An Alternate Investment
Henry Montag, CFP, CLTC | August 24th, 2009Several years ago a well known Financial Author asked me to write a chapter for her book containing what I thought was my best and most clever use of life Insurance that her readers would find unique and of benefit to them.
By the way when this book was reviewed , the reviewers sole comment was that the idea regarding the use of Life Insurance was the most interesting and creative use hes ever seen , if one can get past the emotional hurdle of profiting from the death of a loved one.
Let me explain. As a normal course of business I would routinely place large amounts of Life Insurance as a means to provide a beneficiary with tax free dollars to be used to replace a business owners partners family interest in the event one of the partners should pass away .
No one was upset when I delivered a check at claim time as a matter of fact I can think of several time over the last 32 years when everyone was quite happy when I came with a check to pay the business or the remaining partner sufficient money so that they could pay their partners family in exchange for the value of their share of the business.
So it occurred to me since there are only 3 instances when someone is allowed to have a beneficial interest in a life insurance contract on someone elses life.
When there is a partnership or shareholder agreement when you owe someone money when its a Family member and since business people felt no shame when they owned life insurance on their business partners life ,then perhaps a son or daughter need not feel funny about owning an Insurance contract on and profiting from the death of a parent , when that parent eventually passes away.
I soon began proposing to clients and friends alike that they consider having a discussion with their parents about the idea of owning a life insurance contract on their lives and paying a premium to an Insurance company rather than depositing money into their current IRA.
If you are currently aged 45 and have parents who are hypothetically aged 70 and 68 lets take that annual $5000 deposit to your current IRA and compare it to an equivalent amount of life insurance that could instead be purchased on one or both of your parents.
Typically if you were to deposit $5,000 per year for 25years at 5% net after taxes after 25 years you would have $142,000. However if that same $5,000 were used to purchase an alternate investment, a life insurance contract on a parent it would have a Tax free value of $171,000 from day one.
If however the Insurance would be placed on both parents otherwise called a second to die contract it would instead have a ultimate tax free value of $477,000 at the death of the second parent.
The above example assumes that the stock market has a positive overall gain of at least 5% each and every year, but as we have just seen the market can also have some dramatic losses where the investment return can be far less than originally anticipated. However the life insurance is based on pure guarantees regardless of what the stock market or Interest rates or inflation or deflation or unemployment or recession may or may not do.
Based on ones parents age and health a premium can be calculated and then paid to an insurance company that will guarantee a principal sum that will be paid out to ones beneficiaries on a 100% tax free basis. It is my contention that the payout from a life insurance contract will always be larger than what would have been earned from a otherwise tax deferred deposit to a traditional IRA.
Fortunately today a lump sum future inheritance that we can use to fund our own retirement can be purchased simply by paying a small annual premium on a life insurance policy on your parent or parents and all you have to do is manage that small premium and get over the emotional hurdle of profiting from a parents death.
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Tags: benficiary, current ira, death, henry montag, life insurance, tax free
About the Author: Henry Montag is an Independent Certified Financial Planner as well as a CLTC. He’s been in practice since 1976 with offices on Long Island, New York. He is a contributing writer for The Moneypaper, a national financial publication, been my sourced by Investors business Daily, Long Island Business News, Newsday, Wall St Journal, The Moneypaper,Investment News, Senior Lifestyles and has held insurance and securities licenses for over thirty years.
