Douglas R. Andrew has a new book out. "The Last Chance Millionaire: It's Not Too Late to Become Wealthy" was published in June. It is a continuation of the saga that began with "Missed Fortune" (2002) and "Missed Fortune 101" (2005).
If his name sounds familiar, I'm not surprised. If you have a mailing address or have read a newspaper anywhere in America, you've probably had an invitation to a seminar based on Andrew's ideas. His disciples, and there are thousands of them, will explain the horrors of home equity that earns nothing and the wealth-building benefits of equity-index life insurance policies.
In his new book, Andrew explains once again the virtue of equity-indexed life insurance as a conservative wealth-building tool that is far better than almost anything you can think of because your money will grow untaxed at a guaranteed minimum rate while participating in the long-term rise of the stock market. Better still, every dime will also come out tax-free.
He also says things that are important and true. My favorite is his Misconception No. 5: "I'll be in a lower tax bracket when I retire." As many are discovering, diligent saving in a 401(k) plan, combined with the taxation of Social Security benefits, can lead to nest-egg-zapping tax rates in retirement. As a result, the prospect of tax-free income in retirement gets my attention.
So let's examine his case for owning an equity-indexed universal life policy. We need to remember that much, if not all, of the money that comes out will be removed with no realized tax liability.
Using a 30-year history of the S&P 500 index ending in 2005 and a common formula for crediting returns, he says (on Page 267) that a policy crediting 1 percent in loss years and 100 percent of gains up to 17 percent in good years would have provided an average crediting rate of 9.62 percent. Over a longer period, a policy with a 2 percent guarantee in loss years and 100 percent of gains up to 12 percent in positive years would have provided an average crediting rate of 7.9 percent.
Even after subtracting the cost of insurance and other policy expenses, such as the commissions that would enrich all of his disciples, he estimates (on Page 268) that your net return would be 8.5 percent on the 17 percent cap policy and about 7 percent on the other policies.
Now let's take his best case and assume, as he does, that you had accumulated $100,000 in cash value by age 55 in 1976. Growing at 8.5 percent, your money would have grown to a stunning $1,155,825 only 30 years later, when you were 85.
Is this a magical opportunity, or what?
Unfortunately, just as the line-of-credit mortgage sales pitch fails to mention the additional principal payments required to achieve dramatic results and the "living benefits" policies fail to compare with traditional lifetime annuities, "Last Chance" never makes any comparisons with alternatives.
I'd like to remedy that.
Suppose, for instance, you had invested $100,000 in the S&P 500 index in 1976, knowing you would suffer lots of ups and downs. What would have happened?
Your return over the period would have been 12.7 percent annually, and your original investment would have grown to $3,611,748 if it had grown tax-deferred. So you could sell the shares, pay taxes at a stunning 68 percent rate and still have $1,155,825 left -- without the entanglements of a life insurance policy.
But let's not be theoretical. Suppose you had put the same $100,000 in the American Funds Balanced Fund, A shares, and had paid taxes at 28 percent on all dividend and interest income and at 20 percent on all capital gains. Even after paying a 5.75 percent front-end commission, your investment would have grown to $2,612,003 over the same period. You'd have unrealized capital gains taxes to pay, of course, but your accumulated cost basis would be over $1.9 million. So the tax hit wouldn't be so horrible.
However you cut it, the alternatives that Andrew fails to mention would have done far better -- more than enough to offset any possible concern about taxes.
But what about safety and guarantees?
Long investment periods eliminate the risk of negative returns. In all 62 of the 20-year investing periods from 1926 to 2006, an investment in large stocks produced a positive return. The worst return was 3.1 percent annually for the 20-year period beginning in 1929 and ending in 1948. In other words, even investing on the eve of the Great Depression produced a higher long-term return than the guaranteed minimum return of equity-index products.
Bottom line: If you go to one of these seminars, eat the food. But don't drink the Kool-Aid.
Earlier columns in this series:
"The Magic of a Tricky Mortgage" (10/26/07):
"A Simple Alternative to 'Living Benefits'" (11/4/07):