Tax Secrets of the Wealthy: The best tax-free investment for the conservative investor

Never thought there were so many truly conservative investors. What makes me think so? Well, the last time I wrote about the specific subject covered in this article, it was followed by a blizzard of responses: phone, fax and mail. The subject? ... “conservative investments.” (CI).

This article covers the subject again and answers the questions that were part of the response blizzard. So, if you have a bent for CI, you’ll love what follows.

Every conservative investor tells me, “I don’t want to risk losing my investment.” Fine. A worthy goal. But here’s the problem. Most CIs are in low-yield, fixed-rate stuff like CDs or U.S. Treasury bonds. But municipal bonds are the hands-down favorite CI. But watch out, when inflation rears its ugly head, CIs are anything but conservative. Consider just one additional value-eating bandit who walks hand-in hand with inflation: Interest rates. For example, the three ways the bandit steals your money and hard-earned wealth when you are heavily invested in municipal bonds:

1. The value of the bonds go down as interest rates go up.

2. You are locked into a low interest rate until the bond matures or you sell it (probably at a painful loss).

3. Nasty inflation reduces not only the value of the interest you receive, but the already reduced value of the bond (see 1 above) has less buying power due to inflation.

What’s the long-term impact?... Here’s a quote from the “Currency Options Hotline Operating Manual” that drives home the devastating economic impact of inflation over time,”… if you were somehow able to take one of today’s greenbacks [dollars] back in time to 1940, you would find it worth only about 6.5 cents.”

Sorry, but it looks like inflation (plus the falling value of the dollar against most foreign currencies) will be our rather unwelcome bedfellow for at least the foreseeable future.

What is a conservative investor to do?

Actually, we all know the answer: Find an investment vehicle that overcomes the three evils of the rising-interest rate bandit. First, let’s outline the attributes of such an investment; second identify the investment; and finally, give an example of how the investment works.

Okay, here comes the attributes of the investment:

1. A higher rate of return than on traditional conservative investments like CDs, treasury bills and notes, and, of course, municipal bonds.

2. The interest rate tends to go up as inflation goes up.

3. Your investment will never go down in value, and I fact, will always guarantee you a profit.

4. The interest earned and your investment profit are income tax-free.

5. Your total investment at time of death (original investment, interest earned and profit) escapes the clutches of the estate tax (when properly structured).

What’s the identity of this picture-perfect investment? Simply a type of life insurance, which I call conservative investment life insurance or CILI for short.

Next, let’s look at an example. Joe and his wife Mary are both 70-years old. They buy a $1 million policy (it could be any amount, usually more) second-to-die CILI with an annual premium of $23,516. The policy currently earns 5.1 percent.

The payoff on Joe and Mary’s investment comes after the second death (here assume after 10 years – age 80 – both Joe and Mary get hit by the same bus) and is always determined as follows. Their heirs (kids and grandkids) would receive:

1. Death benefit – $1,000,000

2. Premiums paid ($23,516 times 10 years) – 235,160

3. Interest earned on premiums paid (at 5.1 percent, but could be higher if interest rates rise, or lower, if interest rates fall) – 67,870

Total amount (tax-free) to heirs – $1,303,030

Next, suppose the second death (of Joe and Mary) happens after age 80. Their heirs would get a larger amount (for premiums paid and interest earned) for-each additional year one of them lives (tax-free).

The easy way to summarize the investment is as follows:

1. You get your investment (premiums paid) back, dollar-for-dollar;

2. Plus earnings on the premium paid;

3. You get a guaranteed bonus, the death benefit (here $1 million); and

4. Best of all, it’s all tax-free (no income tax, no estate tax).

Yes, CILI can be purchased on a single life (if you are single, or if married and your spouse is uninsurable). Here’s the big question most readers asked, “How does the insurance company make money?”… Don’t worry those guys are not about to serve you a free lunch. The company simply charges you enough premium in the first place to actually cover the final anticipated death benefit based on your age, sex, health and other factors.

Sure, sure, you want to know how a CILI might work for you, your Mom/Dad or your grandparents.

So, I have made arrangements for readers of this column to get all the information you need and your questions answered. Just fax your name and birthday (same for your spouse, if you’re married), address and phone numbers (work, home and cell) to Irv Blackman at (847) 674-5299. Please mark “CILI” on the page.


Irv Blackman is a certified public accountant who lives part-time on Marco Island and specializes in estate planning, business succession and asset protection. E-mail him at or call 417-9732. His Web site is

© 2008 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

  • Discuss
  • Print

Comments » 0

Be the first to post a comment!

Share your thoughts

Comments are the sole responsibility of the person posting them. You agree not to post comments that are off topic, defamatory, obscene, abusive, threatening or an invasion of privacy. Violators may be banned. Click here for our full user agreement.

Comments can be shared on Facebook and Yahoo!. Add both options by connecting your profiles.