Using Whole Life Insurance as an alternative asset
Most investors are aware of the benefit of diversifying an investment portfolio – the potential for smoother and steadier returns. However, investments have varying degrees and different types of risks associated with them.
We don’t think about it often enough but the truth is that your monthly rent check you collect is only as good as your tenant’s ability to pay it. If your tenant loses his job or gets hurt there is a good chance you may have trouble collecting your rent check. In addition, real estate involves a high degree of carrying costs – maintenance, repairs, and property taxes in addition to the monthly mortgage payment. These costs must be paid whether you have a tenant or not! An investment in real estate can pose a significant risk to those that do not have the funds to withstand a prolonged vacancy or major repairs/renovations.
Risk of Investing in Real Estate
Investing in the stock market poses a significant degree of market risk. Although stocks have traditionally provided superior returns over the long haul – individual investors do not always realize these gains. This is because the stock market is directly correlated to the health of the overall economy. Think about this for a moment, when times are great and jobs plentiful, investors purchase stocks at regular or inflated prices – they don’t cash these investments out because there isn’t much of a need for the money. However, when times are bad, investors end up cashing their stocks at discounted prices to be able to sustain themselves through periods of unemployment. This is exactly why the “buy low & sell high” strategy rarely works out! Average investors end cashing out their 401k’s and IRAs at the exact same time they should actually be adding more into them.
Risk of Investing in Stocks
Although we are conditioned to believe there is no risk investing in CDs or keeping money in a savings account this is undoubtedly false. Holding money in these vehicles long term practically guarantees its value be eroded by inflation. To add insult to injury – especially in the case of CDs, the interest earned is taxable even though it is locked away in your CD. In addition, savings accounts/CDs do not have the preferable tax treatment of stocks (think reduced tax rates) nor real estate (think depreciation) – making them an especially expensive alternative. Why would you pay 20% - 40% in taxes on a measly 1% you earn in interest.
Risk of Investing in CDs (Certificate of Deposits) & savings accounts
Whole life has guaranteed cash values and death benefits stated in the contract – there is no stock market risk associated with it and it grows every year.
Earnings in a Whole life policy actually keep up with inflation – 4% is the typical interest rate earned on the cash value.
The Interest earned is not taxable to you
Tax free withdrawals can be made from the policy up to what you paid into it
The cash value in a life insurance policy is not counted for purposes of Financial Aid.
Whole life offers superior flexibility
You can stop paying premiums at any time and request that the cash value in the policy be used to purchase a reduced amount of permanent insurance; or
You can simply surrender the policy for all the cash value; or c) You can convert the policy into a guaranteed monthly payment stream for life – similar to a pension.