What do banks – and large corporations – know that the majority of investors are missing? Posted by host on 6/2/2010 3:02:37 PM Since the 1980s, companies have become some of the largest buyers of life insurance … Unlike group life insurance … corporate-owned life insurance pays the company when an insured person dies, even if that occurs after the worker has retired or left the company.
Surprised about paying extra taxes on your accumulating investments this past April 15th? You might want to look at what most banks and corporations know that “majority thinking” misses.
Since the 1980s, companies have become some of the largest buyers of life insurance … Unlike group life insurance … corporate-owned life insurance pays the company when an insured person dies, even if that occurs after the worker has retired or left the company.
There has been extensive media coverage of how some companies have abused corporate-owned policies – in particular, the “dead peasant” or “dead janitor” policies taken out on lower level employees without their knowledge, for the purpose of bypassing regulatory limits on executive compensation and bonus packages. Beyond those who stretch the limits, however, the fact remains that companies recognize that life insurance policies represent sound, secure investments, capable of reliably accumulating capital, while at the same time, minimizing the tax liabilities incurred.
According to information contained in a report by the Federal Deposit Insurance Corporation, “a third of all commercial banks, and half of the 100 biggest banks, reported owning life insurance.” And these are conservative numbers, as the report goes on to state, “banks have to report life insurance holdings only if they surpass certain thresholds. As a result,’ the FDIC said, ‘it is likely that more banks own insurance than are required to report it.”
The banks are making these decisions to help remove uncertainty. When you consider that banks’ very existence in the marketplace depends upon their inherent stability – their ability to build more assets that do not create excess liabilities, even during the most difficult economic times – the fact that so many of them purchase cash amassing life insurance policies speaks volumes about the value of those policies. Life insurance companies also bring an important source of capital to the long-term investment markets. This steady stream of capital helps all of us by fostering the creation of new and better places to work.
The banks have many bright, well-educated financial folks to review the economics of life insurance – and its many tax-favored benefits. They understand that paying for a “B*” block of capital – the benefit from life insurance – coupled with the “C” block of capital – the cash amassing component – besides having many tax advantages, also helps offset the declines in equity portfolios that most investors have experienced since 2000. This combination of “B*” + “C*,” coupled with the accumulation of assets “A*” (401(K), stock options, home equity, etc.) can provide a balanced approach and help remove uncertainty from your financial future.(* – Part of the SMART Group Houston A+B+C strategy)
Majority thinking focuses upon the up-front costs of cash amassing life insurance, while ignoring the compounding cost of seemingly cheaper term insurance, which slowly – but steadily – removes wealth. Banks recognize that this is incorrect logic. Again, from the same issue of the Wall Street Journal, “Money that companies pay into the policy in excess of the moderate cost of the actual insurance grows tax-free and ultimately is refunded to the company tax-free when the insured dies.”
We haven’t really gone into the “C” component that deeply as yet, but here are a few examples of things some of our clients have been able to do with those cash values:
- Business owner: Take advantage of volume discounts, funding inventory buildup. Result: they have more product to sell at higher margin levels. This generated revenue to help keep them in business.
- Successful executive: Purchase an auto at a time that did not coincide with their future bonus. Result: Quit sinking money into an auto that was beyond its prime. The dealer did not even take the older car in trade. The buyer acted as his own banker, lending the money to himself from the accumulated cash value of the policy, thereby controlling the debt service and paying off the “loan” with a future bonus.
- Proud parents: Able to obtain reduced tuition rates for college, because the out-of-state student’s parents had their assets positioned beyond majority thinking, where the state would not consider the assets when determining qualification for financial aid. The state looks only at traditional “majority thinking” programs such as 529 plans. Results: cut the education investment almost in half! Easily enabled the parents to fund college without impacting their lifestyle, even though they are out of state.
- Challenged entrepreneur: Helped cover payroll. During these tight times, big companies use their leverage to extend the time before they pay smaller suppliers. Informally, the big players squeeze the smaller companies into being a short-term lending source. Results: The smaller company was able to maintain their quality staff and avoid furloughs. Nobody likes to be out of work, even for a short time.
- Protection: Individually owned cash amassing life insurance in Texas is protected from lawsuit. Corporate owned policies do not enjoy this same protection.
What was the return for the Beyond Majority Thinking clients illustrated in the examples above for being able to have liquidity, use, and control of their cash values? Enormous!
These are all examples of SMART clients that kept their money in motion—another example of “beyond majority thinking.” If asked, the majority would agree with the statement, “God helps those who help themselves.” The reality of this majority thinking is that this statement appears nowhere in the Bible. In fact, we are advised in many places to do just the opposite: wait on the Lord. The quote about “helping themselves” is actually from Algernon Sidney in “Discourse Concerning Government,” and was reprinted by Benjamin Franklin in Poor Richard’s Almanack.
No specific investment recommendation is made or implied. Your situation may require alternative solutions.
These concepts are included in the book, Beyond Majority Thinking, written by the founder Ron Schutz. If you don’t yet have your own copy, you can order one today: www.smartgrouphouston.com
SMART Group Houston
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Houston, TX 77007 713-984-8044
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Advisory Services offered through Resource Horizons Investment Advisory
April, 2010
