Many Financial Advisors have started to recomend using investment grade insurance contracts to supplement your retirement savings however there are many advisors who still don’t even know what the heck these plans are. I think the first person to coin the term “Investment Grade Insurance Contract” was the best selling author of “Missed Fortune 101” Douglas R Andrew. What he has taught us about this unique savings vehicle has changed the way advisors around the country view insurance contracts.
Insurance contracts in general are some of the most often misunderstood financial vehicles on the planet and yet they offer some opportunities that can not be found in any other financial products. Why should you care? Because not knowing about the unique advantages of an investment grade insurance contract could cost you literally thousands of dollars in missed opportunities. Let’s take a look at some of these opportunities and then we can break down for you just what an investment grade insurance contract really is.
There are many financial vehicles that allow your money to grow tax-deferred while you are trying to grow your nest egg. And any financial advisor will tell you that tax-deferred growth is an advantageous pursuit. Making interest on your interest without having to split that growth with Uncle Sam means that you will end up with a much larger account than if you had to pay taxes along the way. Even if you have to pay tax at the end when you pull the money out you still end up way ahead of an investment vehicle that offers no tax shelter. But what if your money could grow not only tax-deferred but you could pull your money out tax-free when ever you need it. How much better off would you be? Well an IGIC (Investment Grade Insurance Contract) can help you do exactly that if you know how. But before we get into what it is and how to set one up lets talk about another unique advantage.
Recently, I met with a client of mine who is about to retire and he expressed to me that he has been sheltering his money in tax-deferred accounts like IRA’s and 401(k)’s his whole life and now that he is about to retire he was worried about what happens to all of that money when he passes away? After all he didn’t squirrel all of that money away just to leave it to his silent partner (The U.S. Government). Well had he been saving that money in an IGIC instead of in his government regulated retirement vehicles he could have left the entire account to his children, his grandchildren or whomever he chooses with no income taxes due.
So far we talked about this IGIC offering tax-deferred growth during the accumulation stage of your life and then tax-free distributions during the distribution stage of your life and then lastly we talked about how this plan can be passed on to your children income tax-free in the wealth transfer stage of your life but are these the only benefits? Actually no. There are at least 3 other advantages that I can think of.
The first other advantage in addition to the tax break is that your money can grow without any stock market risk. This makes for a very nice supplement to most government regulated retirement plans like 401 (k)’s that are often subject to sharp stock market losses. Yet even with this protection in place the return on your money can also be very competitive.
Another advantage of the IGIC is that the when set up properly you have very liberal access to your money. If you are currently using IRA’s or 401(k)’s your money is generally tied up until you are 591/2 except for certain rare circumstances. And if you borrow out your funds beware, stiff penalties apply if you don’t pay the money back on their terms and in their time frame. Often you are forced to garnish your wages just to pay back a loan of what is supposed to be your own money. None of these harsh requirements are involved with an IGIC. Access to your money is much more easily accomplished because the plan is not a government regulated retirement vehicle.
The final advantage that I have room to mention is the most important one to some people and not really a concern to others. If you happen to die prematurely the IGIC pays out a large lump sum insurance payment to your heirs that allways ends up being much more of a pay out than what you actually paid in. This last benefit helps you begin to see just what an investment grade insurance contract really is.
Now you know some of the most important benefits of an IGIC but how do you go about setting one up and exactly what is it? An Investment Grade Insurance Contract is simply a permanent life insurance policy that has been set up in exactly the “opposite” way that most insurance agents tend to set them up. The most common way the typical life insurance agent goes about setting up your plan is to first determine how much life insurance you need. Then he or she tries to calculate, what is the largest amount of insurance they can give you for the smallest amount of money out of your pocket?
When a life insurance policy is structured using that method a good portion of your premium dollars ends up going back to the life insurance company in fees and insurance charges. (See my article on life insurance fees and charges to learn more) You will most likely be disappointed in the growth of your cash value.
On the other hand there is an alternative way to structure a life insurance plan that tends to go against the conventional wisdom of trying to get as much death benefit “bang for your buck” as possible. In this alternative scenario the agent or advisor structures the plan to give you the least amount of death benefit that the IRS requires so that you can stuff your plan with the highest allowable amount of cash that the law permits. Why would anyone want less death benefit you ask? Because the lower the death benefit in relation to your premium the less you pay in insurance charges and the more cost effective your plan becomes.
But you are probably wondering why go through all of that trouble to calculate the correct proportions? How does that benefit you? Well if you set this up correctly you get all of the benefits mentioned above and a competitive return on your money over the long haul.
Are there any disadvantages to IGIC’s? Like any financial vehicle there are always pros and cons. Some things to consider are that you are not able to write off your premium dollars like you do in an IRA or 401(k) plan. Another problem is that if you are not in at least somewhat decent health you may not qualify for this type of plan. Also these plans are designed to work best over the long term as they offer advantages in multiple stages of your life. To get the full benefit from an IGIC you should be looking to invest your money for the long term even though you will have short term access. If you are looking for high short term speculative gains this is not the program for you.
Lastly there are lots of ways to set up these plans. You can use many different types of life insurance as your chasse. You are not limited to just one type of policy, you can use Whole, Universal, Variable, or Equity Indexed Life. But often times it is not the product that is the biggest concern, it is instead finding someone who truly understands how to structure these plans correctly so as not to violate the current tax-code. Make sure your advisor knows more than you do about IGIC’s and has helped others to set them up. For a listing of quality financial advisors you might try doing a Google search under “International Association of Registered Financial Consultants” or “Found Money Management”. Advisors on both of these sites have been through extensive training and should understand these concepts in detail.