Protecting Your Legacy in the Midst of Volatility

By Jim Roberson | Principal



Stock market and investment volatility undoubtedly creates anxiety and concern for investors. Most recently, the financial crisis of 2008 and today’s pandemic feed that anxiety and concern. I prescribe and agree that investors need to be patient, not react emotionally, and look to the long-term impact of their capital invested. Now is the time to protect your legacy. A strategy to maintain guaranteed levels of capital is especially important in times of crisis when you have a desire to transfer all or a portion of your wealth to the next generation.


How does an investor evaluate volatility from a legacy and wealth transfer perspective?


I believe there are four important characteristics of a lasting legacy: (1) what values you instill in your family, (2) how you love people, (3) how you give back, and (4) how you properly manage the assets with which you have been blessed. Key parts of successful legacy include how you structure your assets, how you prepare your heirs for inheriting wealth, and how you manage volatility not knowing the timing for the transfer of assets upon your death. That being said, it is important to look at volatility and its impact on the transfer of assets under different scenarios and timeframes.


How does life insurance protect capital and help manage volatility?


Often, sophisticated investors think that life insurance only delivers a competitive rate of return if you die young. This is not always the case, particularly if a policy is underwritten and funded properly. In light of the new wave of volatility resulting from COVID-19, I wanted to share thoughts and analysis for how guaranteed life insurance works through periods of investment volatility, as well as its impact on the transfer of your assets to heirs. To illustrate this, our firm analyzed how a guaranteed life insurance contract helps protect capital through unknown volatility. The comparison looks at the amount transferred under a guaranteed life insurance contract compared to a hypothetical investment in the S&P 500 index.

Client Example: Male age 65 patriarch with $10M in liquid investable assets The guaranteed life insurance contract is issued based on preferred underwriting, with $100,000 of annual premium paid for 10 years totaling a $1M premium allocation (a 10% allocation to life insurance) . For investment in the S&P 500 index, we have assumed the same allocation of $100,000 per year for 10 years.

Hypothetical Results Under Different Volatility Scenarios The guaranteed life insurance contract has no investment volatility because the death benefit is guaranteed by the life insurance carrier. The only investment risk is the solvency of the carrier. For the S&P 500 return, the analysis uses returns (less 50 basis points for fees) from April 1, 1991 to March 31, 2020. This equates to an average annual return of 9.10%. The returns are projected with an average return each year (9.10%), actual historic year-to-year returns (with 9.10% in years 31+), highest to lowest returns (with 9.10% in years 31+), and lowest to highest returns (with 9.10% in years 31+). The analysis assumes a blended tax rate of 30% on investment income & gains.



Numeric Summary of Hypothetical Results Based on Assumed Death Ages:



Conclusion: Peace of Mind with Life Insurance

Ultimately, no one knows exactly how an investment will perform or how those returns will vary from year to year. However, I believe an appropriate allocation of your liquid assets into guaranteed life insurance can eliminate some uncertainty, give you peace of mind, and even provide enhanced returns in the event of an early death.


With expected death ages for a male age 65 today ranging from age 82 to 88, the guarantees delivered from a life insurance death benefit provide a safe and effective allocation for a portion of your wealth transfer plan. The past decade has taught us all that average returns are not realistic to illustrate hypothetical results. The reality of annual volatility still needs to be analyzed and considered.


Let our firm help you develop a plan that best incorporates life insurance into the protection and transfer of your wealth. I look forward to having the opportunity to work with you, your family and your advisors.


APPENDIX: Hypothetical S&P 500 Returns Used



The purpose of the above comparison is to analyze the impact of the tax characteristics of a guaranteed life insurance policy and a taxable investment based on S&P 500 returns. The comparisons, employing hypothetical rates of return, illustrate how the differing tax characteristics of the investments could affect the investor’s investment results. The hypothetical projections are not intended to be, and should not be relied upon, as a prediction or forecast of future investment results. Rather, the purpose of the hypothetical projection is to illustrate how the performance of the investment accounts could affect the values in future years.


This is not an offer to sell a security or insurance product. This information is provided for informational purposes only and should not be construed as legal or tax advice. You should discuss your circumstances with a financial professional before making any decisions. This material and the opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. https://www.trcfinancial.com/disclosure

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