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April 5, 2019

Protecting Estate Values When Your Investments Decline

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The total net value of your estate represents what you will leave to your family when you die. It may include the following:

  • Your residence;
  • Cottage or other recreational property;
  • Investment real estate;
  • Stocks, bonds, mutual funds and commodities
  • Life insurance;
  • Any other assets you wish to leave to your heirs.

After paying off any liabilities, taxes arising at death, last expenses etc., what is left over is what your family will use to maintain the lifestyle that you created for them.

Two easy ways to make sure debt and investment losses do not impact the estate you leave for your family

  • Insure your debt
  • Insure against market drops and other investment losses

Consider life insuring your debt and investment declines so that your heirs are not burdened by outstanding liabilities and market fluctuations.

In 2008, many investors experienced a decline of 40% to 50% in their equity portfolios resulting in a significant reduction in the amount of the estate to be left to their beneficiaries.

A greater problem was experienced by those that had used bank loans to leverage their investments.  The value of those investments may have declined by up to 50% but the loan balance didn’t decrease at all.

Even if the investments are not leveraged, there is always a risk to the estate should the equity markets decline.

Be Prepared – The risk of waiting to insure for losses

Of course, you could always top up your life insurance when the market declines right?  Not necessarily.  If you have lost all or part of your insurability due to health that could be a problem.

Consider hedging against possible future decreases in your investments by purchasing life insurance specifically for this reason.

For hedging purposes, any form of life insurance can be used. Term insurance is an inexpensive way to insure for shorter terms such as 10 or 20 years.

Participating Whole Life Insurance should be considered for protecting your investments through diversification and building in stable returns. It is the only type of life insurance that is guaranteed to increase in value and death benefit regardless of equity market conditions.

Other benefits of Participating Whole life include

  • Can be used as an investment in place of bond or GIC-type investments.
  • The cash values of these policies grow on a tax-deferred or tax-free basis.
  • If funds are required for unforeseen expenses or to make additional investments, the policy can be borrowed against either from a lending institution or directly from the insurance company.

Using Participating Whole Life insurance satisfies two objectives – providing a hedge against equity values declining prior to death and adding additional stability and less volatility to the overall portfolio.

Summary of how to manage the risk of estate shrinkage due to adverse equity market conditions:

Hedge the estate value of your investments

Select a percentage of your equity investments that you wish to protect if you die when market values have fallen.  Purchase life insurance for this amount.  For example, if you have $2,000,000 of equity investments and you wish to hedge 40% consider buying $800,000 of life insurance.

Life insure the loan in a leveraged investment strategy

It’s always a good idea to life insure debt. This is particularly the case when insuring leverage loans to protect against investment values falling prior to death while the loan is still outstanding.

Consider Participating Whole Life as a method to optimize your estate

Unlike equity investments, the values of a whole life policy cannot decrease.  As long as the premium is paid the cash value and death benefit will continue to increase.  This provides stability in your investment portfolio and reduces volatility.  The increasing death benefit will optimize the value of your estate for the benefit of your family and heirs.

Combining your investment portfolio with an effective life insurance strategy to maximize the value of your estate is a prudent means to provide for your family.  Great comfort comes with the knowledge that even if your investments decline your family will be adequately provided for in the manner you wished them to have.

Connect with me if you wish to discuss this further.  As always, please feel free to share this with anyone you think will find it of interest.

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