By Barry James Dyke

In 1980, Doris Christo­pher used a life insur­ance loan to launch her strug­gling kitchen gad­get com­pany. In 2002, she sold that com­pany — the Pam­pered Chef — to War­ren Buf­fett for a reported $900 mil­lion. Even in the midst of the Great Depres­sion, J.C. Pen­ney used a loan against his $3 mil­lion life insur­ance pol­icy to resus­ci­tate his retail stores after the 1929 crash. By this point in our nation’s reces­sion, it is clear that there is no such thing as a per­fect invest­ment strat­egy. As the Dow Jones Indus­trial Aver­age sits at about 65 per­cent of its value from 18 months ago, now is an ideal time to learn about the proven ben­e­fits, strengths, and ver­sa­til­ity of life insur­ance and annu­ity invest­ing. IF IT’S GOOD ENOUGH FOR BANKERS …

Accord­ing to gov­ern­ment dis­clo­sures, Fed­eral Reserve Chair­man Ben Bernanke has a major­ity of his liq­uid wealth — between $1 mil­lion and $2 mil­lion — invested in fixed and vari­able annu­ities, which are con­tracts issued exclu­sively by life insur­ance com­pa­nies that promise guar­an­teed rates of inter­est. What’s more, the 401(k) Thrift Plan for Employ­ees of the Fed­eral Reserve Sys­tem, accord­ing to a 2009 first-quarter Fed report cov­er­ing 22,000 Fed employ­ees, has 75 per­cent of its assets — that’s $3.2 bil­lion — invested in its fixed-income fund, which is invested exclu­sively in annu­ity con­tracts under­writ­ten by major U.S. life insur­ance com­pa­nies guar­an­tee­ing prin­ci­pal and an inter­est rate of 5.8 per­cent. And this is not a new trend. A Deloitte audit affirms that in 2007 and 2006, Fed employ­ees over­whelm­ingly chose fixed-income annu­ity funds over volatile mutual funds. The nation’s large banks invest immense sums of their Tier 1 cap­i­tal reserves — a bank’s most impor­tant asset and a key mea­sure of its strength — into per­ma­nent life insur­ance under­writ­ten by major life insur­ance com­pa­nies. (See side­bar “Bank­ing on life insur­ance” for more details.) Why do banks look to insur­ance com­pa­nies for sound invest­ment? Unlike banks, life insur­ance com­pa­nies do not use exces­sive lever­age. If a bank has $1 mil­lion on deposit, it can lend out up to $10 mil­lion to the pub­lic. This lever­age is called “frac­tional reserve lend­ing,” and it can lead to insta­bil­ity. Indeed, exces­sive lever­age is a major rea­son why banks are fail­ing today and have through­out his­tory. How­ever, if a life insur­ance com­pany has $1 mil­lion on deposit, that com­pany may loan no more than $920,000, and usu­ally only a frac­tion of that. As such, life insur­ers are 100 per­cent reserve-based lenders, which makes them sta­ble insti­tu­tions in down economies. WHY LIFE INSURANCE? There are two basic types of life insur­ance: term life, which is essen­tially a rented pol­icy for a spec­i­fied period of time; and per­ma­nent or “cash-value” life, which is insur­ance for as long as you live. While a mix of both types of pol­icy proves valu­able for most investors, finan­cial rewards are attain­able only with per­ma­nent life poli­cies. Fol­low­ing are some of the key ben­e­fits of invest­ing in per­ma­nent life insur­ance and annu­ities: Safety. Per­ma­nent life and annu­ities, when backed by the gen­eral account of a life insur­ance com­pany, con­tain finan­cial guar­an­tees, are pro­tected by state guar­an­tee funds, and adhere to strict invest­ment port­fo­lio stan­dards. Enor­mous losses in today’s stock mar­ket illu­mi­nate the dan­gers of invest­ing with­out guar­an­tees. Dur­ing the Great Depres­sion, when more than 10,000 banks failed, 99.9 per­cent of con­sumers’ sav­ings in life insur­ance and annu­ities remained safe with legal reserve life insur­ance com­pa­nies. Earn­ings in addi­tion to guar­an­teed rates. Although addi­tional earn­ings above guar­an­tees are not assured, most life com­pa­nies paid addi­tional earn­ings even dur­ing the Great Depres­sion. Per­ma­nent life insur­ance and annu­ities are sav­ings sys­tems. A major prob­lem today in finan­cial plan­ning is that 401(k) and mutual fund mar­keters have suc­cess­fully blurred the dif­fer­ence between “sav­ing” and “invest­ing.” When one saves, money is safe and liq­uid. When one invests, 100 per­cent of your money is at risk 100 per­cent of the time. When you save through per­ma­nent life insur­ance and annu­ities backed by the insur­ance company’s gen­eral account, your funds are safe, liq­uid, and tax-favored. Valu­able tax ben­e­fits. Sav­ings and earn­ings within per­ma­nent life insur­ance and annu­ities grow tax-deferred, and loans from insur­ance are not taxed as ordi­nary income. What’s more, insur­ance pro­ceeds are received income-tax-free and, in most cases, estate-tax-free. Asset pro­tec­tion. Although asset-protection priv­i­leges for law­suits and bank­ruptcy vary from state to state, life insur­ance and annu­ity assets are a favored asset in all states. States with par­tic­u­larly strong asset pro­tec­tion for life insur­ance and annu­ities for today’s physi­cian include Ari­zona, Florida, Michi­gan, New York, New Mex­ico, Okla­homa, and Texas. Income-tax-free death ben­e­fit. Life is a gam­ble. The great­est risk we face is the risk of pre­ma­ture death. Pro­tect­ing those peo­ple or causes we love with life insur­ance is a wise allo­ca­tion of resources. When the Rev­erend Jerry Fal­well died in 2007, he left $34 mil­lion in life insur­ance to pay off Lib­erty University’s debts, strengthen that school’s endow­ment, and pro­vide fund­ing for a Thomas Road Bap­tist Church. Newer annu­ities also offer addi­tional life insur­ance ben­e­fits. Pro­fes­sional money man­age­ment. Sav­ings within a life insur­ance com­pany are pro­fes­sion­ally man­aged to secure the high­est rate of return with the max­i­mum amount of safety. You will enjoy diver­si­fi­ca­tion by indus­try as well as by geog­ra­phy. Unlike some retire­ment plans, you have access to your money in a life insur­ance pol­icy through loans and other options. Today, money within a qual­i­fied retire­ment plan (e.g., pen­sion, 401(k), 403(b), IRA) is money in a strait­jacket until retire­ment. Unfor­tu­nately, your money is still sub­ject to mar­ket risk, infla­tion, and lost oppor­tu­nity cost. Not so with per­ma­nent life insur­ance or annu­ities that are backed by the insurer’s gen­eral account. Life insur­ance and annu­ities can per­form addi­tional eco­nomic jobs as well. By attach­ing rid­ers onto base life insur­ance and annu­ities, they can pro­vide addi­tional ben­e­fits for dis­abil­ity pro­tec­tion, long-term care, crit­i­cal ill­ness, and retire­ment fund­ing. Life insur­ance and annu­ities are wills unto them­selves. They are able to accom­mo­date mul­ti­ple and com­plex ben­e­fi­cia­ries, and can be eas­ily changed with­out legal costs. At your death, they also bypass pro­bate — thus avoid­ing legal bills, appraisal costs, taxes, and other expenses com­mon even to mid­sized estates. States with par­tic­u­larly oner­ous pro­bate costs include Cal­i­for­nia, Con­necti­cut, and Geor­gia. GUIDELINES FOR INVESTING Life insur­ance and annu­ity pur­chases are some of the most impor­tant finan­cial deci­sions you can make. Do not pur­chase either of them if you plan to do it for only a year; there are costs asso­ci­ated with any invest­ment, and these are long-term plan­ning tools. Finally, this author prefers mutual life com­pa­nies over pub­licly traded stock-based life insur­ers (although stock com­pa­nies can be well-run and offer investors great value). Why mutual com­pa­nies? A mutual com­pany is not a pub­licly traded entity and does not suc­cumb to the con­tin­u­ous demands and whims of Wall Street. Mutual com­pa­nies, although not entirely unscathed, have for the most part dodged the stock mar­ket melt­down that has ham­mered their pub­licly traded coun­ter­parts. Mutual com­pa­nies, often crit­i­cized for being too prud­ish and con­ser­v­a­tive, are now pil­lars of strength. With a mutual com­pany, a physi­cian is tech­ni­cally an owner in the com­pany and receives the prof­its of the com­pany through div­i­dends and inter­est — not stock. If a mutual com­pany does go pub­lic at a later date, its investors can enjoy poten­tial rewards of cash, addi­tional insur­ance, or shares of the new pub­lic com­pany — while still main­tain­ing their ini­tial insur­ance and annu­ities. It is wise to work with an adviser who has exper­tise not just in life insur­ance and annu­ities, but who has a work­ing knowl­edge of taxes, risk man­age­ment, invest­ments, and eco­nom­ics. Insure your life as you would insure the eco­nomic replace­ment value of your auto­mo­bile, home, or prac­tice. Your human life is the great­est eco­nomic value of them all — the cre­ator of all prop­erty val­ues. As a gen­eral rule, the eco­nomic replace­ment value for life insur­ance for a physi­cian under 40 is 20 to 25 times his annual income. Physi­cians who are young will need large amounts of term life insur­ance — pure death ben­e­fit pro­tec­tion. As cash flow improves and debts such as stu­dent loans are paid down, pur­chas­ing per­ma­nent life insur­ance makes eco­nomic sense. When buy­ing life insur­ance and annu­ity prod­ucts with sav­ings com­po­nents, pur­chase prod­ucts that are backed by the gen­eral account of the com­pany first. Why? The gen­eral account is the heart of any life insur­ance com­pany and, by design, one of the safest depos­i­to­ries for sav­ings in Amer­ica today. By choos­ing general-account-backed prod­ucts first, all finan­cial risks are shifted onto the insur­ance com­pany. When allo­cat­ing funds to life insur­ance and annu­ities as an asset class, a com­mit­ment of 10 to 30 per­cent of one’s port­fo­lio is pru­dent, since these instru­ments have sta­ble value and are eas­ily con­vert­ible into cash. The nation’s large banks con­sis­tently invest between 10 to 30 per­cent of their reserves — hun­dreds of mil­lions of dol­lars — into life insur­ance and annu­ity prod­ucts. There’s every rea­son for you to do the same. Send your feed­back to meletters@advanstar.com [meletters@advanstar.com] . For more than two and a half decades, Barry James Dyke has advised indi­vid­u­als and cor­po­ra­tions about finan­cial plan­ning, employee ben­e­fit plans, invest­ments, and other eco­nomic issues. He is the author of the book The Pirates of Man­hat­tan, which illu­mi­nates the rea­sons for today’s finan­cial cri­sis and how to pro­tect your assets in the days ahead. Learn more at www.thepiratesofmanhattan.com. SORTING OUT THE OPTIONS Sim­ply put, there are two types of life insur­ance — term and per­ma­nent — and a com­bi­na­tion of both types works well for most investors. Term insur­ance cov­ers you for a spec­i­fied period of time, usu­ally from 5 to 30 years, depend­ing upon your age. This, essen­tially, is rented insur­ance. Per­ma­nent or cash-value life insur­ance are essen­tially one and the same: insur­ance for as long as you live. You own your life insur­ance. Per­ma­nent life insur­ance has a sav­ings com­po­nent and a death ben­e­fit. There are three gen­eral types of per­ma­nent life insur­ance: whole, uni­ver­sal, and vari­able life. Whole life has guar­an­tees in mor­tal­ity charges and inter­est, and addi­tional earn­ings in div­i­dends. Uni­ver­sal life is more flex­i­ble: Inter­est earned is deter­mined by short-term money rates. Mor­tal­ity charges increase with age. Vari­able life includes mor­tal­ity charges that can be either fixed or increas­ing. The sav­ings com­po­nent rate of return with vari­able life is deter­mined by the rate of return in the stock mar­ket — thus adding sig­nif­i­cant risk. An annu­ity, mean­while, is a con­tract issued by an insur­ance com­pany that offers a guar­an­teed rate of inter­est and guar­an­teed pay­out options — includ­ing an income for life. Annu­ities are par­tic­u­larly well-suited for retire­ment sav­ings and are the cor­ner­stone of all pen­sions. Unlike a bank or mutual fund, an insur­ance com­pany must main­tain cash reserves equal to the annuity’s value. Strict state laws guar­an­tee your prin­ci­pal invest­ment. You won’t pay taxes on inter­est earn­ings until you with­draw. Click pic­ture to enlarge and sharpen. _____________________________________________________________________________ ______________________________________________________________________________ BANKING ON LIFE INSURANCE THE EQUITY MYTH