Buying homeowners’ or car insurance isn’t long-term planning as much as short-term risk mitigation: the only thing you’re investing in is peace of mind, with nothing to pass down to your heirs. That’s not the case with life insurance; its eventuality is one of life’s two inevitables. The cash value and/or death benefit is a guaranteed payout at some point in the future, which makes it an investment alternative. Once you start viewing life insurance this way – as an asset rather than an expense – you can start utilizing it for its many unique advantages as a wealth creation vehicle.
The Value Provided by Life Insurance
In order for us to view life insurance as a portfolio asset, we need to talk about cash value and death benefit—the two primary ways in which the policyholder receives financial value. When you buy a universal or whole life policy, there will be a buildup of cash value that occurs. The exact amount of that buildup will depend on a combination of factors including the amount of your premium, the costs charged by the insurance company, and the annual interest credited to your policy, which may include dividends, or interest tied to a market index such as the S&P 500.
The death benefit is the other way in which a policyholder receives financial value. With permanent (non-term) insurance, we know the death benefit is going to payout at some point in the future. However, figuring out exactly what that rate of return will be is tricky because none of us knows when we are going to die.
If you were a young guy who buys a $1 million policy for the price of $5,000/year, and were to die in year one, the rate of return on your investment would be astronomical. In the far more likely scenario where you live a long life and die somewhere in your late 80s or early 90s, your return would probably be closer to 4-6%.
Regardless of exactly what the return ends up being, you and your beneficiaries have an investment alternative where the future payout amount is known and guaranteed. Plus, you don’t have to worry about the many risks involved with investing in stocks and bonds.
Taxable Equivalent Yield
Another crucial topic when trying to understand life insurance as an investment alternative is the fact that the death benefit is tax-free. People often have this discussion of “tax equivalency” with municipal bonds: Say you buy a taxable corporate bond that pays 4%, but are taxed at 25%, you are really only getting a 3% return from your bond. If you were able to find a tax-free (municipal) bond that paid 3.25% instead, that would have been a more favorable outcome for you, despite the fact that the actual interest payments are slightly lower.
The same math can be done with life insurance—any rate-of-return calculation on life insurance should also include a tax-equivalency projection because taxes are a real thing that drag down your return. For people who fall within the nasty estate tax brackets, the appeal of life insurance is magnified even further, especially when you consider that funding a life insurance policy can be an activity that reduces the size of your estate.
At Howard Kaye, we believe that life insurance can and should play a role in your portfolio, just the way stocks, bonds, and real estate do. Speaking with one of our experts can help you understand exactly how you can integrate a life insurance strategy within your estate plan in order to maximize your legacy and pass more tax-free dollars along to your heirs than you ever thought possible. Speak with us today. Call us at 1-800-DIE-RICH. We are here to help.
