The Proof is in the Pudding

Really! Wouldn’t that be an unfortunate and messy place to find the proof? Before it was condensed to its current colloquial use, this 15th century proverb went like this: “the proof of the pudding is in the eating.” In its original context, “pudding” was not referring to a creamy dessert, but a mixture of meats and seasonings stuffed into a casing. Given the contents of the “pudding,” the implication is that one should simply test the result if one is not able to or desirous of verifying the provenance of the ingredients (i.e., if you don’t want do your own investigation you need to take my word for it).

While this proverb was originally applied to food, it has morphed into a much broader use. In the context of wealth accumulation, it can be applied to the Life Insurance Retirement Plan (LIRP): a little known strategy that produces sublime results. So, if the results are so good, why isn’t every high-income earner using this strategy as a component of their wealth accumulation plan? As we shall see, many are, and they’re fortunate to work with the CPAs, wealth advisors, executive benefit consultants, tax attorneys and others who have taken the time to study the strategy, and have concluded they don’t need the pudding to be fully baked in order to know its value. For others, there is an inherent “distaste” for the ingredients, and given this particular pudding takes years to bake, would rather not bother understanding how all these ingredients piece together to form this financial pie.

So, what are the ingredients and how do they blend together to work the way they do? The core of the strategy is an intelligently engineered life insurance policy. Cash value life insurance has come a long way since the days of Ordinary Whole Life. Today, there are several different options to accumulate wealth inside a life insurance “wrapper.” The wrapper allows the inside cash value to bake (pun intended) on a tax-efficient basis, while minimizing the costs and expenses typically associated with life insurance. This is often referred to as a Life Insurance Retirement Plan or LIRP. A significant percentage of Fortune 1000 companies (and many non-profit institutions) use this strategy to fund the long-term deferred or supplemental compensation plans for their key executives. (Example: Jim Harbaugh’s 2016 deal with the University of Michigan to contribute $12M over six years to fund this strategy.)

In our practice, we bring this LIRP strategy to our high-income clients using a technique called Maximum Funded Equity Indexed Life Insurance. Simply stated, this strategy, if properly implemented, will deliver unparalleled long-term results, while at the same time, mitigating risk and keeping cost and expenses relatively low.

So, let’s revisit my earlier question: if this strategy works as well as I’m suggesting, why doesn’t every investor/saver use it to grow wealth? It’s a simple question, with not such a simple answer. I believe the reason is two-fold. First is the age-old inherent bias against cash value life insurance, based on, to put it bluntly, the antiquated beliefs that have been drummed into us by those who only understood the expensive and low-yield products of the past. The people who share these beliefs are the same people who believe life insurance should never be used as an investment, and usually propound the theory of “buy term and invest the difference.”

The second answer is complexity, and most people, even some financial advisors and CPAs (who should be constantly searching for and utilizing exactly this type of strategy for their clients), are unwilling to take the time necessary to understand how the strategy works. Unfortunate, but somewhat understandable! Our research has shown us that most (tax) advisors are interested in finding ways to help their clients avoid current income taxes, but are much less focused on the very real possibility of significantly higher tax rates in retirement. (Our next blog piece will focus on exactly this issue).

Myerson Wealth has prepared a comprehensive “user-friendly” analysis of this strategy. The analysis consists of an easy-to-read white paper on how Maximum Funded Equity Indexed Life works, and moreover, an interactive spreadsheet that demonstrates, in no uncertain terms, why this strategy works as well as many other equity-based investments, and substantially better than any investment with the same low-risk profile. We’d be happy to share this with you, as we believe it will provide you significant evidence that the combination of ingredients is perfectly balanced, and you don’t need to be a MasterChef to know this is one exceptional pudding.