According to Mark Twain, history does not repeat itself exactly, but it rhymes. Here is a rhyme you might find interesting.
A participating life insurance policy issued in 1963 to a 19 year old male. Premium of $411 annually. Current cash value $226,908 with an amount payable at death of $290,679. Both growing.
If our client, now aged 72, dies today what is the average compound rate of return? As I mentioned recently, no one is intuitive about compound interest. Pick a number that you think might be close.
Did you pick 7.7%? You should have.
Many people arrange life insurance with the cash value in mind, and while that is fine, most people either quit very early on or hold the plan until the end. Measuring cash value now, the return with no value attributed to the insurance gain that might have happened, the yield is 7.1%. The insurance part is not as prohibitively expensive as many think.
People avoid participating insurance because their intuitive idea about how compound interest works yields a weak answer. People should spend a little time and work out the arithmetic.
Life insurance is “good money” meaning that if you hold it to death, the investment will be immune to income taxes. This compares favourably to something like a Registered Retirement Savings Plan which generates a large tax bill at death. From an estate planning standpoint, RRSPs are “bad money.” That is a concept most people miss because it is so counter-intuitive. “Bad money” makes about as much sense as leftover wine.
You can understand the opportunity better if you see the original question as it was in 1963. How likely would it have been to assume that over 53 years someone could make 7.7% after taxes on an affordable ($411) and available investment? Bond rates were low then, too. Most people would not have considered it. Not interesting. No excitement. Too small to matter. I hate insurance and insurance companies.
Think again about “history rhymes.” Consider a long time beginning now. Could you reasonably decide the future will be radically different?
Many people would benefit by trading in part of their bond portfolio for a participating life insurance policy. Insurance is more complicated than bonds, but the methodology behind success is easy enough to see if someone breaks it down and shows you.
Such a policy is a superb long term, low tax, cheap management, investment. More people would have one if they understood the plan.
Don’t let the complication put you off. It is an easy, high yield investment.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772