Would You Ever Consider Betting Against Yourself?

By Fritz Schafer, with contributions by Chris Schafer. March 25, 2017.


When you sign up for a most marathons you have the option of taking out race insurance.  Basically, if you get injured or have health issues and you can’t run, then the race will refund your money or put it towards a future race.  I never take this option, as I look at it as betting against myself.  Also, if I end up not running, I take solace that the proceeds from these events go to good causes.

Anyone who has spent time in Cincinnati knows all about Pete Rose, the greatest hitter of all time, who is banned from baseball for life for betting on baseball while he was the manager of the Cincinnati Reds.  The common belief is that he never bet against (himself) the Reds.

However, would you ever bet against yourself in the realm of finance?

Recently we have advised some clients of a strategy that does just that.  It’s an idea that somebody coined “IRA Max” and it could be an excellent strategy for certain IRA investors.  At age 70 ½ the IRS requires IRA investors to start taking distributions from their IRA account whether they need the income or not.  For those who don’t need the income, they can always pay the taxes and reinvest what’s left in a non IRA account.  Presumably, if they do not need the income then the investments should continue to grow and eventually be left to their heirs.  This is where estate planning becomes an important part of the overall financial plan.

One way to increase one’s estate is the purchase of life insurance.  When many people think of life insurance they think of young couples with small children and mortgages.  What would happen if a main wage earner suddenly died?  Life insurance is usually the answer.  But, life insurance may also be used as an estate planning strategy for enhancing one’s estate.

Let’s look at an example of a retired couple at age 70 who had an IRA required minimum distribution of $50,000 per year.  What if they were to put $10,000 of their required withdrawal into a “Joint Life, Second to Die” permanent insurance policy with the purpose of enhancing their estate?  The face amount (or death benefit) of the policy would depend on several factors.  Obviously, your health is the main factor – keep in mind life insurance may not be an option, if you have certain health conditions or illnesses.  If you are healthy, then future financial considerations come into play.  You may not need the income today, but what if you need home health care, assisted leaving or nursing care in the future?  You would want to have those covered before committing to an annual premium of $10,000!

Assuming your healthy enough and you have the main concerns of your financial plan covered, a “Second to Die” life insurance policy may make sense.  The term second to die means, that the policy does not pay its death benefit until the second insured passes away.  If it is a couple, it will not provide financial help for a surviving spouse.  A recent example, for a couple in their early 70s / late 60s, provided a death benefit of $580,000 for a $10,000/year premium.  When we discussed this strategy, we remarked in a way they were betting against themselves.  The question came up: how many years would we need to invest $10,000 for it to build to $580,000?  If you think about the insurance premium as an investment the rate of return percentage goes down for every additional year of premiums paid, so in a sense they would be betting against themselves.  If they lived for 58 more years with no return they would break even, but they would be somewhere around 130 years old!  That is a bet they would like to lose!  If you earned an average of 5% compounded return per year it would take you a bit more than 26 years to reach $580,000!

Sometimes betting against yourself is a smart financial move for your family.




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