Exploring Life Insurance as a Financial Vehicle for Risk-Averse Savers
It’s no secret that we are living in volatile times. As I write this, the markets are struggling with the fallout from Britain’s historic vote to exit the European Union. That’s the news of the day. Earlier this year, it was China’s decision to devalue its currency that was jolting stock prices. It seems like every month there is another news item to worry about. Using life insurance as a financial vehicle allows families to grow wealth safely and securely.
When the market environment gets like this, there are plenty of people who simply avoid putting their money into investments that are loaded with risk. The idea of working hard to generate and save money — and then potentially losing some or all of that money — just doesn’t sit right with them. These same people are frustrated at the moment because traditionally “safe” investment vehicles, such as savings accounts, CDs, and fixed annuities, are offering minuscule returns, mostly due to the persistently low interest rate environment.
The good news is, there is an investment alternative with specific appeal to those risk-averse investors: life insurance.
Life Insurance as an Investment Alternative
The reason why life insurance has such a strong appeal among the risk averse is that principal is never at risk, and returns can be either guaranteed or based on a major index. Assuming you do not surrender your policy early, regardless of what happens in the markets, either you or your heirs will receive back more than you paid into the policy. Exactly how much more will depend on the type of policy you own, but you won’t lose money so long as the insurance company stays in business.
If part of your investment planning involves creating retirement income sources, buying life insurance may help get you further than, say, your average annuity. Why? An annuity will require you to withdraw your gains first — and pay ordinary income tax on those gains. Life insurance allows you to pull your basis out first and then, if needed, take a policy loan (tax-free) against the death benefit, which can be paid back at the death of the insured.
Many people don’t use these sorts of strategies because they still see life insurance as an expense rather than an investment alternative. We feel the majority of people misunderstand and underuse life insurance, particularly in the areas of wealth creation and wealth transfer, where it’s perhaps the most efficient vehicle out there.
When you stack the benefits of funding a life insurance policy against the alternatives, it’ll help shed more light on what we’re saying. If you fund an after-tax mutual fund or brokerage account, you’re exposing yourself to interest, dividends, and capital gains, all of which are taxable each year. If you fund an IRA, you’re treating yourself to a tax deduction and tax-deferred growth, but don’t fool yourself — Uncle Sam will come back to bite you during retirement when you’re forced to take distributions that are taxed as ordinary income. Even that annuity can hurt because the distribution of gains become taxable income rather than the typically more favorable long-term capital gains rate.
Life insurance not only creates a pool of money that can be borrowed from – tax-free – during retirement, but there are far fewer rules and regulations imposed on those withdrawals. For example, if you tap an IRA before 59½, you’re going to pay a nasty 10% penalty in addition to income tax just because you didn’t wait long enough to take a withdrawal. Life insurance withdrawals (or policy loans) are also not subject to required minimum distribution rules, so if you decide not to take withdrawals, you won’t be forced to.
Another layer to this is that life insurance policies provide a death benefit the moment you make that first premium payment. So even if you’re buying the policy for longer-term benefits, you give yourself the immediate perk of death benefit protection. In the unlikely event you pass away before life expectancy, you’ve just provided for your spouse and kids and helped to alleviate their financial concerns. The internal rate of return in that scenario is staggeringly high!
At Howard Kaye, we’re committed to building your net worth and improving your estate plan through our innovative use of life insurance. Call us today at 800-DIE-RICH and speak with one of our experts. We’ll help you rethink your financial planning in ways that will benefit you and your family for decades to come.
