The August 26th issue of the Wall Street Journal had an article that started with the headline...

" Investment Now a Draw For Buyers of Insurance"

What assumptions would you make from the following excerpts?

  1. "Buyers of life insurance in the second quarter moved toward purchasing more-expensive policies that include an investment component, perhaps seeking safety amid turmoil in the stock market"

  2. "Annualized premiums on whole-life policies jumped 23% while universal life rose 11% in the quarter"

  3. "Both whole and universal-life policies invest primarily in the investment-grade bonds. While the premiums are often significantly higher than for term-life insurance, many such policies recently have promised minimum interest payments of 3% or more."

  4. "Both whole and universal life delivered positive returns during the 2008 financial crisis even as many other investments sank"

  5. "The quarterly data appear to show a move toward life insurance as a means of keeping money safe.The annualized premiums of term life fell 11% in the second quarter."


 

What's Misleading About the WSJ Article?

The article prompted me to write because one could be easily misled.



About guaranteed rate of return:

The WSJ article mentions a guaranteed 3% as the impetus for moving out of stocks and into insurance. A typical universal life policy will guarantee a minimum interest credit of 2.5 - 3.0% while crediting somewhere between 4.0 - 5.5%.

 

What's wrong with this? It is highly unlikely that the crediting rate will increase above the 4.0 - 5.5% range since most highly rated companies invest most of their assets in investment graded corporate bonds ( one of the reasons they are highly rated ) and the interest credit to the policy is based on the returns of the general assets of the company. So your "investment" is likely locked in at a low-capped rate

When you read about the newer indexed life insurance below you'll learn about some options that allow potential returns far past these numbers..
.

 

BUT, it is important to know that the interest rate credited is before the insurance company deducts their costs

So, if we were to look at a short term horizon ( say 10 years or less ) it is highly unlikely that premiums deposited into a life insurance policy will show a cash on cash return of anything close to 3%.

 

The first question that must be answered:

Does the need exist? Do you have a need for permanent life insurance rather than temporary life insurance (term)?

If you have a need - or a want - for a life insurance policy that will be in force when you die, then the investment component of a life insurance policy may have a place in your financial program.

 

Assuming the need (or desire) of permanent life insurance...

What if you had the ability to participate in a program
with the following features?

 

  • Minimum 3% interest rate credit.
  • Annual credit based on the upward movement on the S&P Index with a cap (currently 16%)
  • No current tax liability for annual increases in account value
  • Zero impact on the account value if the S&P Index drops during the year. The account value stays the same as the previous year so you are protected from account loss no matter how far the S&P Index might fall
  • Tax Free Death Benefit to your heirs
  • Option to stop making premium payments and still keep the death benefit in force until age 120
  • Ability to borrow the cash value at a very low interest rate
  • Ability to use the policy as a supplemental retirement plan with tax free taxfree retirment incomeretirement income

 

These are the features that are available on the latest product in the evolution of permanent insurance that is on the market now. It is called Equity Indexed Life. I believe that it may be the finest product to date

 

Since the return is linked to the upside of the S&P Index
this product is one that can show a positive rate of return even in short term.