I hear a lot of people say that life insurance is not an investment. IMO, people do not know how to financially manipulate a life policy to make it an investment. "Buy term and invest the rest" sounds great but most people don't know to to invest, and wouldn't know how to balance their portfolio and decrease their exposure to risk over time. I believe that life insurance can be used to replace the risk free (as in the portion in treasury securities) portion of one's portfolio.
From my limited experience, UL and even SWL policies pay a higher crediting interest rate than an annuity. My strategy involves having a life policy for the period of time when it is most important (kids growing up, mortgage, etc) and then using a 1035 exchange to roll the UL policy into an annuity to allow for steady income. I will also show how it is more advantageous to use a life insurance policy vs. a Certificate of Deposit.
(Try to grind through the numbers before you make any statement here)
I was trying to crunch through some numbers for my dad mainly, so these number's are based off a certain companies products and rates on a 44yo male, preferred NT.
If you over funded a level UL policy by paying a $160 premium each month, you would have a cash surrender value of $55967 with total premiums paid being $38,400 and interest earned being $17567.
If you had a CD that paid 5.75% interest, and you wanted to save money throughout the year and buy a $1498 CD each year, paying 10% taxes on all gains, you would effectively earn (as in net of tax) 5.175% interest each year. After 20 years, you would have 50458 in cash -- with no tax liability. I selected $1498 because it is $160 * 12 - $422; with $422 being the cost of a 20 year term for the above individual.
It is important to note, that with the policies I am working with the above individual would have the benefit of accelerated benefits riders in the event of cancer, critical, or terminal illness -- essentially creating a small edge against incurring large amounts of debt or OOP expenses.
With the CD, you have 50,458 with no tax liability available for, say, an annuity. With the UL policy, you have nearly 55,967 with a tax liability on only $17567. However, through the use of a 1035 exchange rolling the life policy into an annuity you can essentially cause the tax liability to be expensed over a long period of time -- and the annuity has more to gain interest on in the first place. If you know anything about the time value of money, trickling your taxes to uncle Sam while earning interest on your tax liability is GOOD.
Annuity with 50,458 (CD route) @ 3.5% interest:
If the accumulation period is 6 years (the individual would be 70 in this example), the owner would have a value of 62,025 at the time of it begins to annuitize. If the annuity were to pay for a period of 10 years (age 80), the owner would receive $613 a month. $96 is tax liability/month. Net of taxes the payment is $517 each month. In today's dollars, at 3% inflation the tax liability is essentially $43.49 and the monthly payment is worth 234.
Annuity with 55967 (UL route) @ 3.5% interest:
If the accumulation period is 6 years, the owner would have a value of 68,798. If the annuity were to pay for a period of 10 years (age 80), the owner would receive $680 a month. $250 is tax liability/month. The monthly payment is $430. At 3% inflation, in 26 years $1 of today's money is worth 45 cents later. Thus, "today's" tax liability is essentially 114 and that payment is worth $194.
Thus, we can conclude that for 40 dollars a month of TODAY'S money, the individual in this case could give himself the option to continue his life insurance to death, allowing him to pass money tax free to his heirs and outside of his estate. That $9600 dollars over a lifetime also gives him the possibility of receiving living benefits from his life insurance for cancer, critical, or terminal illness during the 20 years (or longer, if he had elected to keep the UL policy. Term would not provide this.
From my limited experience, UL and even SWL policies pay a higher crediting interest rate than an annuity. My strategy involves having a life policy for the period of time when it is most important (kids growing up, mortgage, etc) and then using a 1035 exchange to roll the UL policy into an annuity to allow for steady income. I will also show how it is more advantageous to use a life insurance policy vs. a Certificate of Deposit.
(Try to grind through the numbers before you make any statement here)
I was trying to crunch through some numbers for my dad mainly, so these number's are based off a certain companies products and rates on a 44yo male, preferred NT.
If you over funded a level UL policy by paying a $160 premium each month, you would have a cash surrender value of $55967 with total premiums paid being $38,400 and interest earned being $17567.
If you had a CD that paid 5.75% interest, and you wanted to save money throughout the year and buy a $1498 CD each year, paying 10% taxes on all gains, you would effectively earn (as in net of tax) 5.175% interest each year. After 20 years, you would have 50458 in cash -- with no tax liability. I selected $1498 because it is $160 * 12 - $422; with $422 being the cost of a 20 year term for the above individual.
It is important to note, that with the policies I am working with the above individual would have the benefit of accelerated benefits riders in the event of cancer, critical, or terminal illness -- essentially creating a small edge against incurring large amounts of debt or OOP expenses.
With the CD, you have 50,458 with no tax liability available for, say, an annuity. With the UL policy, you have nearly 55,967 with a tax liability on only $17567. However, through the use of a 1035 exchange rolling the life policy into an annuity you can essentially cause the tax liability to be expensed over a long period of time -- and the annuity has more to gain interest on in the first place. If you know anything about the time value of money, trickling your taxes to uncle Sam while earning interest on your tax liability is GOOD.
Annuity with 50,458 (CD route) @ 3.5% interest:
If the accumulation period is 6 years (the individual would be 70 in this example), the owner would have a value of 62,025 at the time of it begins to annuitize. If the annuity were to pay for a period of 10 years (age 80), the owner would receive $613 a month. $96 is tax liability/month. Net of taxes the payment is $517 each month. In today's dollars, at 3% inflation the tax liability is essentially $43.49 and the monthly payment is worth 234.
Annuity with 55967 (UL route) @ 3.5% interest:
If the accumulation period is 6 years, the owner would have a value of 68,798. If the annuity were to pay for a period of 10 years (age 80), the owner would receive $680 a month. $250 is tax liability/month. The monthly payment is $430. At 3% inflation, in 26 years $1 of today's money is worth 45 cents later. Thus, "today's" tax liability is essentially 114 and that payment is worth $194.
Thus, we can conclude that for 40 dollars a month of TODAY'S money, the individual in this case could give himself the option to continue his life insurance to death, allowing him to pass money tax free to his heirs and outside of his estate. That $9600 dollars over a lifetime also gives him the possibility of receiving living benefits from his life insurance for cancer, critical, or terminal illness during the 20 years (or longer, if he had elected to keep the UL policy. Term would not provide this.