Buy term and invest the difference?

[Peaceful_Warrior]

Peter Katt has some articles that may help with the modeling or decision.

After reading one of his articles, I came across this comment of his:

Because of its significant income tax advantages, bond-based life insurance, purchased from quality companies that give fair treatment to all policyholders, will always outperform similar investing outside of life insurance because fixed-income yields are reportable as income each year, whereas the values built-up inside whole and universal life insurance are not reportable.

And from this article:

Life insurance is an ideal wealth transfer asset when cash is gifted and must be invested because life insurance¯s benefits are not subject to income or capital gain taxes and can therefore produce an aftertax rate of return that is superior to investing in a similar manner (for instance, bonds) outside of life insurance.

 

[ERD50]

Life insurance is an ideal wealth transfer asset when cash is gifted and must be invested because life insurance¯s benefits are not subject to income or capital gain taxes and can therefore produce an aftertax rate of return that is superior to investing in a similar manner (for instance, bonds) outside of life insurance.

Sorry, I'm not buying that statement. If it were true, this forum would be full of people recc buying insurance as an investment. The blanket statement that he makes should hold true no matter the source of the money.

Remember, money 'gifted' within the annual exclusions (currently $12K per individual)* is not taxed in any manner. The recipient can invest it in any way they see fit. If life insurance was a great investment for that money, it would be a great investment for all our money.

IMO, these statements sound good to less knowledgeable investors, and open the door for 'tax planners' to set up some complex strategies and expensive products and skim money from their clients along the way.

I'm open to anyone that can show how life insurance becomes a 'superior' investment under these conditions. I am very, very skeptical.

-ERD50

* http://www.irs.gov/formspubs/article/0,,id=112782,00.html

 

[Gumby]

For me, the decision to go with a whole life was almost entirely due to the ability to defer taxes on earnings. My current combined federal and state marginal tax rate is 40.5%. I chose a policy where I pay premiums for 15 years (as I understand it, it must be more than seven years or you lose the tax advantage). My plan is to cash it in at the conclusion of that period, when I expect to be RE and in a marginal tax bracket no greater than 25%. I am into the 5th year of the plan and the crediting rate has been stable at 7.4% over the past five years. I consider the cash value to be akin to a bond (or a series of bonds purchased every quarter and held to maturity) with a 7.4% coupon. When I run a spreadsheet that compares 1) buying term, investing the difference in bonds and paying taxes on the coupons at my current rate with 2) buying whole life and then paying taxes on the cash value minus the total premiums once I terminate the policy, the whole life option is clearly superior on an after tax basis. (and that assumes I could find a non-junk bond paying 7.4%).

Of course it helps that it is a mutual insurance company available only to people in the Navy/Marine Corps that has very low insurance costs and no commissions or surrender fees.

In my asset allocation plan, I treat the cash value as a bond.

 

[tryan]

PW,

Haven't seen/heard the most important question asked ... DO YOU HAVE KIDS?

If not, forget about life insurance - whole or term. DW does not need to hit the insurance LOTTERY in the event of your untimely death. She'll continue working and meet someone else and move on (same deal for you if she dies).

If yes (kids), then get a term life policy that covers at least 3-5 times your's - and DW - salary. The KIDS will need it.

When you have kids do not let anybody insure the kids ... nobody should profit from the death of a child (that's SICK).