When you start working on a financial plan, life insurance is likely to enter the conversation because the death benefit will help your family if something happens to you. And if you decide to add permanent life insurance to your financial plan, you’ll get additional benefits that you can use during your life, including cash value, which grows on a tax-deferred basis and serves as a source of money you can tap into at any time for any reason. A permanent life insurance policy becomes a growing asset that you own.

And because the cash value of most permanent life insurance doesn’t decline with the market, it can be an important asset to incorporate as a part of your overall plan and investing strategy. Here’s why.

YOUR RISK TOLERANCE

The goal of any investor is to grow money over the long-term. But how fast it grows typically hinges on how much risk you’re willing to take. When you take more risk by allocating more of your investments toward stocks, you have the opportunity for more gains over the long-term. However, you're exposed to more ups and downs along the way.

Determining risk tolerance and the appropriate asset allocation (the blend of stocks, bonds and cash), typically involves asking questions about how soon you will need your money and how much you could handle fluctuations in the value of your overall portfolio.

Having permanent life insurance as part of your financial plan can allow you to take more risk with your investments.

When you’re young and have a long time for your investments to grow, you might build a portfolio that allocates 80 or even 90 percent of its value toward stocks. As you get closer to retirement, you might reduce your stock holdings to 60 percent or less with the rest in cash and bonds. If you need to pull money out to live, you want to have enough allocated to stable assets so you won’t have to sell stocks at a time when they have declined in value.

HOW PERMANENT LIFE INSURANCE AFFECTS YOUR INVESTMENT STRATEGY

A common mistake when investing is to set your asset allocation without taking your entire financial picture into account – the equity you’ve built in your home, insurance policies and other assets. For instance, if you invest in a target-date fund, the fund will slowly change your allocation over time so that you take less risk as you approach retirement. That’s great if it’s your only investment, but every asset you own should factor into your risk-reward equation.

Let’s say, in addition to investments, you’ve also accumulated significant cash value in a permanent life insurance policy that won’t decline with the market. Instead of dropping your stock allocation to reduce your risk exposure as you get closer to retirement, you may be able to keep a larger portion of your savings in stocks. That’s because you can access your cash value in the event of a market decline rather than sell stocks or funds at lower prices to raise cash. That also means you’ll hang on to more shares that will benefit from a potential recovery later.

Basically, having permanent life insurance as part of your financial plan may allow you to take more risk with your investments and avoid selling at steep losses. That’s also why it’s so important to work with a financial planner or professional who looks at your whole financial picture and makes sure all the pieces are working together.

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