“So Bob, I never heard that you could invest in funds in a Life Insurance policy.” George H., my client, said with an obvious interest. “Is this something new?” I quickly responded by saying, “No George. It’s actually been around for over thirty years.” George darted his head back and with a puzzled look said “Then why haven’t I heard of it?” “I think there are three reasons.” I continued by saying “first you have the fact that many life insurance agents are not registered to sell securities. In addition, people are not used to using Life Insurance as an asset class. And lastly you have an added expense of paying the management fee of the funds or sub-accounts that you use.”
George pulled back. As I began to think he wasn’t interested, he leaned forward and said well explain to me how it works. “Actually George, it works exactly how a regular Life Insurance policy works. You get a Death Benefit and select a primary beneficiary. However, in this case, you have the flexibility to choose where you want your premium dollars allocated. It is much like choosing where you want your dollars invested in your IRA or 401k plan.”
“So Bob the Life Insurance Company manages this for me?” I smiled and continued. “No George. They realize they don’t have the expertise to handle Life Insurance and also pick from thousands of stocks. So they enter into selling agreements with many well-known investments companies. These companies have billions of dollars invested and have been in the investment business a very long time.” George murmured and asked, “So I can pick and choose from more than one management company?” I responded. “Yes. There are sometimes up to twenty different companies to choose from and often you have a total of a hundred different investment options.” George asked. “What would be some choices?”
“You could go into domestic equity funds. You might also want to select Income funds such as investment grade Bond fund. There are also many international funds. Another popular option is Sector funds. They would invest in a particular segment of the economy. A good example would be Drug companies.”
George proceeded to inquire further. “The fees must be much higher then, no? In fact George, they are no higher than what you’d pay for a mutual fund. However, please keep in mind that you are paying two fees, the cost of insurance and then the management fees.”
“So are there any other advantages?” George asked. “Perhaps the biggest advantage is that all these equity and bond funds grow TAX-FREE!” George continued. “So I never report any tax income?” While the account grows, your interest gain is always tax-free. When you withdraw the funds it could be possibly taxable. However, if you code this as a LOAN, then the withdrawal is also considered tax-free.”
George then asked for some written information. “What I can do is offer you an illustration based on an assumed interest rate. I generally like to use a conservative estimate of approximately 6%. I will also provide you with a prospectus that explains all the fees for your management of the funds.”
George then offered his thanks and asked for a follow-up meeting.