- investment only
- Term life insurance plus investments
- PLI plus investments
- DIA with PII plus investments
- PLA plus DIA with IIP plus investments
In one scenario, for a 25-year-old couple making $80,000 a year, the analysis found that permanent life plus investments outperformed investment-only and term life plus investments strategies.
For example, if the couple starts with just over $61,000 in retirement income, they would earn a 20% return compared to the investment-only strategy using a 50% PLI investment plan. Using a term life plus 50% investment strategy would actually result in a 2% negative change compared to an investment-only strategy.
“There are a couple of reasons for this,” the analysis concluded. “On one hand, PLI tends to outperform fixed income in long-term scenarios due to the combined effect of guaranteed cash value growth and dividends. Term life premiums do not boost long-term savings, but rather act as a drag on portfolio performance. The second reason is that the use of PLI as a volatility buffer improves returns because the investor does not have to sell and realize the losses of their investments.
The analysis found similar results when examining scenarios with 35-, 45-, and 55-year-old couples, with a few exceptions and rebalancing of investments due to age differences.
‘More efficient’ integrated strategies
“Integrated strategies are more efficient than investment-only strategies,” the report concludes, with integrated strategies giving investors the flexibility to focus on the financial outcomes most important to them: retirement income, legacy, or a balance in between.
“Allocating up to 30% of annual savings to PLI and up to 30% of wealth at age 55 to DIA with IIP may be appropriate when optimizing retirement income and legacy value outcomes,” he said.
Integrated strategies are still better even for investors with a higher risk appetite, E&Y said.
“Although the degree of improvement in revenue and legacy is less when the analysis is anchored at a 75% probability of success,” the report says. “We note that our findings still apply. In general, integrated portfolios still provide better income and legacy benefits relative to investment and term life + investment strategies.”
Looking ahead, E&Y said its analysis could be extended to many other retirement investing strategies.
“For example, we expect other annuities to provide value relative to an investment-only strategy, but would still be worth incorporating into our framework for confirmation,” the report says.
“This analysis could be done for households that do not use investment advisers and invest primarily in low-cost exchange-traded funds. While the fact that do-it-yourself investors tend to lag the market, which may somewhat offset the impact of lower investment advisory and management fees, would be interesting to investigate. What would be the boost to retirement income and legacy from an integrated strategy compared to an investment-only strategy? Would the same findings continue to apply?”
Doug Bailey is a freelance journalist and writer living outside of Boston. He can be contacted at [email protected].
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