Simply stated, life insurance is perhaps one of the most misunderstood and improperly criticized investment options. Most insurance agents and so-called financial planners do not know how to properly use, much less structure, life insurance to perform as a superior investment. When done correctly, this option can be incredibly powerful and flexible due to its highly liquid nature, large contribution limits and potential for tax-free income.*

All forms of permanent life insurance can be structured to qualify as investment grade. However, many of these contracts have been established ignoring the investment benefits. The result therefore is disappointment: Although permanent life insurance provides valuable death benefit coverage, if not set up properly, the investment performance is usually poor. To avoid this result, an investor must understand a few key elements and traits of life insurance to create an investment grade contract, not the least of which is that an investor should have a minimum time horizon of 10-12 years.

First, after determining the desired amount to invest per year, it is advisable to purchase the least amount of death benefit allowable under IRS codes. This annual amount is called the 7 pay maximum, but easier to think about as the annual maximum. Minimizing the death benefit in this manner insures the internal cost of the plan will be as low as possible. Second, you should invest the annual maximum each year until the aggregate maximum is achieved, called the Guideline Single Premium. Once this is accomplished, the policy is maximum funded and cannot be contributed to any longer.** The Guideline Single Premium is usually achieved in by contributing the maximum annual contributions allowable (7 Pay Maximum) for 4-5 years. Hence, an investor with a lump sum to invest or high earning capability for the next 4-5 years may benefit best from the use of such a vehicle.

A common misconception is that the insurance is expensive. If structured properly as described above, insurance is not any more expensive than most other managed money options over time. However, if the insurance is not structured as above, it does not qualify as investment grade and is therefore quite an expensive investment. If held for the proper amount of time before accessing the cash value, the fees average 1-1.5% a year. Most no-load mutual funds average similar annual fees, excluding taxes. A common mistake made by those who analyze IGLIs is forgetting to calculate taxes on gains of investment alternatives. Further, when doing a comparison between an IGLI and any other investment alternative, it is vital to compare the net spendable income achieved from each investment. In this category, assuming a similar rate of return, an IGLI almost always wins.  In the end of any investment analysis, net spendable income is the most important factor.

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