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Life insurance one option for investors

April is Financial Literacy Month, and with the current economic slump millions of Americans are slowing down and giving their personal finances a hard look especially if they are nearing retirement.

The Employee Benefit Research Institute (EBRI) reports that only 13 percent of the U.S. workforce feels confidant about having enough money for a comfortable retirement. The study says that many Americans are cutting expenses, working a second job and changing the way they invest their money.

Life insurance is one investment option many are considering as a way to secure their future and give their portfolios a surge. There are numerous types of life insurance with the two most common types being term life and whole life. Term life is popular and cheaper and covers a policyholder for a set period of time. When the holder dies, the full value of the policy passes to the heirs.

“Whole life insurance plays a dual role for many people,” writes Paul Sullivan for the New York Times, “It is both insurance in the case of an untimely death as well as an estate planning tool for when that final day comes.” Also known as permanent or cash value life, whole life has higher premiums but when used as a retirement investment offers tax-deferred money growth by delaying income and capital gains. The insurance investment option has financial analysts divided.

“I’m not a fan of schemes that combine life insurance protection with investing, especially investing for retirement,” writes Money Magazine senior editor and CNN online contributor Walter Updegrave. “For one thing, a slew of marketing, sales and investment fees significantly drag down your returns… I don’t think these policies are worth the trouble. Stop investing in the insurance policy, sign up for your workplace plan and open a Roth IRA.”

“Do not invest money in life insurance, the returns are horrible,” says Dave Ramsey, best-selling financial author and nationally syndicated radio host. Ramsey suggests sticking with term life insurance and investing the difference.

David Allen, a general agent for Allen Financial Group in Jackson, says that people consider the “term and invest” strategy since many large-cap growth mutual funds have achieved a zero percent rate of return over the last decade. “The buy term and invest the difference concept also presupposes you will have no further use for life insurance at the end of the investment period,” he says.

Allen says that whole life insurance as an asset class is getting a lot of buzz these days. “Participating whole life is a life insurance contract that offers a guaranteed premium, death benefit and cash surrender value,” Allen says. “The policy owner also has a choice of using annual dividends to increase the value of his policy.”

Allen says the death benefit is frequently misunderstood and that it can create positive opportunities if integrating into the overall financial plan. “One planning strategy that is frequently overlooked is the ability to significantly increase retirement income if a guaranteed death benefit is a part of the plan,” Allen says.

“People that are conservative will push whole life,” says Dudley Barnes, a certified financial planner (CFP) with Barnes-Pettey Financial Advisors, LLC, in Grenada. Barnes favors term life insurance saying whole costs too much on the front end. “If a person has fully funded their retirement plan and maxed out their 401(k) and they still want some deferred savings then I would recommend a low or no commission product that would include a death benefit, preferably a pure no-load variable life.” No-load insurance often has no surrender penalties and higher liquidity.

“All of us need to find a way to get from our 30s to our 60s without a financial catastrophe,” Barnes says, “We have to manage our taxes, spending, credit, savings and insurance and you can’t afford to overspend in any area. It doesn’t leave much money for whole life.”

Germaine Weldon, a CPA and CFP for AVL WealthCare in Gulfport, advises clients to use life insurance only for protection. “Just have the investments in your name and go to mutual funds, stocks and CD’s for your investment vehicles,” she says.

“Insurance isn’t the safest thing,” Weldon says. “Many familiar insurance companies have been hit hard in recent days and some have gone under. So, make sure your company is safe and has a good credit rating.”

Weldon says one popular investment/insurance product is annuities; however, many financial advisors don’t suggest it because of the high fees and capital gains taxes. “There would have to be a particular reason, but in general I don’t recommend them.”

Karl Byrd, a CFP for Security Ballew Inc. in Jackson, says that given the right situation, annuities can be a very good product. “People are looking for safety today in light of the financial meltdown in the stock market. You are seeing a lot of people using fixed annuities with a guaranteed principle and attractive rate of return.” Byrd adds that an immediate annuity can be an appropriate vehicle to insure an income stream that the subject will not outlive.

Byrd suggests that people wanting to use insurance as an investment tool first define their objectives including risk tolerance and return expectation so they can develop a strategy that fits their situation. “Insurance-based products have some great features, but you have to understand the cost relative to the benefits. If you own a contract already, you should request an in-force ledger statement every couple of years so you can evaluate how the policy is performing.”

Contact MBJ staff writer Stephen McDill at stephen.mcdill@msbusiness.com.

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