Yesterday I promised a look at a very conservative asset class with very low management costs and no current personal taxes. I proposed a comparison to a very large, conservative mutual fund. Over the past five years it has produced yields before fees and taxes ranging from 4.7% to 8.6%. With that choice, the investor’s problem is twofold.
- Taxes are due on part of the yield each year and on the remainder of the yield when they dispose of the investment.
- The management fee as a share of the yield is very large. In the year with the best yield, 22.6% of income and in the year with the lowest yield 41.4%.
The proposal is to gradually move the asset into a participating life insurance policy. The asset mix is nearly identical so there will be no market changes that can be better for one than the other.
The advantage is that the insurance policy has:
- A management cost that is federally regulated and in the most recent year was 2.65% of income. Less than one tenth of the fund.
- Taxes are less than 10% instead of about 20% of after expense income.
- There is no tax to the estate or to the individual upon death.
- The estate would be much greater if the client died too soon.
In this case the advantage to switch is material. Around life expectancy, the estate is more than 50% greater.
You are offered two solution that have the same financial input, similar underlying investment characteristics, and large financial institutions in the background. One accumulates to about half again more money about the time you expect to need it. Not a difficult choice if you know it exists.
The trick, of course, is to know how many of today’s dollars are going into the last dollar category. Fortunately the amount is not ground into granite. You can adjust later.
If you hold very conservative investments with a view to never spending them, you may have a better choice.
Ask for help.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.