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Oh no, mainstream is rediscovering Life Insurance March 18, 2009

Posted by shaferfinancial in Finance.
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Frankly, I get a little wary when the mainstream media, starts to pick up on ideas I have been posting on for years, but here it is right on cue.  Kiplinger via yahoo finance has 10 Financial Myths Busted.  Here is #6:

MYTH 6. Life insurance is not a good investment. This canard spread as 401(k)s and IRAs supplanted cash-value life insurance as Americans’ most popular ways to build savings while deferring taxes. True, the investment side of an insurance policy has higher built-in expenses than mutual funds do. But two factors point to a revival of insurance as an investment. One is guaranteed-interest credits on cash values, which means that if you pay the premiums, you cannot lose money unless the insurance company fails (see “Savings Guarantees You Can Trust,” on page 55). The other is the boom in life settlements. If you’re older than 65, you can often sell the insurance contract to a third party for several times its cash value — and pay taxes on the difference at low capital-gains rates.

Truth: A good investment is one in which you put money away now and have more later. Checked your 401(k) lately?

What has happened is that the propaganda the mutual fund companies have put out has become naked in its wrong assumptions.  Now I have posted several times on the issues [look to the right under mutual funds and click], and even done a comparison between the two where I found a way to make mutual funds come out ahead.  But the bottom line is that when comparing the two options; mutual funds and life insurance it all depends on what happens in the future as to which one works out the best.  Here are the deciding factors:

1. When do you die?  An early death benefits the life insurance option;

2. What happens to the market right before you retire?  A boom market benefits the mutual fund while a bear market benefits the insurance policy;

3. How much variation is in the market going forward?  The more variation, the better the life insurance does because it never goes below zero.

4. What tax bracket and tax rates are when you retire?  The lower your personal tax rate is, the better the mutual fund does; and

5.  How well you can withstand drawdowns?  What do you do when the market goes south like it has?  Do you get out of the market?  Move to bond mutual funds?  Chase higher returning funds?  All these things lower you overall return.  So if you are risk adverse, or not up to being an active investor, then this suggests the life insurance policy will work better for you.

Two years ago, after going over the previous five items, I suggested to five different families they should either re-finance their homes to 80% loan to value or cash in their 401K and pay the penalty to fund a equity indexed universal life insurance policy.  Only one did.  I think about the other four.  How are they handling their 50% loss in their 401K?  How about seeing their main savings vehicle, their home lose 35% of its value?  Per chance I ran into one of them the other day.  He was bitterly complaining about his 401K loss blaming AIG and the banks for their malfeasance.  I didn’t have the heart to remind him he ignored my suggestion [I think he had  forgotten about it].  He said after his 401K dropped 45% he sold and now is in a money market account.  Thank god, he said he got out.  I asked him how long he would be out of the market?  Forever he said.  Maybe I should approach him about the EIUL?  But I don’t think he could stomach another loss with the penalty for getting money out of a 401K.

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