Can You Insure Against Market Losses?

After a period of relative calm, the stock market has once again reminded us of its unpredictability. This turbulence, driven by sweeping tariffs and escalating trade tensions, has left investors grappling with heightened uncertainty. Of course, clients face a range of risks to their portfolios, which raises an important question: Can clients insure their portfolios against market losses? 

While you can’t insure a portfolio the same way you insure a physical asset, the underlying concept is similar: risk can be transferred to other parties to mitigate financial loss. Asset managers already apply this principle by diversifying across asset classes with different risk profiles. This reduces the overall impact of volatility and supports more consistent long-term returns. But one asset class is still underutilized as a tool for risk mitigation: permanent life insurance.

Among the various life insurance options available, Permanent Life Insurance stands out for its ability to provide protection against market swings. While it’s easy to point to Indexed UL or Variable UL with Indexed or RILA strategies as a potential solution because of the downside protection they offer, they are far from the only solution. In fact, Whole Life is likely the superior choice for clients seeking to mitigate market risk because of the non-correlated nature of the bond-like return Whole Life can deliver. In addition, the tax favored treatment of Life Insurance makes the approach all the more attractive and effective. 

The remaining question is simply: How do you implement a risk management strategy using life insurance? Ultimately, it will come down to the individual client, their appetite for risk and the other elements of their asset management strategy. That said, two fundamental approaches are worth consideration. 

Life Insurance as a Hedge Against Volatility in Other Investment Positions 

This approach extends a traditional bond strategy by integrating Whole Life Insurance as a non-correlated asset that adds diversification and smoother returns. Why implement this if there is already a bond strategy in place? While Whole Life offers a bond-like return, that return is not driven by the day-to-day performance of the bond market.

Think of this as accessing the type of return a mutual insurance company generates through its general account and other business lines. This is reflected in both the guaranteed return and the dividend-driven total return. Assuming today’s dividend rates, that return could look something like that seen in Figure 1, below. 

Figure 1: Whole Life Cash Value Growth 

Cash Values based on a 50-year-old male, preferred health, funding a $1MM Whole Life policy with paid-up additions dividend option. Please contact the office for additional details. 

What does Figure 1 translate to in terms of total performance? Consider the following:  

• Internal Rate of Return:  

  • Year 10: 1.00% 

  • Year 20: 4.02% 

  • Year 30: 4.60% 

  • Year 40: 4.74% 

• Tax-Equivalent IRR, assuming a 24% tax rate: 

  • Year 10: 1.32% 

  • Year 20: 5.29% 

  • Year 30: 6.05% 

  • Year 40: 6.24% 

There will clearly be an ebb and flow to actual performance over time but based on dividend history and how slowly dividends tend to move over time, this is likely to be far less volatile than a bond portfolio. Additionally, the top tier financial ratings of many mutual insurance companies allow their whole life products to offer the same, if not superior, quality versus many bond offerings. Of course, a bond portfolio fails to offer any type of death benefit. In this case, the total death benefit at age 90 is projected at a robust $4.44MM that passes to the beneficiary tax-free, a 6.54% tax-equivalent IRR. 

An Insurance Portfolio Approach 

A second approach comes into play when a client has a significant need for insurance coverage, likely for their estate or wealth transfer planning. Rather than simply considering a single type of insurance, it makes sense to apply the same thought process around asset allocation in investment management to their insurance strategy. By constructing a portfolio of insurance solutions, each with a unique risk/reward profile, clients will see similar benefits in terms of lower volatility and overall performance. Whole Life plays the same role in this approach, offering the bond-like return without the volatility that comes with direct investment in the bond markets. 

In addition, as actual performance plays out over time, advisors and their clients can make better decisions around how to allocate policy cash values, changes to premium flows and the like. These decisions are informed by real performance over time and how it compares to the original policy projections—whether it's better or worse than expected. The result is an insurance portfolio that can be actively managed to increase the probability of a successful end result for clients. 

Whichever approach a client takes, the message is the same: Clients face real risks in their asset management strategy, and permanent life insurance, particularly Whole Life, can be used to insure against those risks. As with any type of insurance, it needs to be implemented before the loss occurs, making now the perfect time to implement a life insurance position in a client’s financial plan.