Web Exclusive: Poor Investment (May 1987)
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By Benjamin N. Woodson, CLU
A Classic Back Page from the late Woody Woodson
Across the years, you have occasionally been told by a well- meaning friend or by a carping critic that "life insurance is a good thing, and gives good and strong family protection when we need it. but really isn't a good investment."
I am sure you have heard those words many times. Some of you would say that we run into this expression frequently, and some would prefer the word "occasionally." For my part, I can say that I have heard the statement fairly commonly. And I have disliked it, and deplored it, and disapproved of it, and differed with it, and offered to fight the bearer of the phrase, even to the ridiculous extremes of fellows half as old as I and twice as big - on every single occasion of the many times I have heard it in the fifty-nine years and more that I have been a full-time insurance man.
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Why do I react so violently to this canard? Because "it just ain't so!" And because it does an injustice to the splendid product and the excellent investment which you and I sell. Lately I have had occasion to dislike the phrase even more, because I heard it said by a career life underwriter who should know better. The fact is that you and I, and that life underwriter as well, can today find a considerable number of policy offerings where non-smoker males in their twenties or thirties can surrender a permanent policy, whether universal life or conventional whole life, at the end of twenty years, and enjoy a total surrender value which approaches or surpasses savings account interest even before allowing for the value of the protection enjoyed during the intervening two decades. And of course that insurance coverage has a solid and worthwhile value, which is enough to bring the overall rate of return to significantly more than savings account interest when the value of the protection is duly considered.
Well, even without allowing for the value of insurance coverage, it is a good investment on its merits. And if I ever have to swallow these words, I will stop by and eat your hat without catsup, relish or mustard!
Yes, I know about growth stocks, or bonds offering more interest than savings accounts, and most of them are good and some are excellent. I would like to say in passing, however, that you will probably experience increasing respect for savings account interest compounded over a long period of years when you have lived long enough to survive several economic cycles.
But can you buy those stocks, or those bonds, for only a thousand dollars a year now and in the 19 succeeding years? Can you buy elsewhere a guarantee of principal and a right to keep on investing your annual thousand dollars for the next 19 years with a floor under the interest rate, however modest?
Can you find in any other form Guaranteed Burrowing Power, which promises that no matter how tight the money market may become, you can burrow up to 100% of your accumulated value, at interest rates either fixed and guaranteed, or in the alternative, rates determined objectively by a formula which will tend to be in line with going loan rates, and close to the prevailing prime rate?
Of course you can buy tax-exempt bonds (municipals) which typically will pay a gross return measurably less than the "going rate," but an entirely satisfactory net after-tax rate because the offer income free of federal income tax. Municipals are one of the two real "tax shelters" left, the other of course being permanent cash value life insurance. But can you buy good municipal bonds in such small bites as $100 each year? And even if you can, will you be able to acquire them year after year at yields which promise the realization of your plans and dreams?
Can you find a municipal bond which will agree to take your $1000 a year for 19 years to come, and will agree to take these dollars in at a guaranteed interest rate or even at a guaranteed range of rates?
Can you find a tax shelter of any sort, including any which may prove to "shelter" somewhat less well than claimed, which will be worth, at the death of the owner, twice as much or twenty times as much as has been invested - and then will forgive and forget the income taxes which otherwise would have been payable?
Yes, now it has increasingly seemed to me that possibly one of the reasons the uninformed or the misinformed underestimate the investment qualities of permanent life insurance is that many do not understand the great value of tax deferral, even though the income tax may or must ultimately be paid.
Laying aside for a moment any consideration of the priceless tax exemption offered by the life insurance investment held until death of the insured rather than earlier surrendered, let us examine the tax advantage of tax postponement - which of course is not quite as good as no tax at all, but is impressively better than the payment of taxes currently as they fall due each year. Suppose you invest $1000 on the first day of each year for 20 years, during which time your growing fund earns interest at, say 10 percent. Out of each yearly increase in the value of your fund, you must pay a 28 percent tax (new rate) so your fund actually grows at 7.2 percent, and in twenty years would amount to $44,919.
By contrast, suppose that you are able to invest your $1000 annual deposit in a tax-deferred fund (which is precisely what you do when you invest the cash in value life insurance) and suppose that this fund also earns 10 percent annually. Your fund balance at the end of 20 years would be $63,002. But (except for the privilege of keeping the fund until it becomes payable to your executor untouched and untaxed by the IRS), you would then owe in one bite a 28 percent tax on the value of your fund in excess of your $20,000 deposited. The amount of this excess would be $43,002 and the tax at 28 percent would be $12,041. Even so, you would be left with a net of $50,961.
This is $6,042 more than you would have in your 7.2 percent fund, or $1.13 for every dollar you would have available from the currently taxable fund. And while it can be contended that the difference isn't much, that difference (which is merely the interest earned over a 20-year period on the amount of taxes normally due each year, but payable in one sum at the end of the period) becomes truly impressive if we think in terms of larger amounts or longer terms.
If the annual deposit is $5000, the excess of the tax- postponed fund over the currently taxable fund would be $30,200. Or, if the $1000 annual deposit is for 30 years instead of 20, the effect on the increased duration, aided by another $10,000 in deposits compounded with another 10 years for interest to do its wonderful work, is tremendous! In 30 years, the currently taxable fund (at 7.2%) would be worth $104,980. The tax-postponed fund would total $180,943, which after a 28 percent tax on $150,943 would leave a net of $138,679 - an advantage of $33,699.
And just to help us appreciate to the full the great value of tax deferral, let us take a look at forty years. This is admittedly a long, long, long-term look, but still it is only a 25-year-old buyer who surrenders his contract at age 65. A $1000 annual deposit at 7.2 percent for 40 years brings the currently taxable fund to $225,356. The tax-postponed fund is $486,852 before a 28 percent tax, and $361,733 after tax. The $136,000 difference between approximately $225,000 and approximately $361,000 is a fortune in itself, and it bespeaks eloquently the value of tax deferral. And that is only on a $1000 annual deposit! You can multiply it by five if you want to contemplate the results of an annual investment of $5000! Fifty years I shouldn't even mention, but for the benefit of the curious, the difference is $469,198!
Yes, the value of tax deferral is enormous, yet widely unappreciated. And when we consider all the other wonderfully helpful and wonderfully secure guaranteed values of long-term permanent life insurance, we can conclude that the one who calls it a "poor investment" just hasn't considered all the facts. He just hasn't considered long-term cash value life insurance, and has not yet discovered that the investment in such a policy can be rivaled but not surpassed by any other investment of comparable duration, comparable quality, and comparable tax advantage.
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