By Gray Crow

Should you buy municipal bonds or permanent life insurance? The answer may depend on who you talk to and how he or she gets paid. These two products have unique tax benefits that an investor or policyholder can enjoy. They are compared below:

Municipal Bond

Basics:

• According to FINRA’s website, a municipal bond, commonly referred to as a “muni,” is a loan to a state, city, county or other government entity to raise money and finance projects that promote the public good (such as roads and schools).

Pros:

• Most munis yield interest on a semi-annual basis that is completely tax-free with a possibility for further state or local tax benefits, should the investor live in the city or state that has issued his or her bonds.
• Rarely, when munis are taxable, or not tax-exempt, they can offer higher yields.

Cons:

• Liquidity may vary between bonds, and depending on the maturity date of a given bond, it may be difficult or impossible to get money out when it is needed.
• Investors should also be mindful of interest rates, as these will have an indirect effect on the value of bonds in the secondary market.

Permanent Life Insurance

Basics:

• Insurance policies provide coverage for the life of an insured person and build cash value which can be treated as a savings vehicle.
• Typically offered in two forms: whole life and variable life.
• Whole life offers more stability because there are more guarantees associated with the dividends paid to policyholders, as these dividends are based on the financial stability of the life insurance company.
• Variable life is considered a securities product, because a certain percentage of the premium payment made by the policyholder is invested in securities.

Pros:

• Gains in the cash value of the policy, seen from investment returns or dividend payments, are tax-free.
• The death benefit of the policy is paid to beneficiaries tax-free.

Cons:

• The “cash surrender value” and any amount over the total premium amount paid over the life of the policy (your cost basis) will be taxed as income.
• Most of the variable policies provide minimal investment options when compared to a free choice of different munis in the market.
• Insurance products carry many different charges and fees beyond what an investment in bonds may bring, which can complicate things.

The Verdict:

A municipal bond can be a smart choice for an individual with a high income tax burden, while life insurance may be optimal for those who seek a return as more of an ancillary benefit built into a plan. Insurance policies tend to have a variety of charges while liquidity is important to consider when investing in munis. Prior to purchasing either of these products, research should be conducted to make an informed decision. When consulting with a professional, one should not only make sure that the professional has experience, but relevant experience to assist with his or her specific needs and goals.