An income annuity is a very useful tool to create a guaranteed income stream. The period of time that you will receive the income for can be selected by the annuitant. For example, it can be an income stream that is guaranteed for the lifetime of the annuitant or for a period certain. There are also the ability to allow the surviving spouse to continue to receive the payments after the death of the annuitant. Annuities are great tools when a client needs to guarantee income to themselves and/or a spouse. Defined benefit pension plans are an annuity. They guarantee a retiree a certain amount of money annually in retirement.
The two types of annuities are immediate annuities and tax-deferred annuities. Immediate annuities are designed to create the immediate income that we are talking about above. The tax deferred annuities are built for building tax-deferred growth. In many cases is using both of these types of annuities at the same time. An example of this is for a client who has a defined amount of income that they need for a period of time and has a lump sum to invest. A portion of the money might be put in the immediate annuity for a period certain (10 years) and they other portion put in a deferred annuity. The goal would be to deliver the necessary income over that period of time and try to build the amount of the deferred annuity back to the original lump sum at that the end of the 10 years.
How can you take advantage of the advantages of dividend paying whole life insurance? Are you aware of the tremendous advantages that are available to you?
The bottom line is that most of the media and most of the people in the life insurance business have very little understanding or clue about how to use this product. The whole concept is to uniquely fund and structure a dividend paying whole life insurance contract. This concept was really developed by Nelson Nash and I highly recommend you read his book, “Becoming Your Own Banker”.
Once you have funded the policy and creating a liquid fund that you can borrow from, you start to loan yourself money to finance your big ticket purchases. Each whole life contract has a maximum amount of money that you can put in it before it loses its tax advantage. When I say tax advantage, I am referring to the cash value growing tax deferred and the ability to axcess the money on a tax-free basis if done correctly. Each contract has a MEC (Modified endowment contract) ceiling which is the maximum amount before the tax advantage goes away. If you go over the MEC level than the internal buildup of the policy is taxed the same as an annuity. This system allows you to recapture much of the interest that you would typically pay out to a finance company and make their bank grow. This way you can buy a new car and finance it yourself. For example, pull out 40,000 to buy that new car and then pay yourself back at an interest rate above the insurance companies interest rate. When you amortize these payments, like a bank would, you pay yourself back over a period of time. Let’s just say you loan yourself 40,ooo and amortize the loan over 4 years. The insurance company charges about 6 percent for the loan and you pay yourself back at 10 percent. The spread that goes back into your policy is similar to the spread that the bank would typically make. At the end of the 4 year period you own the vehicle outright, your bank has been paid back the full 40,000, and it will have grown with the 4 percent spread it has been making from each payment.
This concept tends to be a major paradigm shift for people, but it works if done properly. The key is that you set it up properly and try and raise the MEC ceiling as high as possible and then capitalize it so you have ample funds available to use. On top of being able to use these funds for loans to your self, it will create a great tax free retirement fund. The living benefits of this system is tremendous and it will also give you a great permanent life insurance benefit that will grow large over time.
A very popular product in this volatile market are fixed deferred annuities. These are insurance contracts that pay a guaranteed interest rate on the money deposited and grows on a tax deferred basis. Most companies have different break points and surrender periods. For example, the longer you keep your money with the life insurance company in the annuity, the higher interest rate you will receive. They also have bands that pay at higher rates depending on the deposit amount. For example, a higher interest rate might be credited to any deposit above $100,000. The different surrender periods are the periods where there is a penalty to move your money from that company to another. The surrender charge and period will decrease the longer the contract is in force and will eventually go down to 0%. It is just important to understand how many years before the annuity gets to 0%.
We always look at products for our client that have suitable time horizons for their money. For example, if the client is going to need the money in five years, then they shouldn’t buy an annuity with a ten year surrender period. On the other hand, if the client won’t need the money in five years and can wait ten, then there can be a higher with that trade off. It is also important to select a company that has a high financial rating. Obviously, it is important to know the company will take good care of your money. Look for an A rating or better with a company if you are looking at annuities. For a free analysis of your situation and what products are available please email vince@paramountlifeinsurance.com.
One popular option with life insurance is naming your favorite charity or charities as the beneficiary. This can be a powerful and leveraged strategy to leave a legacy as well as provide a windfall for organizations that you care about. You can leave a percentage of the benefit and don’t have to leave 100%. For instance, many people will leave a majority to their family like 90% and 10% to their charity or to their church. You write the small checks to the insurance company and they will write a big check to the charity upon the insured’s death.
This is not only a strategy for the wealthy, but a strategy that can be used by anyone. It is important to make sure you have all of your wills and insurance information properly structured. We suggest to our clients that they consult with a good estate planning lawyer and a CPA.
A charitable remainder trust (crt) can be used as a planning tool as well. This type of trust allows a person to donate an asset to charity and basically have that asset annuitized back to them. For example, you donate a stock portfolio worth 500,000 dollars and in return get a stream 0f income from the charity. The amount that you receive will be based upon your age and the option you choose for payment. You can choose lifetime payments or get payments that last for you and your spouse’s lifetime. Like an immediate annuity if you select the option that lasts for you and your spouse’s lifetime, the payment is slightly lower than the straight lifetime option. With the donation of the asset, life insurance can be used to replace all or part of the asset donated.
With medical malpractice claims on the rise and only limited amounts of liability coverage being offered to doctors, it is important to find other strategies to supplement the protection of assets. The average OBGYN on average gets sued 2.6 times in their career with the median claim well above 1 million dollars. Typically physicians with high exposure can pay $200,000 for 1 million dollars in coverage. This is expensive and not much leverage. Many physicians are having trouble securing any coverage and in fact in many instances going bare.
One of the biggest assets of any practice is their accounts receivable. If a judgement can’t be satisfied by the insurance in place, then the creditor will come after the receivables for sure. A strategy that has been around for 16 or 17 years that can be very effective and create supplemental retirement income is the pledging of the AR. The practice would pledge the receivables to the bank and in turn the bank would place an UCC-1 lien on the AR. The bank then becomes the first creditor of the receivables and puts them out of reach of creditors. The proceeds of the loan are placed inside a vehicle that will help the practice get a positive return on the otherwise dormant asset (the AR). The proceeds will then grow in a tax favorable vehicle such as Life insurance or an annuity. The bank will also put a lien on the life insurance or the annuity and therefore become the first creditor for that as well.
The practice would we responsible to pay simple interest on the interest only loan. This interest could be tax deductible, but it is important to consult with your tax consultant. The goal would be to get a positive return on the loan proceeds above the cost of the simple interest. It is important that you have a good agent and a good program. Not all programs are created equally.
