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Life Insurance; Who Owns It and Why? May 27, 2008

Posted by shaferfinancial in Uncategorized.
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Last week I spoke about my dislike of mutual funds as folks primary investment.  This week I am talking about Life Insurance.  Now let me be clear, like mutual funds, life insurance will not make you wealthy.  However, it will provide a hedge against inflation and will protect you from the tax man.

Interestingly, most of the mass media “financial experts” tell people to buy term insurance and invest the difference at best, while some tell you how bad insurance is as an investment.  Well, as usual, their advice runs contrary to what the wealthy actually do. 

First off, as a financial product permanent life insurance is one of the few that has performed as it is advertised, with the exception of variable universal life insurance.  So right off the bat, I am telling you to not buy that product.  You see life insurance is not an investment, at least not the way some people try to sell it.  Variable life insurance allows you to invest your cash value in mutual funds (any bells going off for you?).  But the inherent costs of the product as well as the ability for folks to try to “time” the stock market makes it an inferior product in my opinion.  But for variable universal life, permanent life insurance is a great product.

First, what it allows you to do.

1. Create a pool of money that YOU own and can be accessed without penalty (as long as you don’t end the contract), and without tax issues for whatever reason you want without government interference;

2.  Create a pool of money that your heirs can receive tax free (with the exception of the inheritance tax);

3.  Create a pool of money that has guaranteed principal and minimum guaranteed rate of returns;

4.  Create a pool of money that is protected from lawsuits (except divorce);

5.  Protect your family from loss of your income if you die prematurely; and

6.  Create a pool of money that can sustain you in your retirement years.

This money is protected by the insurance company you write the contract with.  Life insurance companies rarely fail, unlike banks which fail by the thousands every decade or so.

Perhaps the most telling point is to look at what corporate executives use for their compensation packages.  Here is a very small slice of companies that pay for life insurance as a form of compensation for their top executives:

American Express/Anheuser-Busch/Bank of America/Dow Chemical/Fannie Mae/General Electric/Johnson & Johnson/Harley Davidson/Pfizer/PNC Bank/SunTrust Bank/ TD BankNorth/Wachovia/Verizon/Lockheed Martin

The king is apparently William Ryan of TD BankNorth whose annual premium of $1,260,000 is paid for by the corporation.

Interestingly, banks along with purchasing life insurance on their key executives also buy what is called “Bank Owned Life Insurance.”  They own a tremendous amount of life insurance because it is considered “TIER ONE” capital, which is there to protect the bank in times of adversity.  Other Tier One capital includes cash, gold, funds borrowed from the federal goverment and the federal reserve.  Just so we understand, banks buy cash value life insurance for safety and as a reserve requirement.  How much?  Over  110 BILLION dollars of it. Corporations also own quite a bit of it.

So financially astute executives own it, banks own it, corporations own it, why do the so called experts tell you not to own it?  Even some of the corporations that own alot of it (GE), have their employees giving out advice not to own permanent life insurance!!  Are you ready to throw out all those financial advice books into the nearest trash can yet?  You should!

Here is the final story I would like to tell you.  It might make your blood boil as it tells the story of how a corporate criminal kept millions away from those that he harmed.  Remember Enron and its main man Kenneth Lay?  About 10 years before his death, Enron purchased a $11.9M life insurance policy for him.  In bankruptcy the trustees was able to collect the $1.25 M in premiums from his estate.  Of course that left over $10M for his family.  That came in handy as the rest of his estate was valued at $0.  So after his death his wife collected over $10M that was paid for by Enron and no one could sue to get that money.