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From Mark Ford, founder, Palm Beach Research Group: I think it’s fair to say that every subscriber to Palm Beach Research Group’s investment publications has heard of Income for Life.
Income for Life is a favorite strategy of Tom Dyson and Tim Mittelstaedt. They say it’s their favorite way to grow and compound their cash.
That’s not just talk. Tom’s put over $300,000 of his own money into it. Tim’s personal investment is close to $50,000.
Income for Life involves putting money into a dividend-paying whole-life insurance policy from a mutual insurance company. It takes advantage of three factors:
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The tax-deferred mechanism of life insurance
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The advantage of consistent, long-term compounding
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The solidity of a certain kind of insurance company that has been around for more than a hundred years.
If you set up your policy correctly (and with the right agent), Tim says you can expect to see your cash appreciate “at rates up to 5%.”
Another feature of Income for Life that Tim and Tom talk about is that policyholders can borrow against the cash they have accumulated.
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For example, instead of financing a new car purchase with a bank or dealership, you could get the cash you need from your policy. Another option is to borrow against the policy for investment purposes. Tim tells me he has borrowed against the cash in his policy to invest in real estate and in companies that pay rising dividends (like the ones in our Legacy Portfolio).
It works because your money goes into a mutual insurance company. And mutual companies are very different than stock-based insurance companies like, say, Allstate or State Farm.
Stock-based insurance companies trade on the stock market. Mutual funds, pensions, hedge funds, and small investors hold most of the shares. The policyholders are just the customers.
Mutual companies do not trade on the stock market. There are no shareholders. Instead, the policyholders own the company. (In this sense, it is like putting money into a credit union.)
This may seem like a technical point, but it has very important consequences. In a stock-insurance company, the executives run the company for the benefit of the shareholders. Wall Street is their master.
That means stock-insurance company executives have to worry about their company’s stock price, quarterly earnings results, and other short-term goals to please shareholders. As a result, they take greater risks to grow their money or earn profits.
Mutual companies serve only the policyholders. There is no stock price. No hedge funds or activist investors to appease. As a result, the executives of a mutual insurance company are free to run the company for the best interests of their policyholders. Those interests are safety and longevity.
And that’s why these mutual companies can make the guarantees they do. They feel comfortable guaranteeing a return because they are paying you a portion of their profits… And they have a history of being profitable even when the stock market is in decline. (You’ll see how Tim comes up with his 5% figure in a minute.)
This guarantee—usually 4%—is obviously a big benefit at a time when you can’t get even 0.5% from your bank.
All of this feels right to me. The way mutual companies are structured benefits investors. And the guarantees provide a safety net that is very attractive. So far, I’d say Income for Life dovetails nicely with Palm Beach Research Group’s investment philosophy.
But I can’t recommend it simply because it makes sense. I’ve always had a very negative view of life insurance.
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I Was Skeptical From the Beginning
Way back in July 2011, I said this about life insurance:
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The proper purpose of life insurance is to provide financial assistance to a family in the event of the death of its principal breadwinner. That is, or should be, the only reason to buy it. But most people are told that it is a great way to offset estate taxes or build retirement savings. Both of these reasons are bogus. Life insurance is only necessary if you don’t have enough money to take care of your family’s needed expenses to survive your death. By needed expenses, I mean your funeral costs and the money you need to keep your children housed, clothed, and fed. College expenses are optional. You should consider life insurance an expense, not an investment. It is a cost you pay to safeguard against an unlikely event. It is not a good investment, nor is it a good estate-planning or retirement tool. Every nickel you put towards it will probably make you poorer. Use it to insure your life and nothing more. |
So when, in 2012, Tim and Tom told me they wanted to recommend Income for Life to our readers, I objected.
“The only sort life insurance we should recommend is term insurance,” I told them. “We should tell them to buy term life insurance until they have hit their retirement number and then get out of the life insurance game altogether.”
[Term life insurance is the simplest form of life insurance. You decide what death benefit you need to cover your family’s needs if you or your spouse dies. You decide how long you want the policy to be in effect (the term of the policy). And then you shop around among reputable insurance companies to find out how much it would cost you (i.e., the premium you will have to pay).]
But they insisted. “If you need life insurance to help a surviving spouse, you’re right. Term insurance is the cheapest way to do that,” Tim said. “But this is different. This is a savings strategy that provides the tax benefits of life insurance but without the traditionally high commissions. Plus, there’s a neat loan feature that comes with the policy. We want to teach people how to use it.”
Although I was 100% sure that they believed everything they said, I was not sure that they hadn’t missed some of the little tricks insurance companies typically use to hornswoggle their customers.
So for nearly two years, I asked Tim hundreds of questions about it—some of them over and over again.
To give you an idea of how this two-year conversation about Income for Life went, tonight I will send you, in condensed form, the questions I asked and the answers I got…
Reeves’ Note: Be on the lookout for the second installment of Mark’s essay tonight at 5 p.m. You won’t want to miss it…
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