by Archie M. Richards, Jr.
October 16, 2006

Cindy writes, "My husband and I, both 52, recently refinanced our home and took out a large sum to invest for retirement. Our financial consultant wants us to purchase indexed life insurance. He suggests an annual outlay of $20,000 for 5 years. I'm skeptical about the supposed tax advantages. I'm also concerned about our money being unavailable for emergencies. What are your thoughts?"

Permanent insurance policies vary a lot, Cindy, but an index life policy would probably be credited with a portion of the advance of the S&P 500 Index - say, 60 percent. For example, if the S&P rises by 12 percent, the policy, before costs, would be credited with 7.2 percent (60 percent of 12). In any year that the S&P falls, the policy would be credited with something like 2 percent. It would earn some of a year's gains but be protected from losses - again, before costs.

Not too bad, but here are ideas to ponder:

• Permanent life insurance policies are high cost and extremely complicated. It's easy to be fooled.

• The earnings come out tax free if you die with the policy in effect. But what good is that to you? You're buying for retirement, when earnings paid out of the policy are taxed as ordinary income, not long-term gains.

• The purpose of life insurance should be to protect the family if you die prematurely. Permanent insurance is much more expensive and generally a bum deal. It aims to protect the family from death decades from now, when you're expected to die.

• Term insurance, with no cash value, is cheap. It covers death within 10, 20, or possibly 30 years. While paying the low premiums, you might also invest in low-cost exchange-traded funds. (See archierichards.com > Suggested Portfolios.) Later on, life insurance should no longer be necessary.

• If you've taken out a large amount of money from refinancing the house, why aren't you investing it all now, rather than in $20,000 increments over 5 years? If the money is sitting in a money market fund while you're paying interest on the mortgage, you're throwing cash out the window.

• Emergencies are unlikely. So are serious bear markets. For both to occur at the same time is even less likely. Put all your money to work in the market. By the time you have an emergency, prices will probably be higher. If an emergency arises, bingo, you sell some of the ETFs that day, and cash is available a few days later, with no penalties.

• Don't make investment decisions on the basis of tax considerations. Instead, invest your money outside of an IRA or pension plan. Use double diversity by investing in different asset classes, with each one invested in scores of stocks via ETFs. Rebalance every year and a day (to avoid short-term capital gains), and let the taxes fall where they may.

• Tying your investment to just the S&P 500 Index is too limiting. My recommendations include nine asset classes, not just one. (See archierichards.com.) Limit your risk with diversity, not with tax-saving gimmicks.

• Insurance agents who earn commissions have too much conflict of interest. If you're still interested in permanent insurance, talk with a consultant who accepts fees only, not commissions. Visit www.feeonly.org.

To enjoy big investment gains, you need to accept moderate investment risk. And why not? Economic policies are improving almost everywhere. People are discovering that big government works miserably. Tax rates are falling, and the world economy is growing.

You and your husband are likely to live for another 50 years. Never mind life insurance that protects the family from death that occurs when it's supposed to. Forget about receiving only a portion of the market's gains. You want all of the gains.

Drop the index life insurance idea. Insure yourselves inexpensively against premature death and allocate your money among various ETFs with a heavy emphasis on stocks.