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What You Always Suspected About Life Insurance Fees, Is It True? - 2

April 12, 2008

Continuation of part 1 of the article

Even with the added cost of insurance that you would pay inside a life insurance plan vs. another type of investment vehicle in many instances the tax-breaks alone can more than make up for the added cost.

But let’s look at those added fees for a moment. If your contract is put together properly as mentioned above, it most often works out that your costs are about 1% to 1.5% over the life of the contract. Is this cost prohibitive?

Well, where would you put the money if you did not use a life insurance contract? How can you really know if you are getting a fair value unless you make an accurate comparison to your other choices?

If you are like most people your first choice would probably be investing in some sort of a mutual fund. But what kind of fees does the average mutual fund charge? According to the Chicago Tribune, Feb. 26th 2006 “The industry average for mutual fund expense ratios or annual costs is 1.3%” So the cost to invest in a mutual fund is about the same as the insurance contract. But what do you get for your 1.3% in a mutual fund? Advice, period. What do you get for your 1.5% in a properly structured life insurance contract?

You get an income tax free death benefit for your family and tax-favored growth with tax-free access to our money. If you select life insurance as you investment vehicle you are really swapping out the mutual fund expence charges (that you would have paid anyway) for the life insurance charges. If you don’t need the insurance and you live to a ripe old age then good for you. If you do need it, your family will be forever grateful you chose to forego the mutual fund investment choice.

By the way so far we have only looked at mutual funds obvious expenses but we did not even consider the many hidden costs to owning mutual funds. For example most mutual funds today have turnover rates in excess of 90%. That means that they rarely follow a buy and hold philosophy, and instead tend to sell about 90% of their portfolios in a given year in order to buy different stocks. Each time they buy and sell they incur transaction fees that are passed on to you. We can only estimate how much the funds pay in transaction cost because the funds themselves do not even know that amount. In addition all of this trading, costs the share holder additional expenses in capital gains taxes and this is really just the tip of the iceberg.

Once you add the 12b-1 fee to the estimated transaction fees along with the added capital gains tax the average mutual fund investor looses 3.1% of his investment returns to these costs each year. John Bogle, the creator of the Vanguard 500 mutual fund had this to say about the 3.1% average fee of today’s mutual funds, “That may not seem like much but such costs would consume 31% of a 10% market return. Add in the 1.5% capital gains tax bill the average fund investor pays each year, and that figure shoots up to 46%, nearly half of a potential 10% return”.

As noted above when you look at the fees inside the average mutual fund they can add up to more than double the fees in a properly structured life insurance contract.

So what is the bottom line answer to the question, is life insurance a cost prohibitive way to invest? Plain and simple, it depends! Depends on what you ask? Is the insurance plan structured properly? And where would you put the money if it did not go into an insurance contract?

No matter where you invest your money there are sure to be fees that go along with that investment. Life Insurance is no different. However in the life insurance plan the cost of the insurance is basically absorbed by avoiding mutual fund management fees and otherwise payable income taxes. That being said if you do decide to use life insurance as an investment tool make sure that you are talking with a qualified advisor who fully understands not only its cost but also its potential.

Antonio Filippone is a respected speaker on a wide range of subjects. He has been published in the official journal of the IARFC as well as interviewed on the Radio about his out side the box financial strategies.Readers who are interested in gaining more information on how to live debt free and truly wealthy can request a complimentary copy of Mr. Filippone’s booklet by visiting his website at http://www.tonyfilippone.com

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Written by Be Safe Insure · Filed Under Life 

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