Tax-Free Investments For Conservative Investors

I never knew there were so many conservative investors until the last time I wrote about the subject in this column. I received a blizzard of responses via phone, fax and mail. The subject of all these responses was conservative investments (CIs).

Although most CIs are in low-yield, fixed-rate investments such as CDs or U.S. Treasury bonds, municipal bonds are the hands-down favorite. However, when inflation rears its ugly head, CIs are anything but conservative. Consider the ways interest rates steal your money and wealth when you are heavily invested in municipal bonds: The value of the bonds goes down as interest rates go up; you are locked into a low interest rate until the bond matures or you sell it (probably at a loss); and inflation not only reduces the value of the interest you receive, but also the already reduced value of the bond has less buying power because of inflation.

What’s the long-term impact? Here’s a quote from the “Currency Options Hotline Operating Manual” that drives home 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.”

What can a conservative investor do? The answer is to find an investment vehicle that overcomes the problems with rising interest rates. First, I’ll outline the attributes of such an investment; second, I’ll identify the investment; and finally, I’ll give an example of how the investment works.

The investment’s attributes are:

A higher rate of return than traditional conservative investments such as CDs, treasury bills and municipal bonds.
An interest rate that tends to rise as inflation rises.
The investment will never decrease in value, and, in fact, it will always guarantee a profit.
The interest earned and investment profit are income tax-free.
The total investment at the time of your death (original investment, interest earned and profit) escapes the estate tax.

What’s the identity of this picture-perfect investment? It is simply a type of life insurance that I call conservative investment life insurance (CILI).

Let’s look at an example. Joe and his wife, Mary, are both 70 years old. They buy a $1 million policy second-to-die CILI 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 person passes away. Assume that after 10 years, at age 80, both Joe and Mary get hit by the same bus. The payoff would be determined as follows: their heirs would receive a death benefit of $1,000,000; premiums paid amounting to $235,160 ($23,516 × 10 years); interest earned on premiums paid (at 5.7 percent, but it could be higher if interest rates rise, or lower if interest rates fall), amounting to $75,411. The total amount (tax-free) that will go to their heirs equals $1,310,571. If Joe and Mary were to die at age 90, their heirs would receive $1,816,458 tax-free.

The easy way to summarize the investment is as follows: you get your investment (premiums paid) back, dollar-for-dollar; you get earnings on the premium paid; you get a guaranteed bonus, the death benefit (in this example, $1 million); and best of all, it’s all tax-free (that is, there is no income tax and no estate tax).

You may want to know how a CILI might work for you, your parents or your grandparents. I have made arrangements for readers of this column (age 50 or older and worth at least $2 million) to get this information. Just fax your name and birthday (the same for your spouse, if you’re married), address and phone numbers (work, home and cell) to me at (847) 674-5299.