My Comments: I’ve been licensed to sell life and health insurance policies since 1975. Over these many years, I’ve been fortunate to have had many exceptional clients who have listened to what I had to say and made what we agreed were intelligent choices.

In the days when interest rates were significantly higher than they are today, and the period when the stock markets were up from the previous day about 90% of the time, it was reasonable to question purchasing what is known as Whole Life Insurance. This is the kind that has higher premiums, builds cash value, and is far more likely to be there when the inevitable happens.

The alternative was to buy term life insurance which costs less, is typically for a specific number of years, and is far less likely to be there when you die. But combined with an investment program, there was the promise of more money left on the table when you died if you simply paid for term insurance to indemnify your family in the short term, and the investment returns would more than compensate for the lack of a death benefit if you lived a normal life span.

The current economic environment has put that alternative into question. For those of you thinking about the purchase of a life insurance policy, this will help you understand what you are faced with.

Nicholas Paleveda MBA J.D. LL.M on March 27, 2013

This article presents a series of demonstrations that challenges certain stereotypes in the financial services industry.

In Demo 1, the myth that an investor will always do better in the long run by investing in the S&P 500 is dispelled. Since the beginning of this century, that has not been the case. In fact, a simple pension annuity has outperformed the S&P 500 since the year 2000.

In Demo 2, the myth you should buy term and invest the difference is dispelled. This myth began in the 1970s, when interest rates were in double digits, and a teacher named A.L. Williams created an entire company based on this slogan. The 15 percent certificate of deposits are gone, yet the myth remains.

In Demo 3, the myth that tax deferral will not work if the tax rates are the same at retirement is dispelled. A greater amount being reinvested will actually create a larger amount for the investor at retirement. If the investor factors in a change of marginal rates at retirement, the dispersion is even greater.

Finally, the article concludes with the advantages of having assets such as life insurance inside of a defined benefit plan. The purchase of life insurance inside of a qualified plan can allow the taxpayer an additional deduction for the mortality cost, provided the death benefits come out to the surviving spouse in the form of a lifetime income or QPSA. The extra cost of the death benefit is not taken into account in determining the 415 limit in a defined benefit plan. If the plan combines life insurance with a fixed annuity that qualifies under section 412(e)(3), the plan may escape the 4971(a) penalty that takes place when a plan becomes underfunded. There are numerous tax and asset protection advantages for the purchase of insurance inside of a qualified plan, as opposed to outside of a plan.

Demo 1 myth: The S&P 500 is a better long-term investment for retirement then a pension annuity.

This model shows that this particular myth is not true for certain time frames. It clearly demonstrates that a pension annuity earning a guaranteed rate of 3 percent or the crediting rate of the insurance company beat the S&P 500 in 10 to 12 years and beat the S&P in the long run. What is the bias? The year the model was started. If you use different years, you will get different results (for example, the last three years). However, if you go back four years or even five years, you will have another result. Timing is an issue in all models; however, in this example, I use the last decade as the basis of the model.

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