Even with the stock market reaching new highs recently, some investors are still reeling from the memory of the economic downturn of the previous decade and its aftershocks. As a result, there is a segment of investors who are risk-averse and have turned to low-yielding assets such as certificate of deposits (CD), money markets and cash. If investors have assets earmarked for their heirs in a CD, they may have sought the relative safety of this fixed interest vehicle. After all, many investors want to at least preserve the amount set aside for heirs.
The cost for this safety is a very limited potential for growth in today’s low interest rate environment. The national average for CDs changes from week to week and varies according to duration. The rates are relatively low by historical standards, sometimes dipping below 1 percent. These low rates of return, compared with the current modest inflation of 2 percent to 3 percent, mean CD assets often lose buying power in today’s planning environment.
For those with sufficient net worth and annual income, and for those who truly do not need the CD or other asset for retirement income, is there another option providing a reasonable way to reposition your assets that has potential growth greater than current fixed interest rates? Absolutely. Many clients can activate their assets by repositioning part of the low-yielding CD or other low-yielding asset to life insurance.
This strategy can provide the following benefits:
- Preservation of capital for children, grandchildren, or a favorite charity.
- Potential for competitive rates of return on life insurance cash value to withstand buying power erosion.
- Death benefits to her heirs based upon the claims-paying ability of the insurer.
- In some cases, optional riders permitting access to accelerated death benefits triggered by chronic illness.
Life insurance contracts vary in terms of benefits and features, amount of death benefit, and crediting methods with respect to cash value. The actual death benefit and other benefits depend upon age, health and premium amount, among other factors. Anyone considering this strategy should carefully consider the specific life insurance features and benefits being purchased in light of their overall planning needs and objectives and consult with their financial advisor and/or tax advisor prior to implementing this strategy.
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In general, this strategy works best for people who:
- Are at least age 59 ½ + and family-oriented.
- Have sufficient net worth and liquid assets to support this strategy.
- Hold a CD or other low-yielding asset not needed to support financial goals in retirement.
- Have sufficient retirement income from other sources, besides the CD or other low yielding asset.
- Have a financial plan completed by a financial advisor.
- Have a desire to provide for children, grandchildren, and/or charity and consider the CD or other low yielding asset as a “leave-on” asset for them.
Let’s consider Cathy Smith, a 60-year-old retired executive who was recently widowed. Cathy has $2 million in net worth, she has adequate income from her pension, her husband’s pension, Social Security and other investment income to easily meet her expenses and, in fact, she often has significant disposable income. Cathy is a saver. She has a $200,000 CD currently yielding 1 percent. This money is earmarked for her granddaughter, Mary. Cathy is interested in providing more for Mary. Cathy also wants the opportunity for her money to grow at a rate exceeding the 1 percent her CD currently yields.