If you're thinking the mattress looks pretty good about now, have I got a deal for you! Because actually as we all know, the mattress isn't safe either for various reasons. It isn't safe if the house burns down, if a hurricane, tornado, earthquake or burglar hits. It isn't safe if your friends and family know what's under it. And it pays absolutely no dividends.
So what is safe as the proverbial mattress but literally so, and pays tax free dividends that can be comparable to or greater than returns on investment from market based funds without the risk-- any risk? And if I teased you further with the fact that not only are the dividends not taxed as they build up inside the fund, but the income taken from the fund is not taxable either. There is no penalty for "early" withdrawal, no requirement to start taking distributions at a particular age, and there is creditor protection.
In other words, who would argue that this investment vehicle is the ultimate libertarian asset one can own. To summarize:
-Tax Free
-Risk Free (on principal)
-Seizure proof (by the IRS, collectors, creditors, courts, etc.)
-Dividend rate (remember, tax free) of 7-11% keeps up with moderate to high risk market investments in some cases.
-And did I say risk free? Seizure proof? The ultimate Libertarian asset.
Now in the spirit of full disclosure I must advise you that I sell this product. However, I will not name the company I?represent. Anyone who has a potential client interest is free to look me up and we can talk. But I'm not writing this article to promote my business. I'm writing this article to promote an option for savings and investment that has always been strong, productive and safe in this country without a lot of the risk and restriction that comes with most other types of long term investments in the current marketplace.
It is safe to assume that the ability to make dramatic gains in the post Paulson-AIG-FannieFred-Bear Stearns market for the next decade or so at the very least may be much less than it has been in the recent past, while the risk may be no less, perhaps even more. It is also safe to assume that government regulation and taxation?of investments will also increase.
So here's the best kept secret in financial planning! Here's the product that has been oft maligned since the mid-seventies, as the average "investor" began going directly to the market. The product that even now, certain unnamed celebrity financial gurus will twist up their face and raise their voice and say DONT buy that. Instead buy term and invest the difference.
So from that comment you have probably guessed I'm talking about whole life insurance, permanent insurance, cash value insurance-- however you may have heard referenced in the past. Well, lets look at that. For those who bought term and invested the difference, where did that get them?
-It got them term life insurance which IS a bad investment since one pays an increasingly large premium with age and normal wear and tear and can't even obtain it for any price with anything more than normal physical wear and tear, and the likelihood of dying while a term life policy is in force in this country is .07%. To be clear, that is seven tenths of one percent, not seven percent. The fact is that most people do not need less or no life insurance as they age. They need more. They need it for different purposes once the mortgage is paid and the kids are educated but they need it-- to leverage estate taxes, to guarantee a legacy, to reimburse the estate for long term care costs, and any number of other things.
-It got them a risky market based investment that may have but probably didn't earn more over a thirty or forty year span than the best whole life policy might have earned them.
-It got them more tax exposure, whehter deferred or not.
-And due to the lack of a death benefit later in life when the term insurance is too expensive or impossible to keep due to health status, it made the dependents, beneficiaries, and the estate itself more vulnerable.
An article by independent financial planner John E. Girouard appeared in the PR Newswire in January of this year that called Whole Life Insurance purchased from a "Mutual Company," "The Investment Bomb Shelter for Scary Times." The author, who has also written the book "The Ten Truths of Wealth Creation" and founder of the Institute for Financial Independence said "Most investment advisers don't understandhow mutual whole life policies work, and don't offer them to clients because they aren't sexy or new."
Girouard goes on to say that "Few people know that the life insurance industry was one of the few economic sectors to survive the Great Depression intact...Buying a policy from a mutual company you become an owner instead of a customer. It's like becoming your own bank," notes Girouard.
Other than savings accounts in commercial banks, whole life insurance was the primary means of saving and investing for the average man or woman on Main Street until de-regulation began in the mid-seventies and direct investment in the stock market and market based equities was more accessible to the common person. Whole Life insurance is the reason your parents and grandparents were more cash liquid than you or most of your friends likely are today.
The best Mutual Life Insurance companies have paid dividends of 7-11% over the past thirty years and have paid dividends consistently for more than a century without interruption. In simple, round numbers, one's contributions can multiply by a factor of four to six over a forty year period, and remember, that's without taking on risk to the princpal, without tax liability, and without any penalties or restrictions relative to timing of withdrawals.
A whole life policy purchased for a newborn with a death benefit of only $50,000 to start, would only cost a parent or relative benefactor $400-500 per year, but with an additional purchase benefit such a policy guarantees the child insurability up to a total of $800,000 regardless of health status in adulthood and a seven figure cash value (if additional purchases are made as scheduled and no withdrawals are taken) by age sixty. In this uncertain age, why wouldn't every parent, grandparent, aunt, uncle, god-parent want to purchase something like this for the children in their lives?
It is possible to create the equivalent of a bank or an investment group by creating a partnership or corporation among a few friends, relatives, coworkers or even strangers to increase the amount of cash and death benefit available at any one time. Such a corporation could be used to pool ownership and beneficiary rights of whole life insurance policies. Member/owners of the fund would have more cash more quickly, available to draw from for major liquidity needs and major planned expenses. Another little known fact is that whole life policies allow for a change of insured so that a new member of a group can buy in and replace someone else (subject to underwriting) without having to start at the beginning in accumulating cash value. Therfore, if in such a group, one or more members default on their premiums, a replacement can be found to carry on the policy and benefit from the already accrued cash value abandoned by the person in default. The new member could pay a percentage of the cash value available to the previous owner or to the investment group to gain admission to the group.
Sometimes something old and simple is new again and sexy by comparison to the last bright idea that syphoned off large chunks of the economy. Whole life insurance is one such simple old thing that is new again and sweet, for its simplicity, safety, and profitability. You don't get rich quick with this. You just get rich. And stay that way.
Note: Legally it must be stated that life insurance, regardless of the cash value and the dividend rate, is NOT an investment. Technically. It is just a damn good way to save money for the long term that you can count on having when you need it.
©2008 John Wingspread Howell, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Monday, September 22, 2008
Last modified: Monday, September 22, 2008
The views expressed in this article are those of John Wingspread Howell only and do not represent the views of Nolan Chart, LLC or its affiliates. John Wingspread Howell is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
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