Guaranteed rates of return of 3.5-4% – don’t drink the kool-aid

Given the volatility in the markets, and the low returns on savings, it is understandable that claims of a “guaranteed return” would be attractive.  Even if it comes from a life insurance salesperson!

Twice last week I was talking with insurance agents who boasted about policies that offer “guaranteed interest rates of 3.5 – 4%.” My reaction?  Concern.

I was concerned because I was not sure that my ezine readers and my clients would understand what the so-called “guarantee” actually covered.  These policies are complicated and the insurance companies are very good at making them seem more simple and more attractive than they actually are.

For example:

  • Many policies deduct the cost of commissions, marketing and administration from dollar #1.  In one policy I saw, the agent’s commission alone would eliminate any returns in the first year.
  • Exactly when a policy actually earns that 3.5% -4% is often dependent upon whether the policyholder lives longer than expected, based on the insurance company’s mortality tables.  If you die earlier, the policy may not deliver the guaranteed return.  [When I evaluated one proposal, it took 13 years before there was an accumulated 3.5% return.]
  • Despite promises to the contrary, your entire investment may not be available as expenses will be deducted.  Usually, the principal is not guaranteed even if the interest rate is. 
  • Since the investment will accumulate tax free, and possibly, tax exempt if paid out in a death benefit, there are limits on what can be contributed.  You need to be especially careful the older you are as large investments will include substantial purchases of life insurance to maintain the policy’s tax-preferred status. 

Sounds complicated, right? And that level complexity increases when the policies add special riders. For example, some life policies now include a rider for long-term care insurance.  This is why I believe the best first step to take when considering any kind of insurance policy is to consult someone like me — an hourly financial planner with a great depth of experience in insurance and best suited to determine how insurance fits into your comprehensive financial plan.  At the very least, here are some of the questions to ask:

  • How much of premium receives the guaranteed rate?
  • When is the money available to withdraw?  Will I get it all back?
  • When does it earn the 3.5%?  Is it immediately?  For how long?
  • Are there any additional expenses that will be deducted from my premiums?
  • Are there any limits on the amount that can be invested into the life insurance policy?

Insurance can be an important part of a financial plan, but before you lock yourself into a policy, talk to me.  Market volatility and low rates of return are problems that have more than one solution, and a complicated insurance policy may not be the best solution for you.


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