Integrating Life Insurance into Wealth Transfer Plans

Asset Class-Equivalent ROI on the Death Benefit

The Traditional View is Incomplete

  • Only considering expected return
    on the death benefit is incomplete
  • Must also compare expected risk
    for a complete asset class analysis


Modern Portfolio Theory

Portfolio of individual assets with varying risk-return profiles can be constructed to optimize overall portfolio risk and return

An efficient frontier of optimal portfolios can be created that maximize return for a given risk or minimize risk for a given return

Individual asset risk and return should be measured in the context of how it impacts and behaves within the overall portfolio

Measuring and valuing assets in the portfolio management context, requires the following data:

  • Asset-specific expected risk (standard deviation) and return (mean)
  • Asset-specific Sharpe Ratio (risk-adjusted return)
  • The covariance of portfolio assets
  • Portfolio risk, return and Sharpe Ratio


Life Insurance as a Contingent Asset Class

Expected Return is measured by the pre-tax equivalent return on investment (ROI) at an expected mortality age, for which life expectancy (LE) is often used.1

  1. When comparing the ROI on the life insurance death benefit to historical compound average returns of traditional asset classes, the insured’s Life Expectancy is used as the age at which to reference its expected return because LE represents the average age of death according to a mortality table based on recent mortality experience for a large number of insureds with the same age, gender and underwriting risk characteristics.
  2. LE calculated using the Society of Actuaries 2015 Valuation Basic Table, which uses industry mortality experience that reflects fully underwritten (insurable) ordinary life business.
  3. Penn Mutual, Guaranteed Protection UL, $10,000,000 face amount, female, standard nonsmoker, all-pay solving for no-lapse guarantee to age 120, 25% blended tax rate for pre-tax calculation.


Expected Risk is necessary for a complete asset class analysis and is measured by standard deviation, which is the average amount by which returns over a specific time period vary from the mean.

Death benefit standard deviation is the average amount by which the projected ROIs (adjusted for their probability of occurring) vary assuming death occurred in any year.

Since they are contingent upon mortality, each projected ROI is adjusted for (multiplied by) the corresponding probability of surviving to and dying at each age; a standard deviation is calculated on these probability-weighted ROIs.

Life Insurance as a Contingent Asset Class

Expected Risk is measured by the standard deviation of the probability-weighted ROIs

Penn Mutual, Guaranteed Protection UL, $10,000,000 face amount, female, standard nonsmoker, all-pay solving for no-lapse guarantee to age 120, 25% blended tax rate for pre-tax calculation.

Hypothetical example for illustrative purposes only. Actual results will vary.

Sharpe ratio is the difference between the expected mean return and the risk-free rate (risk premium) divided by the standard deviation, a measure of the risk-adjusted return of an asset class.

Efficient Frontier of a Wealth Transfer Portfolio

(For conceptual purposes; Actual portfolio management uses a greater number of asset classes)

Forward-Looking Capital Markets Assumptions

Expected Risk (Horizontal Axis) and Return (Vertical Axis)14 For Financial Professional Use Only. Not for use with the public.

Sharpe Ratios of all Asset Classes in this Analysis


Life Insurance as a Contingent Asset Class

  • Income tax-free death benefit with attractive expected return and low risk
  • Fixed payment correlated to mortality, not the markets
  • Hedge against premature death and volatility in other assets, stabilizing the transfer of wealth
  • Reduce risk and increase the risk-adjusted return in a family’s investment portfolio held for wealth transfer

Possible Sources for Premium Payments1

  • Personal cash flow or portfolio income
  • Drawdown fixed-income assets over time1
  • Liquidate capital assets with little to no unrealized gain1
  • Use investment line of credit to avoid having to liquidate assets2

1Clients should work with their financial professional to determine the extent to which life insurance will be incorporated into their legacy planning.  Clients should work with their tax professionals to address any income tax consequences associated with repositioning assets or income therefrom to fund premiums.

2Using credit to finance premiums can add complexity and financial risk which is not accounted for in the standard deviation analysis of the death benefit in this presentation. Clients need to be familiar and comfortable with this additional risk and complexity to be a candidate for this approach.

Additional Considerations

  • Risk tolerance, time horizon, and liquidity needs must inform the asset allocation process
  • Post-mortem time horizon is necessary, or possibly post-morbidity1
  • Can’t maximize the utility of cash value and death benefit in one policy
  • Impact of policy performance on required premiums
  • Carrier financial strength and risk of insolvency
  • Policy owner actions causing policy rescission or refund of premiums only (material misrepresentation, fraud, suicide, etc.)

1Assumes a Chronic Illness or LTC Rider is available and issued under the policy that can allow some portion of the death benefit to be accelerated during life if a qualifying condition occurs.  Additional charges may apply.