Tax-free investments are big. Interesting, tax-deferred investments are even bigger. Logically, tax-free should be number one. Sorry, but the cruel fact is that with the exception of life insurance (got to die to get your tax-free reward) or municipal bonds (plagued by low rates of return), there just isn’t much to talk about that’s tax free. Sad, but true.
Ah, but tax-deferred. That’s where the action is. The biggest tax-deferred sandbox to play in, by far, is the qualified plan area. They — profit-sharing plans, 401(k) plans, IRAs of all sorts, and others — abound. Billions pour in every year. Employer-sponsored plans are usually the tax-weapon of choice. Non-employer plans (traditional and Roth IRA) give every taxpayer an opportunity to play in this sandbox.
But IRAs have dollar limits. Tax-deferred annuities (annuities) have no limits. You can toss as many dollars as you like into annuities. All are after-tax dollars. Not one cent is deductible. Annuities earning powers are low (more about this defect later). Severe penalties murder your dollars if you want to get out in the early years. Simply put, there’s no liquidity.
So what’s the magnet that draws billions of dollars into this not-such-a-good-deal-investment? Here’s the answer and the magic words: tax deferred.
A word about annuity rates of return: Fixed annuities are the most popular. They currently pay in the three to three and a half percent range per year. (Older annuities, when interest rates were higher, paid more.) The new darling is indexed annuities. Your yield is pegged to some index, typically the S&P, on an annual basis. Often in a (say the S&P) loss year, you are guaranteed a small yield (usually in the one and a half to three percent range). A small percentage rise (say four percent) in the S&P is the exact percentage (four percent) you get, but a large rise is capped at six percent to eight percent (for example, the S&P increased by 14 percent but you only get seven percent.
Okay, so what’s a tax-deferred investment that doesn’t have all the impediments of annuities and has a huge rate of return without risk? Senior settlements.
An example is the easiest way to explain senior settlements. Suppose Joe, age 68, has a $400,000 life insurance policy with a cash surrender value (CSV) of $50,000. Joe would like to stop his annual premium payments. Instead of canceling the policy and taking the $50,000 CSV from the insurance company, Joe sells his policy as a senior settlement, receiving $120,000. Joe’s a happy camper.
Investors bought Joe’s policy. Senior settlements have been around for about 35 years. The tax consequences are a delight. Your tax liability for profits are completely deferred to the day you actually receive back your entire investment and your entire profit.
There’s a public company (trades on the NASDAQ) offering senior settlements. The average rate of return has been 15.82 percent per year throughout the company’s 15-year operating history. If your goal is to make a killing on your investments, senior settlements are not for you. (Just a note: AIG, the giant insurance company, and Warren Buffett’s Berkshire Hathaway Inc. invest in senior settlements.) But if an average rate of return (almost 16 percent), with no market risk, is of interest to you (or one or more of your qualified plans) you are invited to learn more about senior settlements. Just fax me (239-417-9045) your name, address, phone numbers (business/home/cell) and estimated amount to invest (minimum is $50,000 for accredited investors.)




