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Life insurance as an investment – twilight zone version

October 31, 2012

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Posted by: glenn

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Category: Life Insurance

The insurance industry has promoted using life insurance as an investment, but here’s a new one that consumers have been pulling over on the insurance companies. They’re managing to earn 10% tax free guaranteed using insurance policies. The only trick? You need to be terminally ill first.

Some life insurance policies have limited benefits in the first two years. These policies won’t pay a death benefit during that time. Instead if you should pass, they’ll refund all premiums paid plus interest. Traditionally insurance companies have guaranteed a reasonable interest rate on that refund of premiums. 10% is not uncommon. And because this refund is treated as a death benefit for tax purposes, that 10% interest is tax free.

So some terminally ill people have been buying policies knowing full well they’ll never receive the actual death benefit. Instead they stuff as much premium as they can into the policy. When they pass away within the two year timeframe, their beneficiaries receive the premiums and plus guaranteed interest at 10% tax free.

Some insurance companies have become wise to this and started reducing the guaranteed rate of return on the return of premiums paid.

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