Investments: Antidote to Death and Taxes

I know I'm taking a big risk, but I'm going to discuss a financial topic that normally bores people to tears. Be forewarned, however. If you skip this article and turn the page, you'll be missing out on one of the most exciting investment opportunities of the 1980s.

Okay, here's the subject: insurance. Before you go to sleep, you should know this fact: the insurance industry has gone through a major revolution in the last 10 years and now offers the most exciting tax-free investment vehicles on the market. In many ways, they are more versatile and practical than tax-free retirement plans or secret foreign bank accounts.

Prior to the insurance revolution, insurance products were definitely not consumer-oriented. Traditional whole-life policies were heavily "loaded," meaning the agent made huge commissions, usually exceeding the first-year premiums. Cash-value insurance was so expensive that it required customers to pay monthly. The cash value inside the policies typically grew at a slow 3 percent or less, even while inflation was raging at double-digit rates.

But all that has changed. In the face of double-digit inflation and high interest rates, the traditional whole-life policy took a beating. Old whole-life was just too expensive, so new customers sought cheap annual-renewal term, which was simply death insurance with no savings buildup.

The insurance industry responded by offering incredibly low rates—a 40-year-old could buy $100,000 in annual-renewal term for a first-year premium of $150 or less. Since then, rates have risen a bit, but there are still bargains galore. (Want a quote from five insurance companies that specialize in annual renewal and level term? Write or call Insurance-Quote, P.O. Box 790127, Dallas, TX 75239, 800/972-1104 or 214/490-7720.)

Yet term insurance is just the tip of the iceberg. The industry has created several investment programs, the hottest new one being the single-premium whole-life policy. This policy is like a bank certificate of deposit, a tax-free municipal bond, and a paid-up life-insurance policy all rolled into one. The basic idea is simple: in old insurance plans, you paid an annual premium and the cash value built up slowly. In the new, single-premium plans, you make just one payment and all of it goes toward the cash value. The cash value earns a market interest rate, currently around 7.5 percent (depending on the insurance company).

This is a no-load (no front-end commission) product, so 100 percent of your money goes to work immediately. Like old whole-life policies, the cash value accumulates tax-free. You can also borrow from the cash value at low (2 percent or less) interest charges. Finally, you get a substantial paid-up life-insurance policy along with it. For example, a 50-year-old putting in $10,000 would get about $25,000 in insurance.

According to David T. Phillips, an independent insurance agent who specializes in single-premium plans, the best deals are available from Equitable, Confederation Life, Old Line Life, and Fireman's Fund. All are rated A+ by Best & Co., the insurance rating firm, and minimum investment is only $5,000. For more information, write or call David T. Phillips & Co., 1255 W. Baseline Rd., Suite 160, Mesa, AZ 85202, 800/ 223-9610 or 602/897-6088.

Now here's the ultimate tax shelter, just announced: the first no-load, single-premium, "variable" whole-life plan. It's a mouthful, but it offers a chance to earn 35 percent or more on your cash value tax-free! How? Through Discovery Life Plus, a single-premium plan offered by the largest insurance company in the world, Prudential. Prudential offers eight different types of investments for your cash value, including a common stock fund that increased 35 percent last year, a bond fund that increased 25 percent, and a money market fund for those who wish to sit safely on the sidelines. You can switch among funds up to four times a year.

Prior to Discovery Life Plus, there were several other "variable" plans available, but they were heavily loaded. Crown and Monarch (sold by Merrill Lynch) offered them, but you had to make 11–12 percent on your money the first year just to break even. Clearly, Prudential's no-load product is better. The insurance coverage is also one of the best I've seen. A 50-year-old investing $10,000 can get nearly $40,000 in insurance.

The insurance industry has gone through a revolution all right, and frankly, I think it's better for all concerned. The old-line insurance agent, who used to get 100 percent or more on first-year premiums, probably doesn't care much for these newfangled products that pay only 3-4 percent of the premiums. But perhaps what they lose in percentages they can make up in volume, now that customers are coming back in droves.

The only clear loser in this deal is the IRS, which continues to pester Congress to change the rules. Last year, the House considered making the "cash value" in whole-life plans taxable, but was deterred when the insurance lobby had customers write thousands of letters to their representatives. I suspect, however, that the issue is not dead, especially if these single-premium plans grow in popularity. Be prepared—you might have to join a letter-writing campaign.

Mark Skousen, editor of the investment newsletter Forecasts & Strategies, is adjunct professor of finance and economics at Rollins College.