So what is this tax-free investment that makes 8%? Something called “Universal life insurance”. Apparently, you buy it with after-tax money, like the equity you've gotten out of your home via refinancing, the value accrues tax deferred, and you withdraw money by means of loans, which are tax free and don't need to be paid back. The amount of the loans simply reduces the death benefit of the policy which is not the primary reason we bought this policy anyway. And the cost of the loan interest can be absorbed by the policy.

Hi. I used to work as an Actuary and my primary position was pricing Universal Life Policies. First off, I would be shocked if you could find one that guaranteed an 8% return. The State Farm Policy at 4% sounded more reasonable. Secondly, they have fees. Lots of them. The insurance company is making a lot of money off of these policies. Our company priced them so that after paying all of the commission and all of our costs, we would yield a 13% return. The theory is that Uncle Sam was the one taking the hit since the policy holder could make up the difference with the tax savings. Supposedly, the company and the policy holder could both come out ahead.

They definitely have their place. Here is when I feel that a Universal Life Policy is most effective. First off, you need to be in a very high tax bracket. If you aren't getting a good savings from taxes on these things, they are hardly worth the fees you are paying. Secondly, you should have every other tax advantaged vehicle maxed out, such as 401(k), IRAs, etc. Thirdly, you should have enough money beyond this to seriously overfund these policies. If you are paying minimum premiums, these policies are awful. Usually the COI (cost of insurance) will eat up a large portion of the premium and the cash value will not grow at a great enough rate to make up for the fees. So, basically, this is a strategy for the very wealthy. It is also an excellent tax shelter for passing on money since the death benefit is tax free.

It seems to me that you would have to have a very large mortgage (such as to make the standard deduction negligible) and be in a very high tax bracket to use the strategy discussed in this book, but I could see how it could possibly be to your advantage. I would never undertake it without the advice of an attorney or trusted accountant.

For the average American, the scenario you described is a recipe for disaster.

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