604-880-9589 jack@jackshaffer.com

Living through the volatility of equity markets can be extremely stressful for those who have significant investment portfolios.


Over the past few years it has not been uncommon to see the value of many equity portfolios see-saw back and forth with as much as 40% or more declines registered. Since most individuals look to the total value of their estate to provide for their family in the event of their death, a sudden demise would create a hardship for the survivors where the estate value has suffered a significant decline. This is especially true where investors look upon the asset value of their portfolio as an alternative to life insurance protection. An investor might pose the question, “If my portfolio is worth $2,000,000 why do I need to have life insurance if this amount is sufficient to take care of my family in the event of my death?”


This is a valid question, but it is prudent to consider the effect of volatility on the investment portfolio and the effect that has on the protection afforded the family. The old saying, “Hope for the best, but plan for the worst” is very applicable when viewing an investment portfolio as security for the family in the event of the death of the investor.


In our example, if the funds mentioned fell by 30% how would the loss of $600,000 of value impact the family if the investor were to die. Also, without proper planning, the $1,400,000 decreased value could still include accrued gains. There could also be taxes due at death (in all probability there would be probate fees) which would reduce the value of the estate even further. With this in mind, it is important and prudent to look at the risk management of the estate value of an investment portfolio in light of the negative effect that a downturn in the market would have on the security for the investors’ heirs.


Let’s look at a concept that was conceived during the bear market of 2001-2002, known as the mortality hedge. Under this strategy, the investor would designate a percentage of his investment portfolio he would want to protect with life insurance to offset the potential loss of estate value due to a market downturn.


Assuming our $2,000,000 investor was a non-smoking male age 52 and he wished to implement a 30% “hedge” to protect his family. He would purchase $600,000 of life insurance. Assuming he wanted to guarantee the cost of this hedge for 20 years, the annual premium of this coverage would be $2,726. Since this coverage is part of an overall investment strategy, if we were to express the annual premium as an addition to the portfolio’s investment management fee, this premium would equal approximately 14 basis points or 0.136% of the total portfolio. Of course, the cost varies depending upon your age.


By using the mortality hedge, the investor won’t have to worry about the day to day and month to month volatility of the markets knowing that the estate value is protected.