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book where the author cautioned against investing in annuities because of the surrender charges (which we discussed in depth in Chapter 7). However, I disagree with those who believe that annuities are a poor investment choice. There are many good reasons for investing in annuities and I’m not against recommending annuities if I believe that they are good for the client.

Life Insurance Policies There may come a time when either a financial advisor or an insur- ance agent tries to sell you on the idea of using a life insurance pol- icy as a means to accumulate the cash value on a tax-deferred basis that can then be used for retirement. This isn’t a good idea because the policy is insurance and it’s an expensive idea. When you pay the premium on the policy, a part of it pays the cost of insurance. The rest then goes into a separate account where it grows tax-deferred. There- fore, just because you are paying in $200 per month doesn’t mean that the whole amount is going to be invested. Your cost of insurance could be $100 out of that $200, leaving just $100 per month being invested. It’s far better to direct that $200 into a different account where the whole amount can grow.

There are many financial advisors and insurance agents who would like you to believe that life insurance is an investment vehicle. Yes, life insurance does allow your money to grow tax-deferred. However, these are insurance policies first and foremost. If you are considering purchasing a life insurance policy make sure that you need the insurance. Do not purchase one because you have been told that they are great investment tools. Life insurance policies are good for estate planning, and I have recommended them for that purpose, but never for an investment choice.

These investment choices, however, aren’t totally fail-safe. Rather, they are only as good as the underlying equities are. While you should definitely remember to try and save as much on your tax bill as possible, don’t sacrifice investment results and rates of return only because you are saving on your tax bill. If you decide that another security offers a better track record and potential return, but is currently taxable to you, it may be a better idea to invest in that security rather than the tax-deferred accounts.

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