer of The Gottlieb Organization.

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