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Using Whole Life Insurance as Subsititue for CDs
Old 01-29-2011, 10:00 PM   #1
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Using Whole Life Insurance as Subsititue for CDs

Thought I'd post what I've been thinking of doing here's why. CD rates are horrible. Here's how. I can buy as many single premium policies from the Army AirForce Mutual Aid Association (AAFMAA)as I'd like. I pay no commission, I'm guaranteed 100% of my premium back so no cost, current dividend rate is about 7%. Purpose of CD ladder is for future known/estimated expenses. I would likely buy one policy a year starting in 2011. The only negative I can see in this case is liquidity, I'd have to wait a few days to get my funds. Interest would be tax deferred until I cash out the policy. Any thoughts?
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Old 01-29-2011, 11:14 PM   #2
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Thought I'd post what I've been thinking of doing here's why. CD rates are horrible. Here's how. I can buy as many single premium policies from the Army AirForce Mutual Aid Association (AAFMAA)as I'd like. I pay no commission, I'm guaranteed 100% of my premium back so no cost, current dividend rate is about 7%. Purpose of CD ladder is for future known/estimated expenses. I would likely buy one policy a year starting in 2011. The only negative I can see in this case is liquidity, I'd have to wait a few days to get my funds. Interest would be tax deferred until I cash out the policy. Any thoughts?
I'm guessing there must be fees and minimum holding periods involved...
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Old 01-30-2011, 03:43 AM   #3
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I am not that familiar with life insurance policies... but don't you only make money on the free cash? IOW, you pay your flat premiums today.. there is a piece of that which pays for your life insurance... and a piece that is set aside for the future... only the second part earns money... I think you would have to figure out how much of your premium will be set aside and earn 7%....
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Old 01-30-2011, 04:18 AM   #4
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You are a life insurance agent's dream come true.

IMO - Life insurance should be used to mitigate risk of financial loss due to death (Life insurance)

Some people that are wealthy use it to deal with estate taxes (which can be a financial risk to wealth upon death) because of favored tax treatment.

What is your need? Do you need life insurance? You will be paying for life insurance!

One thing I do know is that Whole Life is one of the most profitable product lines that most life insurance companies sell... including mutual insurance companies.

There are fees and restrictions. Here is how you can prove it. Talk to an insurance agent. Get a quote (illustration) on a whole life policy for some amount (e.g., 500k)... with an immediate $100k cash value placed in it. Then ask the agent to tell you how much money you would get back if you pulled all your money back and lapsed the policy in 1 year.

No free lunch. You need to carefully study how those products work and the restrictions.

IMO - use the right tool for the job!
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Old 01-30-2011, 09:17 AM   #5
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I am aware that some life insurance policies pay some very attractive rates (5% I've heard of, not 7) on their cash values and even that they are tax free
returns in many cases. However I've never heard of one as good as yours where you get the premium for the life insurance itself returned. I'd doublecheck and be sure you got the same interpretation from agent A.........
and then if I was still tempted, I'd go to agent B and tell him I was thinking of buying from agent A, show him the policy, and I bet that agent B would be able to enlighten you on all the pitfalls of policy A while he tried to get you to buy policy B. Then come back and enlighten us.
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Old 01-30-2011, 10:42 AM   #6
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You are a life insurance agent's dream come true.
No agent involved. Reps work for association on salary. From their website...

Value-Added Whole Life...


AAFMAA is a non-profit, tax exempt organization with minimal operating expenses and no sales force working on commissions. Professional investment management and a conservative long-term perspective generate consistently high returns. Our 2010 crediting rate is 7.0%. This rate is established annually based on investment performance and is NOT guaranteed....


Long Term Care Settlement Option
Those who meet medical requirements may convert death benefits into regular periodic payments before death to defray long term health care costs....


Satisfaction Guaranteed
If you cancel a whole life policy, AAFMAA will refund the cash value or the total premiums paid, whichever is GREATER, with no surrender changes.
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Old 01-30-2011, 10:52 AM   #7
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You still have to qualify medically and the death benefit would have to be sizeable in comparison to the single premium paid to avoid creating a MEC. The larger the death benefit, the less cash value you will have. You need to see the full illustration based on your age/health/avoiding a MEC. Some companies don't allow single premium whole life policies too.
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Old 01-30-2011, 03:06 PM   #8
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You still have to qualify medically and the death benefit would have to be sizeable in comparison to the single premium paid to avoid creating a MEC. The larger the death benefit, the less cash value you will have. You need to see the full illustration based on your age/health/avoiding a MEC. Some companies don't allow single premium whole life policies too.
AAFMAA does allow single premium policies. Yes my rates are higher due to health, but still qualify. Believe it is treated as a MEC if cashed out. I initially did not consider the cost of insurance impact oops...think net yield would still be about 4.5 percent, before tax.
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Old 01-30-2011, 03:13 PM   #9
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AAFMAA does allow single premium policies. Yes my rates are higher due to health, but still qualify. Believe it is treated as a MEC if cashed out. I initially did not consider the cost of insurance impact oops...think net yield would still be about 4.5 percent, before tax.
If you cash out a MEC'd policy, you pay ordinary income on the gain. Figure out the difference between doing that and long term capital gains on other money. Insurance is for insurance, investments are for investments. Just my opinion.
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Old 01-30-2011, 06:21 PM   #10
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Satisfaction Guaranteed
If you cancel a whole life policy, AAFMAA will refund the cash value or the total premiums paid, whichever is GREATER, with no surrender changes.
Isn't the kicker in the above?

If you decide to cash out, you get your premiums back (no profit there) or your cash value ( not much there for a long while) but not both.
I see no way to make money.
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Old 01-30-2011, 07:35 PM   #11
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Isn't the kicker in the above?

If you decide to cash out, you get your premiums back (no profit there) or your cash value ( not much there for a long while) but not both.
I see no way to make money.
The kicker is that AAFMAA insurance is cheap. Even after expenses I would average in the 4% pre tax yield, which is better than current CD rates. I would not intend to keep policies longer than a 4-7 year time frame. Not making money in CD right now either. If CD rates edge up, then this idea would not make much sense.
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