In previous articles, I reviewed both the positives and negatives of using life insurance as an investment vehicle. This time, I would like to discuss what life insurance does best as an investment, and that is, self-completion at any time while the contract is inforce.
I’m omitting Term insurance from this piece as it doesn’t provide permanent protection. The reason Term insurance is so inexpensive is you will probably outlive the years of coverage. It’s the best product to own, however, to protect against premature death.
When you buy Permanent Life insurance, the first consideration is how much do you pay every year to buy that dollar of lifetime protection? Simply divide the premium by the face amount and you have your cost.
As an example, a male, age 60, buys a $100,000 Permanent life policy with a $1,500 annual premium. This dollar costs 1.5 cents per year. If he lives to 85 (his life expectancy) this dollar over time costs 37.5 cents.
Joint Life or Second-to-Die life insurance means exactly what it says. It is priced at a deeper discount than individual coverage and can be a vital part of your financial plan.
Level Premium life insurance can be an excellent vehicle for many situations. Here are a few:
– Income Tax Recovery
Anyone who believes income taxes will be lower in the future, stand on your head. Income taxes are the largest piece of the revenue pie, so the government will go there first to increase revenues. If your retirement plan totals $500,000, all of it will be taxable as ordinary income. Life insurance can pay this bill at a big discount.
– “Pension Max”
When you approach retirement, one of your payout options will be “Joint and Survivor” which will continue your payout should you predecease your spouse. The negative is your benefit can be reduced by several hundred dollars a month. The “Life Only” option provides the highest benefit but when your life ends, the payments end.
A life policy funded with the additional payout from the Life Only option will continue the higher payout while living plus provide a tax-free benefit for your surviving spouse.
– Gift programs for children and grandchildren
Parents wishing to guarantee an estate for children and maybe their grandchildren can utilize life insurance as the funding vehicle. Again, these dollars can be provided at a significant discount. It’s important to have a Trustee/Guardian named for minor children and possibly an age restriction to guard against giving funds to a youngster who might end up in a motorcycle gang!
– Charitable Bequest
Very few of us do not donate to a favored charity whether it be school, church, civic, veterans, etc. Being able to give a cash bequest at a significant discount over time plus receive a tax deduction for the premium can be very appealing.
Product design will be a key component in estimating your cost over time. No-Lapse Guarantee products usually perform quite well for these needs. If you have adequate cash flow, a Participating (dividend paying) policy may allow you to shorten your premium paying period. The other important points will be your insurability. If your doctor has given you nine months to live, you are no longer a standard risk!
Sarcasm aside, a Second-to-Die policy can be very helpful when one of the applicants has significant health history. The insurance carrier will be more concerned with underwriting the probable survivor.
Having a policy owned by a third party, whether an individual or a trust removes the asset from your estate. If
coverage is applied for by a third party, that is effective from day one. If an existing policy is transferred to a new owner, the insured must live for three years to prevent the asset from being included in the insured’s estate.
Going back to my first paragraph you might be thinking, “This stuff isn’t an investment.” Wrong! Protecting your family and loved ones by purchasing dollars for future delivery at a discount is the best investment you can make. Show me something else that promises the full benefit, income tax free, after just one payment. Life insurance should always be a part of your financial plan.
Mike Lassiter is a Chartered Life Underwriter and Chartered Financial Consultant. He is a Licensed Insurance Counselor and a Registered Investment Advisor. He can be reached locally at 770-786-2781.
