There are two life insurance systems worth using.
1. Buy term and invest the difference.
+ if smart, this is all you’ll ever need.
- it will require hands on approaches and practicality.
2. When you have cash or assets eating a hole hole in your brain, you can look into max funded universal life/annuities. Very few people know about this. It’s tax free and very easy to do wrong.
-the soonest you can max fund these is 4 years and 1 day. You can do this in 25/25/25/24.999/.001% chunks.
These were never designed for the mass or public to use them as I’m about to describe. That said, large companies and wealth magnets have done this from Walt Disney to bill gates.
Max funding a well working and smartly tied policy will average 6-9% of completely tax free growth annually on the amount invested. This can then be surrendered and instead have the capital asset indexes against (your choice) smart indexes such as the nasdaq, etc. Very nice choice during election years as almost always, the markets are put into rally mode make the incumbent look great. Example, 2012 say over 17% in the nasdaq. A nasdaq-indexed max funded account routinely saw 15+% that year. Again tax free period. The government will never tax life insurance because the welfare costs would skyrocket in there stead. The collect e tax would never matter compared to the social security pay outs 5 years later.
Anyways... Let’s assume $100,000 is being put into one of these policy’s to be representing a $105,000 life insurance policy. Put tons in to have very little coverage. Sounds dumb but watch.
Year 1, $25k goes in day one, and you pay about ~$200/mo for the that year. This is the gap. It covers the insurance company if you died that year (en mass on those policy numbers). You’ll have paid an additional $2400 by day 1 of year 2.
Year 2, put another $25k in. Now your basically breaking even. Now interest made, but no money out. Your money is earning 6%, but the gap costs about that.
Year 3, put another $25k in. Now you are making about 3% completely tax free. You have $75k in. By the end of the year, it will be about $77,500. The other 3% of interest earned is being used to cover the gap.
Year 4. Put another $24,999.99 in. The day after, put a penny in. That year your money will make roughly 6-9%. You have $102,500 from day 2 of year 4 as collateral for a $105k policy. The gap is now about .1% as an assessed penalty. Meaning your $102,500 will grow basically at 6-9% that year depending on the markets etc. By the end of the year, you will have about $110k and your policy will now have evolved to about $110,500. It will raise to remain about .5% higher than your capital.
Here is the kicker. Unlike a 401k or Roth IRA, if the market takes a shit and drops 33% like 2008, the floor is growth based. Your money will not be dragged down. It grows with the market, but it’s not invested in the market, cash and loans against it held by the insurance company are invested and redistributed to you as reimbursement. When a terrible year hits, your $110k stays at $110k. When the market returns 1-2 years later, your money begins to grow agains. If you chose to index the capital, you cannot hurt the capital, you can only surrender the set rate of return. If that was going to be 6-9%, and you muck it indexing a bad tech sector, oh well. If you do well, you could net 17% (max cap unfortunately in many of these) on an otherwise flat year. Think about that, it’s completely tax free money.
You can also end the policy at any time and pull the money out. You can have multiple policy’s. You can also borrow against the policy’s cash, and again the policy death payout grows as your account increases.
That doesn’t sound very impressive as life insurance, but if you know anything about rates of return and general investing, especially passive investing, you can quickly see why I and many take the time to explain these. Almost no one knows anything about these.
Many real estate moguls will take loaner money and max fund these policys, and borrow against them to continue their venture. Within 3-4 years, they have made not only a great (hopefully) realestate addition such as a strip mall or neighborhood to their portfolio, but also have generated over 40% on the capital borrowed, and deducted the mortgage interest annually to counter balance expenses and capital costs.
Once they have the money in one of these accounts and it’s been over 4 years, they can choose to up the coverage to say $5,000,000 and put in what is needed to come within .5% of that. And again, it will be growing at a very healthy 5-6%. The idea is to start one of these very early in life with about $50k over 4 years and 1 day, then balloon it. You cannot balloon them very often, I believe there is a 5 year period between upping them.
But back to your question, anything except the two types of insurance I described are expensive and less than efficient.
Also, I am not a tax accountant, and most don’t have a clue about these. My own had no clue then was blown away when she read up on them... she’s 60 and very very smart.
You just described a method of Non-MEC level premium funding on a Fixed Indexed life insurance policy. Pretty cool since it the only FIFO insurance product around.
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