Recent economic events are leading to market volatility and uncertainty, motivating many investors to seek stable alternatives for their financial portfolios. Given the introduction of tariffs and the resulting market fluctuations, many are wondering whether life insurance and other endowment insurance products can provide effective protection against economic instability. The short answer is yes. However, to understand the reasons for this, it is necessary to examine the unique characteristics of life insurance as a financial instrument.
The tariff measures have caused considerable unrest and volatility in the markets. While this is not a political discussion, facts and figures show that markets experience turbulence, and this volatility affects everyone, regardless of their stage of life. While younger investors in the accumulation phase can more easily tolerate volatility (especially if they invest continuously), investors approaching retirement or already retired face greater challenges during market downturns.
Life Insurance: The Anti-Volatility Asset
In times of rising markets, life insurance can seem boring and outdated. Stable returns of 4–5% pale in comparison to double-digit market gains. However, in times of volatility and market declines, this “boring” quality becomes one of life insurance’s greatest strengths.
Life insurance—particularly cash-value life insurance policies such as whole life insurance and indexed universal life insurance—has the distinction of being an “anti-volatility investment.” This designation stems from its ability to maintain stability when other investment vehicles experience significant fluctuations.
The Value of Stability
In times of high prices, the consistent but modest returns of life insurance can seem disappointing. However, in times of declining markets, policyholders often express relief and gratitude for the stability of their insurance investments. This sentiment is especially prevalent during significant market corrections, such as those in 2022 and the current volatile conditions.
This reliability is based on the fundamental structure of insurance products and the way insurance companies manage their assets – a stark contrast to the volatility inherent in market-based investments.
Three Key Benefits of Life Insurance in Times of Economic Volatility
When economic conditions become unstable due to factors such as tariffs, life insurance offers three key benefits that make it an effective hedge:
1. Reliable Retirement Income
For retirees, market volatility poses a significant challenge when trying to generate income from market-linked assets. Selling investments during volatile times can permanently damage retirement prospects.
Those planning to take distributions from their portfolios during declining markets face difficult decisions. They need the income, but selling assets at low prices will result in losses. This situation irreversibly changes your retirement prospects.
Compare this with whole life insurance and index-linked universal life insurance. Market volatility has no significant impact on the ability of these products to generate the income they were designed to achieve. They perform as intended regardless of market conditions.
Despite its connection to market indices, index universal life insurance maintains this stability through features like annual resets, which we’ll discuss in more detail later.
2. Penalty-Free Emergency Access
During economic downturns when tariffs are imposed, job losses often increase. In such situations, people sometimes have to take early withdrawals from retirement accounts like 401(k) plans—not because they want to, but out of necessity.
Taking early withdrawals from retirement accounts often carries significant penalties:
A 10% early withdrawal penalty if you’re under age 59.5
Regular income tax on the distribution
The permanent loss of tax-deferred growth of that money
Sale of assets at potentially low prices
These distributions are taken because immediate financial needs—such as avoiding foreclosure or eviction—outweigh future financial consequences. The need to solve “today’s problems” takes precedence over “next year’s problems.”
The cash value of a life insurance policy provides an alternative emergency fund that avoids these consequences:
No additional tax burden
No age-related penalties
No reason to sell at a discount
Value and growth potential that remains largely independent of market conditions
This makes life insurance a uniquely positioned asset in challenging economic times.
3. Opportunities During Market Downturns
Those with cash on hand may have an opportunity to build wealth during times of economic volatility. The cash value of life insurance policies can be an excellent source of capital to capitalize on in such situations.
During previous major downturns, such as the 2008 financial crisis, individuals with cash made significant gains by purchasing depreciated assets. Florida properties purchased from banks at foreclosure prices (often at 10 cents on the dollar) generated substantial returns for those who could take advantage.
When leveraging life insurance surrender values through policy loans:
The original money continues to be contributed to the policy (although possibly at a reduced rate).
Interest accrues on the loan.
The policyholder can potentially profit from arbitrage if the return on investment exceeds the loan interest.
Although borrowing against your policy is not always the optimal financial decision, this strategy can be worthwhile in clear arbitrage situations. The key is to wait for obvious opportunities rather than speculating.
How Insurance Companies Weather Economic Storms
The stability of life insurance products during times of economic volatility is no accident—it is the result of the way insurance companies structure their investments and manage risk.
Conservative Investment Approaches
By design and regulation, insurance companies maintain conservative investment portfolios predominantly consisting of bonds. Unlike many other financial institutions, insurers value these bonds based on their earning power over time, not their daily market value.
Because insurance companies typically hold bonds to maturity and do not trade them, price fluctuations have minimal impact on their financial stability. This fundamental difference in investment approach protects insurance companies from the volatility that affects many other financial institutions.
The AIG Example
During the 2008 financial crisis, American International Group (AIG) ran into severe financial difficulties due to credit default swaps—not due to its insurance business. American General, the life insurance company owned by AIG, remained financially sound throughout the crisis despite its parent company’s problems.
This example illustrates how the life insurance business remains stable even amid significant economic challenges. The insurance business itself remained completely unaffected by the financial turmoil surrounding it.
Index Universal Life Insurance During Market Volatility
Index universal life (IUL) policies deserve special attention when hedging against rate-related market volatility. Because IUL returns are tied to market indices, one might assume these products suffer during market downturns. However, several characteristics make IULs resilient even in volatile times.
Annual Reset Mechanism
The annual reset mechanism is perhaps IUL’s most effective feature during market volatility. Unlike direct market investments, where you must offset losses before realizing new gains, IUL works differently:
Interest crediting takes into account market movement over specific periods (usually one year).
If the market is down on your policy’s anniversary date, you reset the amount to that lower point.
Future interest is calculated based on market movement from that new starting point.
This allows for potential gains even during periods of general market decline.
This periodization of returns allows IUL policies to perform positively even during negative long-term market trends. An analysis of the 2000–2009 decade (a period of slightly negative returns for the S&P 500 Index) shows that index universal life insurance products delivered positive returns even during this challenging period.
Alternative Indexing Strategies
The insurance industry is constantly innovating, and many IUL products now offer alternative indexing options beyond traditional stock market indices:
Bond-based indexing options
Foreign market indices
Blended indices that tactically adjust allocations to market volatility
Options that shift from equities to bonds and/or cash during volatile periods
These alternative strategies can potentially benefit from falling markets, as bonds and cash often perform well during periods of equity market volatility. This provides additional protection against tariff-related market disruptions.
Fixed-Rate Option
For those who wish to completely avoid market fluctuations during volatile times, most IUL policies offer fixed-rate options. These allow policyholders to earn a fixed interest rate regardless of market performance. In recent years, these rates have been quite attractive compared to other fixed-income investments.
Annuities: Another Life Insurance Hedge Against Volatility
Although often overlooked in discussions about life insurance, annuity products are life insurance products that offer similar protection against volatility. Fixed annuities, in particular, offer stability and guaranteed income regardless of market conditions.
For those retiring during times of economic volatility caused by tariffs or other economic factors, annuities can create reliable income streams without the risks associated with market-linked investments. This is precisely what annuities were designed to do: provide income stability during uncertain times.
Like other insurance products, annuities benefit from the financial stability of insurance companies discussed previously, making them an effective hedge against economic uncertainty.
Why this matters: The inevitability of economic disruption
Economic history shows that volatility events occur regularly, even if their triggers vary. From the bursting of the tech bubble in 2000 to the 2008 financial crisis to the recent tariff-related disruptions, these events impact financial markets every few years.
Prudent financial planning recognizes this pattern and implements strategies to mitigate these inevitable disruptions. Avoiding a portion of your assets from market volatility is not just conservative planning, but pragmatic risk management.
Endowment life insurance, index-linked universal life insurance, and annuity contracts offer this protection. They protect policyholders from volatility not as a side effect, but as a core feature of their design.
Practical Implications for Your Financial Strategy
Understanding the relationship between life insurance and economic volatility leads to several practical considerations:
Diversification Beyond Market-Based Assets
Traditional investment advice focuses heavily on diversifying market-based assets (stocks, bonds, real estate). While important, this approach exposes your entire portfolio to market risk. True diversification should also include non-market-correlated assets, such as cash-value life insurance.
Creating Reliable Income Sources
For people nearing retirement or already retired, creating stable income sources should be a top priority, regardless of market conditions. Life insurance can form the foundation of this income strategy, providing security during uncertain times.
Building Accessible Emergency Funds
Economic disruptions are often accompanied by rising unemployment and financial hardship. Access to available funds that don’t impose penalties or require the sale of depreciating assets provides necessary financial flexibility during challenging times.
Positioning for Opportunities
Economic volatility brings both challenges and opportunities. Having liquid assets in the form of life insurance balances allows you to take advantage of investment opportunities that arise during market downturns.
Life Insurance as a Strategic Hedge
So, is life insurance a good hedge against tariffs? The data supports this. By preserving stable value, providing no-fee access, and creating potential opportunities, life insurance with cash value offers sensible protection against the negative consequences of economic volatility.
The key benefits—stability of retirement income, access to emergency funds, and opportunity capital—are a direct response to the biggest challenges posed by rate-related market volatility. At the same time, the fundamental structure of insurance companies provides additional security that these benefits will remain available when they are needed most.
While life insurance shouldn’t comprise your entire financial strategy, investing a portion of your assets in these products creates a component of stability that complements growth-oriented investments. This balanced approach takes into account the reality of economic cycles and positions your financial planning to weather inevitable periods of volatility.
In a world where economic disruptions are becoming increasingly frequent, the “boring” stability of life insurance is becoming one of its most valuable features. The goal is not to achieve the highest possible return in good times, but to ensure financial resilience in difficult times.
The prudent approach is not to choose between growth and stability, but to integrate both into a comprehensive strategy. Life insurance and other cash-value products offer the stability component that market-based investments cannot—and are therefore an effective hedge against tariffs and other sources of economic volatility.
