Thought for the day:
“Man stands for long time with mouth open before roast duck flies in.”
– Chinese Proverb
If you will read no further:
A client of mine for over 30 years is just retiring as a school teacher. She has a life insurance policy initiated in her second year of teaching and a TSA that was tax deductible. She invested the TSA in equities, and the insurance money went into Universal life. Today, the after-tax income she can draw from the insurance policy is almost the same as from her TSA…(proportionately, as she put a lot more money in to the TSA). Fortunately she did not have to draw from her TSA until this year; after it had come back from the shellacking it took in 2008-9. Which account do you think wakes her up at night?
Thought for the week:
We have been talking a lot lately about index life insurance and its ability to accumulate great account values, especially for people who have an interest in setting aside money in a planned retirement strategy. No doubt a young client in their mid-forties could expect some impressive results by setting aside $10,000 per year in a mutual fund inside an IRA. And the extra motivation achieved by the tax deduction is most helpful. But at the end of the day, they still have to deal with the down markets every 6 to 8 years and the uncertain tax burdens that will be in place when it’s time to spend the money in retirement.
For years we have been discussing life insurance as an impressive alternative to the IRA accounts…particularly the Roth IRA accounts. Imagine a ROTH IRA with no government limit to the amount one can contribute, no restrictions on when or how much can be withdrawn. All that is needed is for the insurance contract to credit a decent return.
When we introduced UL the late 70s, interest rates of 10% to 12% motivated many people to “invest” in those contracts for retirement. They kept the death benefit small to minimize the insurance cost and allow the cash account to grow as much as possible. They did pretty well considering they never lost money in the account and even now the minimum guarantees are 4% per year.
Now we have index UL that can credit the increase in the S&P each year up to 11% to 13% comparable to most stock funds. Subtract the cost of insurance (about 1.5%) which equates to the cost of managing a stock fund, and you have a very competitive alternative; PLUS the unique features that are missing in an ROTH IRA. And the Index life cash value cannot go down due to poor market conditions. When the S&P goes down, this cash account doesn’t lose a cent. “Sequence of returns” is the term that describes the difference in results achieved when the average return is the same but gains and losses are experienced at different times. An account value that increases when the market is up but keeps its value when the market goes down is a beautiful thing; a perfect option to bonds or conservative stocks in one’s portfolio. And for those who must be invested in equities, we have Variable UL products with the same tax features but with returns tied even closer to the market and investment options to satisfy every financial planner.
Young professionals would be well advised to consider an insurance contract such as this as a base for their personal retirement plan. Additional funds when available can then be invested in a managed portfolio as time goes on. The insurance plan balances the portfolio while satisfying some or all of the clients need for life insurance to cover family or business needs.
Next time you are counseling a young “up-and-comer” about building their wealth for the future, call us for a proposal and review of the logic of including this early on in their planning process. It’s truly a good way to begin.