BY IRVING L. BLACKMAN
THE PURPOSE OF this monthly column always has been and still is simple: to show you, my readers, how to save taxes and create wealth (usually tax-free).
Every now and then we hit a home run. How do we know? Reader response, usually by fax, phone or e-mail. But Google? Here's the story.
In February, I wrote a column headlined, "How to make 16.28% annually without risk" (pg. 34). The column explained an investment called a " transferable insurance policy," or TIP, which is explained once again later in this month's column.
We were literally buried in an avalanche of reader inquiries for more information. Loved every minute of responding to each and every column reader. Clearly a home run.
But what happened next turned the column into a grand slam. It all started with an e-mail sent to me by John Jost (the TIPs expert in my network of professional advisers). The e-mail said: " Late last night I Googled ' transferable insurance policies.' Guess who is No. 1?" So, I hurried to my computer and Googled the same three words.
Surprise! Here's what it said at the top of the Google page: "'Results 1-10 of about 2,290,000 for 'transferable insurance policies.'" Unbelievable — our column did, in fact, lead the parade of more than 2 million other entries. Took 11 days to drop to second position. Now, as I write this follow-up column, the original column is somewhere in that 2 million-plus maze. Ah, fleeting fame.
Some computer jocks assured me that only word-of-mouth communications to others by the readers of a column can cause what we are calling a "grand slam home run." So, again, thank you, readers.
OK, you missed the first column and you want to learn more about TIPs, more importantly, how to make 16.28% per year without risk.
Yes, we are talking about an investment, which is called a "life settlement" (more often called a "senior settlement," or SS for short). A TIP is a fractional interest in an SS. An example is the easiest way to understand this simple investment.
Joe, 68, owns a life insurance policy with a $500,000 death benefit and a $ 60,000 cash surrender value. Joe would like to stop paying premiums. Of course, he can cancel the policy and get the $ 60,000 CSV from the insurance company.
Instead, an investor (really a group of investors) buys Joe's policy for $150,000, paid in cash to Joe immediately. The investors now own the policy. The investors will receive the $500,000 death benefit when Joe dies. The investment group has a potential $350,000 profit, minus whatever it has to pay later in premiums to keep the policy in force. This entire transaction (the sale/ purchase of Joe's policy) is an SS.
A public company trading on the NASDAQ offers SSs to small investors. (Note: Normally SSs are purchased by large institutional investors such as giant insurance companies AIG and CAN and Warren Buffett's Berkshire Hathaway.)
Now, to continue the example with Joe's policy, let's say you invest $ 100,000. The NASDAQ company would arrange for you to own a fractional interest in Joe's policy, say 3% of the $500,000 policy (or a $15,000 TIP). When Joe dies you will be paid exactly $15,000 (includes your principal — amount invested — and your profit). Of course, because you invested $100,000, you will wind up owning a little portfolio of about eight to 11 TIPs, including Joe's TIP.
Based on the 14-year history of the NASDAQ company, your average rate of return on all of your TIPs will be above 16%. The historical average was 16.28% at the time the first column was written and has inched up to 16.32% since then. As a TIP investor you can enjoy:
- An average rate of return in excess of 16% per year;
- Not worrying about the market being volatile or if it goes up or down;
- The guaranteed return of your principal, as well as your profit (your exact rate or return will vary); and
- Best of all, keep 100% of the profit because there are no fees or costs when you buy a TIP.
What are the tax consequences of the your TIP profits? There are only two simple rules:
- The tax on your profit (for each TIP you own) is deferred until you actually receive your principal and profit.
- Your profit is taxed as ordinary income.
If you want to make a killing on your investments, then TIPs are not for you. But if a set rate of return, with no market risk is of interest to you, your IRA, 401(k) or other qualified plan, fax me (847/674-5299) your name, address, phone numbers (business, home and cell) and estimated amount to invest (the minimum is $50,000 for accredited investors).
Irving Blackman is a partner in Blackman Kallick Bartelstein, 10 S. Riverside Plaza, Suite 900, Chicago, IL 60606; phone 312/207-1040; or via e-mail at [email protected]