INVESTMENT GRADE INSURANCE EXPLAINED
There are several subjects in this world that interest me tremendously, and at the base of them lay logic, science, mathematics, and the ‘not-so-common’ common sense. Perhaps some of these things interest you. Do you like any of the CSI television shows? How about the others of a similar genre like Law & Order? Forensic Files? Or Cops? At the root of all these shows is the collection of clues, evidence, and gut feelings, all of which, when assembled, tell a story and hopefully convict the wrongdoer or exonerate the innocent.
Well, I am going to use all of these ideas and techniques to present to you what I believe to be the single most important piece of evidentiary data, concrete proof as to the safety of Indexed Universal Life Insurance Contracts (IULs), when they are being used as cash accumulation vehicles for a tax-free retirement that one can never outlive. What is this evidence, you ask? It is a term/phrase that is used to describe the most important thing to an insurance company (or for that matter, any company or private person). The technical term or phrase used is: Net Amount At Risk (NAAR) and it refers to the insurance company’s risk, not that of possibly you, the contract holder, and risk to the company can mean loss of money.
Let me ask you a couple of questions.
Have you seen the size of some of the insurance company’s buildings? Of course you have. How about this: do you think that the insurance companies want to lose money? No way!
That is why I am willing to bet my right arm that you answered “yes” and “no” respectively to the questions above. Well, let me tell you, you would be right by saying so. Insurance is a 400 year old industry with a less than 1% failure rate; no other industry has that kind of success! Why? It is because of math and science. They probably hire more statisticians, actuaries, and mathematicians than NASA (not a verified statement, but you get the point). Anyway, I would expect that to be true.
Now back to NAAR (Net Amount At Risk). Here is what it means. Let us say you are a small business owner and you are looking to set up a non-qualified private pension using a properly structured investment grade insurance contract as your vehicle for cash accumulation and tax-free monies on distribution at retirement. Let us also say you are a 42 year old non-smoker in good health and you want to fund it with the statistical average of $1,000 per month. Well instantly, the moment you fund your contract with your first $1,000, the insurance company MUST cover you with a $ 606,466 guaranteed death benefit. So in this case, the immediate Net Amount At Risk is $ 605,466! That means you put in $1,000, and if you die, the insurance company MUST pay your beneficiaries a tax-free death benefit of $ 606,466. Do you understand the underlying implications of this? Do you think that this is a position that the insurance company enjoys being in? How about you? Would you like to be in that financial position? That is exactly the point.
Now the evidence is mounting, and I think you are getting an idea of where this is going. At the end of the year you will have put $12,000 into your contract, and if you die, the insurance company must pay out $ 606,466. At this point, your surrender or cash value is $ 0 because of the relatively high up front surrender charges (charges which in addition to helping to make all the numbers work out, actually help encourage you to stay true to your long-term plan for retirement). As time goes by, and the conservative projections of your cash value grow, the gap between what is in your account and what the company has to pay out upon your death decreases substantially. In other words, the insurance company’s Net Amount At Risk goes DOWN!
Let us look at the numbers in year 15: the cash value is $251,894 at this point and remember the death beneift is still $606,466. See how the cash value and the death benefit compare? There is quite a difference between that amount now and when we first started, isn’t there? How do you think the insurance company feels about that smaller gap?
Now look at year 25: $733,050 is the cash value and the death benefit has climbed to $857,669 (to comply with the IRS ratio for tax-free treatment). Look again at the cash value and the death benefit. The gap has become very, very small now hasn’t it?
Yes it has, and at that age (67 years old), it is as small as allowable by the IRS to qualify for the tax-free treatment of the insurance contract. How do you think the insurance company feels at this point? You know it!!! It loves being in this position!
Now, let me ask you, what if they messed up and did not do their projections correctly and your cash value ended up far less than projected? Who would lose the most when you die? Right! The insurance company would, and as you know, insurance companies don’t lose! Add to that the fact that our gains (the contract holders, yours and mine) are handcuffed to the gains of the insurance company. Doesn’t it stand to reason that our money has a very good chance of being there when we need it? You’re darn right!
Now, can you think of any other vehicle to put your hard earned money in, where the company that is holding your money has a direct and vested interest in your cash value being there when it says it is going to be there?
In other words, can you think of any other company that will lose MORE than you if it is not right? Nope, neither can I, and that is why I believe that Indexed Universal Life Contracts (IULs) are the safest place anyone can put his/her money. Evidence, math, science and common sense all say it will be there. Add to that the tax-advantaged growth, and tax-free money on distribution and you have yourself what I think is the best vehicle on the market for a safe and secure retirement income that you can never outlive.