By Chuck Mancino
So you made a little bit of money. Maybe more than a little bit. So the next
question is: How do you invest it, playing it safe, but still having a shot
at a decent return? Bonds are safe, but you won’t make more than 4 percent
return. That’s barely keeping ahead of the rate of inflation.
Stocks offer a higher rate of return, but they are a bit riskier. How about
something in between? Is there any investment out there that offers a middle
ground?
Yes. It’s called equity index life insurance product. And according to
Greg Stanley, president of Whitehall Management, in Phoenix, Ariz., “It’s
a product that gives you the security of a bond, with the ability to make a
much higher return. You are guaranteed to make 2 percent no matter what. And
you could end up making as high as 14 percent so there’s an opportunity
to do much better than the 4 percent you get back from bonds. Once our doctors
understand exactly how equity index works, they try to get as much of it as
they can. There are a variety of situations where this type of life insurance
policy has considerably improved the financial situation of the doctor.”
What is equity index Life Insurance?
First of all, equity index is a newer savings strategy, but not brand, spanking
new. It has been around for about 10 years. But according to James Cunningham,
president of Cunningham Financial Services, headquartered in Scottsdale, Ariz.,
“Equity index did not start to gain momentum until the stock market slide
in 2000. Investment and savings strategies can be divided into two major areas:
fixed and variable. equity index is categorized as a fixed investment product
but, has the potential to earn a higher rate of return, similar to a variable
product but without the risk of loss.”
Obviously, fixed accounts are more stable and more secure. But, for this security,
you may miss out on the potential for high upside growth. Comments Cunningham,
“Variable products have a much higher return potential but this also means
that you run the risk of losing part, or all, of your investment or savings.”
“Equity index is a strategy that can be used in many different types of
accounts such as IRA, Roth-IRA, pension plans and even life insurance. For the
purpose of this discussion, we are going to focus our attention on just equity
index life insurance,” adds Cunningham.
A lot of insurance companies offer this product. “But it’s crucial
that you talk to a competent financial advisor because not all insurance companies
offer the same products and not all equity index life insurance policies have
the same features,” comments Cunningham. “In fact, there are horrible
products as well as some great products. Just like buying a used car, if you
don’t know what to look for, you could buy a lemon.”
How it works
It is very important that you establish the purpose of purchasing the life insurance
policy. (i.e. death benefit, tax-free savings component, supplement retirement,
pay off debt sooner, future purchases in cash etc.)
This is a life insurance policy. But, depending on the life insurance company,
you have several different indexes to choose from. Your cash value is not at
risk even if the index you choose is down and you can receive a minimum guaranteed
rate of return.
“Let me put all of that language into something that makes a little more
sense,” Cunningham says. “First, you are going to buy a life insurance
policy. Any amount of money that you put into this policy over and above the
costs of the policy will go into the savings element. The savings element will
grow at a tax advantaged pace. You will never pay any taxes on any growth nor
will you pay taxes when you pull the money out.”
Adds Stanley, “The strategy of such a policy: you will receive a minimum
guaranteed rate, (depending on the company), even if the index is down. If the
index is up, you will receive that rate of return up to a certain cap, as in
the case of the 14 percent for example.”
How do I get my money out tax free?
This product also allows you to get the value of the policy, out tax free. It’s
an IRS tax code that allows the company to loan money equal to or generally
within 95 percent of your cash value.
How can this benefit a doctor?
“First, since this is a life insurance policy, it allows the doctors beneficiaries
to have an income tax free death benefit, comments Cunningham. “Second,
the cash value can be used to supplement retirement. For example, for 15 years
‘Dr. Jones’ has contributed $2,000 per month into his equity index
life policy, he has averaged a net 7 percent return and now has $633,924 in
cash value. He also has an insurance amount of $1 million. If ‘Dr. Jones’
dies prematurely, his beneficiaries will receive $1,633,924. This is the sum
of the base insurance amount, $1 million and the cash value, income tax free.
However, if ‘Dr. Jones’ does not pass away, he can decide that he
wants to take an annual loan of $60,000 per year tax free from his policy. Remember
that the loan is a separate transaction and although ‘Dr. Jones’
may stop contributing money to his policy, the cash value is still going to
grow. So in 15 years after pulling out $900,000 in loans ($60,000 per year),
‘Dr. Jones’’ account, if still averaging a 7 percent return
with no new contributions, has also grown to be worth $1,806,016.”
Helping doctors get out of debt sooner
Another common scenario is that a doctor may have a debt of $300,000 and pays
$2,000 per month for this debt. He has also saved $300,000 in mutual funds or
bonds. Adds Cunningham, “‘Dr. Smith’ has been diligent about
his saving program but feels that he is barely getting ahead because of his
debt. He could liquidate the $300,000 in savings, pay off the debt and be debt
free but now he is starting from scratch. What would happen if he got hurt or
lost the potential to continue saving money?”
“‘Dr. Smith’ applies for an equity index life insurance policy
and gets approved. He takes the $300,000 in savings, puts it into the equity
index life insurance policy and then in a short time, he takes a loan out from
his equity index life policy to pay off his debt. Since the loan was a separate
transaction, the $300,000 in cash value is still there making money for him.
Now the $2,000 that ‘Dr. Smith’ was spending each month on debt,
earning nothing, is freed up to save in his equity index life account.”
Word of caution
Equity index life is a very powerful savings tool. There are not very many financial
advisors who have even heard about it and of those who have, many are not clear
how it works. Cunningham Financial Group, is endorsed by Greg Stanley of Whitehall
Management and Dr. John F. Demartini, as the leading authority of not only equity
index life insurance, but more importantly they know how to properly structure
it into a financial planning tool. They are dedicated to helping chiropractors
use this tool to get out of debt, build wealth and develop a plan for financial
independence.