Why is tax-sheltering such a big issue?

Among the several advantages of a good universal life insurance policy, deferring taxes on investment returns is the most basic one. The importance of such a tax-shelter can be seen from the following simple scenarios. What you can see is that, since tax is charged on nominal gains, inflation has the potential to totally destroy even decent investment gains. Today, inflation may not seem to be a major concern; however, it is good to remember that the average inflation rate in the last 30 years was around 5%. The lesson from these scenarios is that it is very important to accumulate money inside a tax shelter.

Scenario 1

 

 

Return on investment

8%

 

Inflation

2%

 

Marginal tax rate

50%

 

Outside a tax-shelter

 

 

Return after taxes

4%

 

Inflation adjusted return after taxes

2%

Purchasing power of $100 invested today will grow to $135 in 15 years (in terms of today’s money)

Within a tax-shelter

 

 

Inflation adjusted return

6%

Purchasing power of $100 invested today will grow to $240 in 15 years (in terms of today’s money)

Scenario 2

 

 

Return on investment

10%

 

Inflation

5%

 

Marginal tax rate

50%

 

Outside a tax-shelter

 

 

Return after taxes

5%

 

Inflation adjusted return after taxes

0%

Purchasing power of $100 invested today will will remain the same in 15 years (in terms of today’s money)

Within a tax-shelter

 

 

Inflation adjusted return

5%

Purchasing power of $100 invested today will grow to $208 in 15 years (in terms of today’s money)

Scenario 3

 

 

Return on investment

18%

 

Inflation

10%

 

Marginal tax rate

50%

 

Outside a tax-shelter

 

 

Return after taxes

9%

 

Inflation adjusted return after taxes

-1%

Purchasing power of $100 invested today will decrease to $86 in 15 years (in terms of today’s money)

Within a tax-shelter

 

 

Inflation adjusted return

8%

Purchasing power of $100 invested today will grow to $317 in 15 years (in terms of today’s money)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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