Posted on | June 11, 2009 | 2 Comments
As an older parent (I’m now age 57), I’m grateful that my children still listen to their dad’s advice.
It’s the only investment vehicle that accumulates money tax-free, then allows you to access your money tax-free, and when you ultimately die, it even blossoms in value and transfers income-tax free.
No other investment does that. I own several universal life insurance contracts (both indexed and fixed), and I have received an average internal rate of return of 7-8 percent on most (that’s cash on cash -after the cost of the insurance is deducted).
Sure, some years I have only been credited the minimum guaranteed interest rate of 1, 2, 3 or 4 percent. But other years, I have earned as much as 21 percent, as the interest rate credited was linked to whatever the S&P 500 did that year — without my money at risk in the market.
Recently I’ve begun to teach my children they can take this strategy a step farther — and I can help.
Let me tell you of the advice that I’m now giving my children.
“Kids, what if I could tell you which two teams would be playing in the Super Bowl next year, and what the final score will be? While I can’t predict that, I can predict something else with fairly good accuracy: 80% of us will live to age 65; 60% to age 75; but only 30% to age 85; and less than 10% of us will live beyond age 90.”
Average life expectancy for a 60-yr old is about 22 years.
In facing the reality of the years I have left, I’ve come upon a revolutionary way to help my children assure their own financial security — especially down the road when I “check out.”
In doing the math, it became obvious that if my middle-age children were the owners and beneficiaries of a life insurance policy on my life for, let’s say $1 million, it would be better for them to deposit premiums of $500 a month into that policy, rather than into a Roth IRA or 401(k).
Why? Because an IRA or 401(k) would need to earn an average yearly rate of return of 9.4% for 30 years for $500 invested per month to grow to $1 million.
But, if I “go” anytime in the next 30 years or so, by using a life insurance policy, they would immediately receive a nice $1 million tax-free nest egg!
Hence, I’m insisting each of my children own a life insurance policy on my life as part of their overall retirement planning process.
The miracle of compound interest and tax-favored accumulation of money is great. But nothing beats the power of safe, positive leverage. I’m thrilled I can leverage my life to leave a legacy for my kids. You might consider the same.
photo by Leonid Mamchenkov