Equity Index Life Insurance

I’ve seen a lot of “wish-washy” hustles in my career using life insurance, but this product implies that Equity Index Life is more of an investment than life insurance. As a planner, we know the truth…that this is just cash value life insurance with a twist.

For normal cash value life insurance, you have a guaranteed yield, and a non-guaranteed yield (which amounts to hogwash). But let’s just say your guaranteed yield is 3%, and after you deduct the “mortality & Expense” charges (M&E)…your internal rate of return is around 1.3% for your cash value. Looking from an analytical point of view I can get a better rate of return in a tax free money market!

With Equity Index Life, most policies base their non-guaranteed yield on a weighted average interest rate of the S&P 500 Index, Dow Jones Index, and the Nasdaq 100 Index. This sounds pretty sophisticated. But it’s not. Let’s say you have an investment percentage in the following indexes: 50% for the DJIA, 30% for the S&P 500, and 20% for the Nasdaq 100. Let’s take a closer:

Let’s say you invested $100,000 dollars. You have 50% in DJIA, 30% in the S&P 500, and 20% in the Nasdaq 100. Let’s say the average rate return for the indexes were the following: DJIA = 4.2%, S&P 500 = 3.81% and the NASDAQ 100 = 5%. So, here the calculation:

$50,000 (DJIA) x 4.2%   +   $30,000 (S&P 500) x 3.81%   +   $20,000 (NASDAQ 100) x 5% = 4.3% [Weighted Average Yield]

Unfortunately, the 4.3% is your gross return. Once you deduct the mortality & expense charges (M&E) for the policy (such as the cost of insurance), the internal rate of return for the policy could be as low as 2.6% (and I’m being kind). And unfortunately, the M&E gets larger each year you own the policy, since the cost of insurance costs rises each year you get older. Taking everything aside, as an investment, a tax free money market is looking much better!

There is another problem with Equity Index Life that most people are unaware of…and that’s the “ghost tax” implications if the owner of the policy borrowed against the cash value (tax free), then surrendered the policy, and now the IRS wants back taxes owed for borrowing against the policy and then surrendering the policy.

From a standpoint of an investment, Equity Index Life is not a good investment. If your focus is to insure against an untimely death…life insurance is a good bet (under most circumstances). That’s the bottom line.

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com