VIEWPOINTS : 1987: Looking Ahead to a Year of Big Changes : Deferring Taxes
In 1987, you’re likely to see big changes in just about everything you buy. If you’re planning a vacation, you’ll notice differences whether you drive or travel by air. If you want to buy a home, you’ll be watching prices and mortgage rates closely. Eating out? You’ll see some unusual, new menus. The worlds of entertainment and retailing are in a state of upheaval. And, with a new tax law, investing may be more tricky than ever.
The Times polled experts in eight fields for their outlook on what 1987 will mean for businesses and consumers.
The world of investments is changing again. The Tax Reform Act of 1986 has taken a neatly stacked deck of cards and thrown them into the air. We not only have a different order but different stacking rules as well.
One of the reasons investors used to purchase real estate was to shelter their personal income. No longer.
And investors used to purchase assets for capital appreciation because the income tax rate was more favorable. No longer.
It was not so long ago that people were sold insurance primarily for the death benefits. Now, due to the new tax law, some insurance products may be among the hottest investment products available. This is because the new tax law continues to allow reinvested interest or dividend buildup (also called “inside buildup”) within an insurance contract to remain tax deferred unless you surrender it.
With the disappearance of the favorable capital gains tax rate and a drastic reduction in tax shelter opportunities, investments that offer tax-deferred compounding now have far greater appeal.
Two such insurance products now look particularly appealing. The first is the single-premium whole life policy. These contracts act like a certificate of deposit, a tax-free municipal bond, a tax-deferred annuity and a life insurance policy. They currently pay a tax-deferred 7.5% to 9% that includes insurance protection in an amount two to three times your initial investment.
It can provide a steady stream of tax-free income, since all single-premium plans allow you to borrow your inside buildup at effectively no cost, with no requirement to repay this loan. In addition, you can even borrow your cash value at a very low (usually 2% to 3%) interest rate.
The second product is the single-premium variable life insurance policy. It is similar to single premium whole-life in that it also has the tax-deferred, borrowing and insurance features. But unlike the single-premium whole life policies, the owner of a variable life policy can choose from a variety of investment opportunities. Here, as market conditions dictate, you can attempt to achieve higher yields by freely switching from one portfolio to another.
Before buying (through insurance firms, financial planners or stock brokers), be sure to shop around. Also, because of an early surrender charge, look at single-premium life insurance policies as a long-term commitment.
