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Your Money Mark Teruya

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Over 50? Type of life insurance could be an ideal investment

Every conservative investor tells me, "I don't want to risk losing my investment." Fine, a worthy goal.

But here's the problem. Most conservative investments are in low-yield, fixed-rate stuff like CDs or U.S. Treasury bonds. Municipal bonds are the hands-down favorite conservative investments. But watch out, when inflation rears its ugly head, conservative investments are anything but conservative. Consider just one additional value-eating bandit who walks hand-in-hand with inflation: interest rates. For example, the three ways the bandit steals your money and hard-earned wealth when you are heavily invested in municipal bonds:

1. The value of the bonds go down as interest rates go up.

2. You are locked into a low interest rate until the bond matures or you sell it (probably at a painful loss).

3. Nasty inflation reduces not only the value of the interest you receive, but the already reduced value of the bond (see No. 1) has less buying power due to inflation.

What's the long-term impact? Here's a quote from the "Currency Options Hotline Operating Manual" that drives home the devastating economic impact of inflation over time, "... if you were somehow able to take one of today's greenbacks (dollars) back in time to 1940, you would find it worth only about 6.5 cents."

Sorry, but it looks like inflation (plus the falling value of the dollar against most foreign currencies) will be our rather unwelcome bedfellow for at least the foreseeable future.

What is a conservative investor to do?

Actually, we all know the answer: Find an investment vehicle that overcomes the three evils of the rising-interest rate bandit. First, let's outline the attributes of such an investment; second, identify the investment, and finally, give an example of how the investment works.

Here are the investment's attributes:

1. A higher rate of return than on traditional conservative investments like CDs, treasury bills and notes, and, of course, municipal bonds.

2. The interest rate tends to go up as inflation goes up.

3. Your investment will never go down in value, and in fact, will always guarantee you a profit.

4. The interest earned and your investment profit are not subject to income taxes.

5. Your total investment at time of death (original investment, interest earned and profit) escapes the clutches of the estate tax (when properly structured).

What's is this investment? A type of life insurance that I call conservative investment life insurance, or CILI for short.

Next, let's look at an example. Joe and his wife, Mary, are both 70 years old. They buy a $1 million policy (it could be any amount, usually more) second-to-die CILI with an annual premium of $23,516. The policy currently earns 5.7%.

The payoff on Joe and Mary's investment comes after the second death (here, assume that after 10 years -- at age 80 -- both Joe and Mary get hit by the same bus) and is always determined as follows. Their heirs (kids and grandkids) would receive:

1. Death benefit: $1,000,000

2. Premiums paid: $235,160 ($23,516 times 10 years)

3. Interest earned on premiums paid (at 5.7%, but could be higher if interest rates rise, or lower if interest rates fall): $75,411

Total amount (tax-free) to heirs: $1,310,571

The easy way to summarize the investment is as follows. You get your investment back (premiums paid) dollar-for-dollar; plus earnings on the premium paid; a guaranteed bonus, the death benefit (here $1 million); and best of all, it's all tax-free (no income tax, no estate tax).

CILI also can be purchased on a single life. But younger people (under about age 50) should not buy CILI; there are better alternatives.

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