Not all Assets are Created Equal (asset allocation has more to it than you might think)

What makes one person buy a Mercedes S550, while another buys a Bugatti Veyron and the next purchases a Volvo XC90? It could be any number of things, from design tastes to performance demands, safety issues to cost. What’s important is that we invariably have a reason for our decisions. Sometimes our reasons are obvious and logical, while others are more intuitive or reactive. The same is true when we look at investment asset classes and wealth strategies.Each of us uses criteria to select assets. Some of our decisions are based on rigorous assessment while other people decide based on past experiences. In either case, however, there is a comparison of the value an asset choice can bring, and the cost it will exact.For example, certain assets may bring liquidity, flexibility, peace of mind, and higher historical returns. These would be examples of “gains.” At the same time, there are costs. Those costs might be risk, lost upside, higher fees or inflexibility. Much like the Mercedes, Veyron and Volvo, there are trade-offs where “if I choose this, I’ll lose (or have to pay) that.” Much of the time, that’s true; but not all the time, and certainly not with asset choices.The fact is that not all assets are created equal. There is a single asset class that seems to bring a paradoxical mix of qualities: reliability, returns, tax intelligence and reasonable fees. This asset class isn’t the right answer for everyone or every scenario, but it is an interesting one to consider. It’s Insurance and traditional investment professionals often overlook it.Here are four quick qualities that show off some of the traits that separate insurance from the rest of the herd.

1. Tax Deferred Growth of the Cash Value – the growth of the cash value of an insurance contract may be exempt from annual accrual taxation if all the requirements for exemption are met. That can be a significant number.
2. Capital Dividend Account – a credit to the capital dividend account is a significant tax win for private corporations that receive life insurance proceeds.
3. Cash Value can be Accessible – while life insurance is best left untouched and used as an estate planning tool, it is true that one can surrender a policy, take a policy loan from the insurance company, or even leverage the contract by using it as collateral with a third party institution. Different tax scenarios apply, but there is quite a bit of flexibility.
4. Creditor Protection – It’s entirely possible to design the contract such that the ability of a creditor of the policy owner to seize or realize against the policy or its benefits may be restricted or even precluded altogether. This is not a benefit to overlook.

While we are certainly not myopic in our work, approach or perspective, we do have a fiscal field of vision that includes the judicious use of insurance where appropriate. A Bugatti Veyron is a fantastic vehicle on the road, but no one really wants to drive it on gravel, and none of those vehicles will let you drive to an island. You need the right vehicle for the right journey. Choosing the right asset classes give you those options.