Rising Interest Rates Could Wound Your CIs

People often say something like, "Irv, I'm very conservative." Then they tell me that they have allocated all or a large amount of extra cash in what they consider to be "conservative investments" (CI). Most CIs are in low-yield, fixed-rate investments such as CDs or U.S. Treasury bonds, but municipal bonds are the preferred CI. Here's a well-known fact: When inflation occurs, CIs are anything but conservative. Let's consider another value-eating bandit that walks hand-in-hand with inflation: interest rates. Here are the three ways the bandit steals your hard-earned wealth when, for example, you are heavily invested in municipal bonds:

1. The value of the bonds goes down as interest rates go up.
2. You are locked into a low interest rate until the bond matures or you sell it (probably at a loss).
3. Inflation reduces the value of the interest you receive, and the already-reduced value of the bond (see number 1) has less buying power because of inflation.

Here's a quote from the "Currency Options Hotline Operating Manual" that conveys the devastating economic impact of inflation over time, "… if you were somehow able to take one of today's greenbacks [dollars] back in time to 1940, you would find it worth only about 6.5 cents."

So it seems as though inflation, as well as the falling value of the dollar against most foreign currencies, will be an unwelcome bedfellow for at least the foreseeable future.

Therefore, a conservative investor should find an investment vehicle that overcomes the three evils of the rising interest rate bandit. First, let's outline the attributes of such an investment; second, we'll identify the investment; and then we'll give an example of how the investment works.

The investment has the following attributes:

1. A higher rate of return than on traditional conservative investments such as CDs, treasury bills and notes and municipal bonds.
2. The interest rate tends to go up as inflation goes up.
3. It will never go down in value. In fact, it will always guarantee you a profit.
4. The interest earned and your investment profit is income tax-free.
5. Your total investment at the time of your death (original investment, interest earned and profit) escapes the clutches of the estate tax, when properly structured.

This investment concept works for people of any age, but it is typically used by an individual or a married couple who are 50 or older. Let's say, for example, that Joe and his wife, Mary, are both 70 years old. They buy a $1 million second-to-die conservative investment life insurance (CILI) policy with an annual premium of $23,516. The policy currently earns 5.7 percent.

The payoff on Joe and Mary's investment comes after the second death and is always determined as follows. (We assume their deaths occur after 10 years—at age 80—if both Joe and Mary get hit by the same bus.) Their heirs would receive a death benefit of $1 million; the premiums paid ($23,516 multiplied by 10 years) for a total of $235,160; the interest earned on the premiums paid (we figure this at 5.7 percent, but it can fluctuate, as interest rates can rise, lower or fall), which would be around $75,411, for a total amount (tax-free) to heirs of $ 1,310,571

If the second death (of Joe or Mary) happens at age 90, their heirs would receive a total of $1,816,458 (tax-free).

Here is a summary: 1) You will get your investment (premiums paid) back; 2) you will receive earnings (5.7 percent in this case); 3) you will get a guaranteed bonus, the death benefit ($1 million); and 4) it's all tax-free.

You may want to know how a CILI might work for you. I've made arrangements for readers of this column to receive the necessary information, as well as have your questions answered. Fax your name and birthday (the same for your spouse, if you're married), address and phone numbers (work, home and cell) to Irv Blackman at (847) 674-5299.