Would You Make This Deal?

Posted: Nov 11, 2010 10:45 AM

If you were the president of a bank and I came to you with the following request, would you make this deal?

“I want to establish a tax-deferred account with your institution that contains a self-completing feature. I want to accumulate a value of $250,000 by the time I am age “x”. Based upon current rates and the number of years until that date, I know I will need to deposit “y” dollars each month into my account, which I will do. As long as I am making those payments toward my goal, you can do nothing to change this account. If somewhere along the way toward my savings goal I need to spend some or all of my money, you must give it to me with no questions asked, and with no restrictions or government penalty. If I live to the age of “x” I can take my savings in any manner I choose or leave it with your institution and draw on it as needed without ever paying tax.However, if I don’t live long enough to complete my savings goal, your institution will complete it for me instantly. Even if I die after making only one savings deposit, you will pay my family the full $250,000 immediately, tax-free. Of course you will structure this account so that not only will my family avoid income tax, they will not need to pay tax on any of the gain at my death. Do we have a deal?”

As president of your bank I don’t think your stockholders would be too appreciative of your making that arrangement with me.But life insurance companies do it every single day! They are not stupid. By using actuarial assumptions, structured investment management, and some nice tax breaks they make out just fine. Who cares if they make money if the deal I just spelled is a good one for you and your family?

For example, I went to a top rated major insurance company and ran the proposal above for a male in excellent health at age 45. Using a net return of only 3.8% he would need to deposit $8,600 per year for 20 years to build an account worth $250,000 by age 65. But there is more. If he died along the way--even after paying just one payment, his family would receive over $490,000--tax free! If he decides to cash out of the policy and take his profits, then he would pay income tax on the gain. But he could also choose the leave the policy intact and just draw on the cash as needed in the form of a policy loan. As long as the policy stays in force he pays no tax on the withdrawals. What other savings plan does that? Let me help you with the answer, there isn’t one. A properly designed cash value life insurance policy creates a pretty compelling way to accumulate wealth while protecting your family.

I present the information above for your education only. Everybody’s situation is different and there are a lot of variables that will impact the results. Your health, age, and interest rates are all factors that must be considered. So talk with a qualified insurance professional to see how a plan would work for you.

Here’s the point. A lot of financial professionals put down the idea of life insurance as an effective savings plan. But with the recent history of a stock market that takes as much as it gives, cash value life insurance is cool again. If your advisor tells you that life insurance is a bad investment, see if they are willing to make the deal above. Then, see for yourself but do it with the guidance of someone who is well trained and knows what they are talking about. An insurance professional can be a valuable member of your advisory team. So, do we have a deal?