Simple Pound

A 20-year-old of good health with a life insurance. Sounds like a waste of money? Maybe, but I will still disagree with you. There are two simple reasons why:

1. Tax-free money: My parents took out this life insurance for me at the last possible date where I wouldn’t have to pay taxes in case I have the money paid out (in the future). Any insurance policy that comes into effect on or after the 01.01.2005 is assessed under a different tax law which applies income tax to any proceedings from the insurance.
2. Mutual funds: The insurance is based on a selection of mutual funds and while the insurance company guarantees a certain minimum payment in case of my death, the amount of money I could eventually get out of this insurance entirely depends on the performance of the underlying funds. I stop making additional payments towards the insurance in 2034 (I’ll be 48 then), but the money will stay in the selected funds until I decide I’d rather go and spend it now.

The insurance has been running since December 2004 and my parents have been kind enough to pay the monthly premium since then. When I start working in July, all these payments will go out of my own account, which was one of the reasons I sat down earlier to figure out how exactly the insurance works and what sort of funds my money sits in.

There are about two dozen mutual funds to choose from, each covering a specific asset category like European growth stocks, emerging market bonds or world-wide real estate. I have analysed the current selection of mutual funds and here are some results of this analysis.

The current split between bonds and stocks is 30:70. The bond section of the portfolio contains some stable, boring government bonds but also high-yield bonds and emerging market bonds. I figured that was quite a decent distribution so I didn’t analyse it further. The following graphs only concern the 70% stocks in the portfolio.

The term “America” refers to the continent as opposed to only the United States and therefore includes Latin America and Canada as well. But it surely doesn’t come as a surprise that US stocks make up at least 90% of this share.

The sector termed “Knowledge” includes both software and hardware, as well as media and telecommunications. Services covers health, consumer and business services, and finance while industry comprises materials, energy but also consumer goods. The highest sector allocation can be found in finance (16% out of 70%) and health (12% out of 70%).

I am quite keen to optimise it, as I don’t think it’s quite ideal yet. If you have any recommendations or thoughts on the current distribution of funds, asset classes, geographical regions, etc. please leave a comment. In fact, I would love to stimulate some reader participation here! So the question is: “What would you change in this life insurance portfolio?”

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