Life Insurance Blog

in cash value life insurance

When you reach retirement have you thought about what tax bracket you will be in?  Will you be in the same bracket that you are currently in?  Will tax brackets stay the same or will they go up?

The bottom line is nobody is 100 percent sure about what the answers will be to these questions.  We can’t control what happens with taxes as they are controlled by the government.  What we try and get our clients to focus on is putting their money in places that will be tax-favorable

Where can you put your money that is tax favorable?  The two main places that you can put your money that can avoid any taxation is permanent life insurance and roth IRA’s.   Roth IRA’s are great tools, but they are highly limiting.  If you make too much money, you can’t participate.   The government dictates how and when you tap into the money.   Don’t get me wrong as it is great if you can take advantage of it.  The other tax-advantaged vehicle is permanent life insurance.   You can build up the cash value inside the policy on tax deferred basis and then tap into it tax-free.  You tap into it tax-free by withdrawing up to your cost basis first.  Once you have hit cost basis you get a stream of income through preferred policy loans.

One of the main places people put money is in tax-deferred vehicles like 401k’s.  While the tax deferral makes the money compound quicker, deferred compound taxes have to be paid on the backend.  The more vehicles that you withdraw from at retirement that you have to pay income tax on, will potentially place you in a higher tax bracket.

 

March 26th, 2010
in Life Insurance

Suzie Orman is a dangerous person to listen to.   She is a jack of all trades and a master of none.   Her blanket statements about life insurance are ignorant and without grounds.    She constantly says that permanent insurance is a rip off and you should always buy term life.  Why is that Suzie?  Do you understand the tax advantage of life insurance with its buildup and death benefit?

While in many cases term is the appropriate direction for people to take, it is not always the best route.   If you can afford to buy some permanent life insurance I would certainly suggest you do.   That is the only type of insurance that is guaranteed to be in force when you pass away (provided you pay the premium).   The life insurance companies love when you buy term as they pay death claims on about 2 percent of the policies.  In other words, most people pay for life insurance for years and their family never gets any benefit.

On top of the permanent nature of this type of insurance, you can accumulate money on a tax free basis in the cash value.   If accessed the proper way, you can avoid ever paying income tax on any of the build up and can supplement you retirement tax-free.  Also, the cash value can be borrowed against during the life of the policy to buy things, invest, etc.   Suzie Orman is obsessed with 401k plans and loves the tax-deferral, but tax-deferral simply means you will pay compound tax later.   In addition the government controls the rules on these types of plans, while they don’t on life insurance.   A good example is you can’t access until 59 and a half.  What if the government adjusts the age to 62 and you are simply at their mercy.

 

January 18th, 2010
in Life Insurance

The AARP has partnered with New York Life Insurance Company to create the “AARP Life Insurance Program”.   Basically it is a program designed for members of AARP to get either permanent life insurance, term life insurance, or guaranteed issue life insurance.  It appears as if the permanent insurance coverage is whole life insurance and it can be attained from age 50-80.   The term life insurance requires no medical exam and only three medical questions to be approved for coverage and ages 50-74 can apply for this coverage.  The guaranteed issue life insurance is exactly as it sounds.   There is no medical exam or medical questions to be answered and it is for members 50-80.  The guarantee issue pays limited benefits for the first two years except for death by an accident.

AARP has done well with this program as it has partnered with one of the premium life insurance companies with huge name brand recognition.   While New York  Life and AARP are great brand names, it is important to know that you often overpay for brand names.    It may be that the rate for your product through the program can be beat in the private market.    I suggest to clients that are interested in this program to let us run independent quotes for comparison.   I compare the AARP Life Insurance Program to how you might overpay for a pair of expensive brand name jeans.  You can get great jeans that don’t have the label of the fancy pair, but that serve you perfectly well.  Just make sure you check out your options.

 

November 19th, 2009
in Life Insurance

Buying term life insurance is like renting your life insurance.  It is very  similar to getting a lease that you pay a flat rate for a period of time.    You could have a 1 year lease or a 5 year lease.   Life insurance companies have created different length level terms.   The most popular are 10 year term, 15 year term, 20 year term, and 30 year term.

This is the most cost effective way to get coverage for a period of time.   At the end of the level term period, the rate goes up very aggressively, similar to rent.   Most term policyholders will drop their term when the rate goes up on the policy.   Often times we will recommend some type of blend of term and permanent life insurance.   When the level term period is over and the policy is dropped, then the client still has the permanent part of their insurance still in place.  This approach can be a very good one as the term can cover much of the exposure during prime working years and the permanent can function as a smaller amount that will be in force after the term disappears.    Many clients say, “I won’t need insurance at that point when the term ends”, but few know how they will feel at that point.  Having some form of permanent at least gives you that option.  If for some reason you truly don’t want the permanent plan at the end of the term, you can just cash in the cash value and walk away with that money.     Often times, that can be as much or more than you put into the policy.    If you want to get life insurance, there are a lot of companies competing for your business right now, so its a great time to apply.

 
in Life Insurance

Permanent life insurance can be a great supplemental retirement tool to tap into.  If you set up the policy the correct way and take advantage of the tax-free benefits, you can see real value.

Many people don’t understand permanent life insurance and that includes many of the agents, CPA’s, Attorney’s, talk show hosts (you know who you are) etc.   If you understand how the tool works, I think you will really see the value.    The way to set up the life insurance policy to use it as a supplemental retirement, starts with the funding.  You should try and fund the policy, just under the MEC level.   MEC stands for Modified Endowment Contract and that is when the cash value loses its tax free status.   In other words, when you hit the MEC level you have gone to far.    The idea is to put as much money in the policy as possible and get the tax advantages available under IRS guidelines.

In order to take advantage of the benefits of  a life policy as a tax free supplemental retirement tool, you must know how to access the money.  You should  start by taking out the money as withdrawals up to your cost basis.  Since it is your contributions to the policy, there is no tax up to the cost basis.  When you reach the cost basis, then you shift to taking preferred policy loans.   If you do it this way, you can avoid paying income taxes on the money.  Whatever money you take out as a withdrawal or as a loan, is simply deducted from the face amount (death benefit) of the policy.  The only difference is you can’t put the withdrawal money back into the policy if you want, but you can on a loan.

 
in Life Insurance

I talk to clients frequently that are pondering whether to buy life insurance of if they want to self insure. I have always believed in using the leverage of the the insurance policy and letting the insurance company pay the death benefit. If you self insure, you have to have dollar for dollar saved for you to leave the benefit to your beneficiaries.

We don’t work our whole lives to get into retirement to hord the money and not feel like we can spend it. If you are self insuring, you are more apt to feel like you need to conserve the assets you have accumulated. In other words, you worked your whole life to have an enjoyable retirement and now you are cutting back. If you have life insurance in place it can serve as a permission slip to spend some of your assets. For example, if you have a 1 million dollar permanent life insurance policy, you will have a death benefit replace 1 million dollars of assets you might spend in retirement. I am not saying to get crazy with your assets in retirement and spend all of them, but the insurance certainly provides for a nice cushion. The leverage you get from the insurance is not dollar for dollar like a hard asset that you accumulate.

 

June 16th, 2009
in Life Insurance

I recently got a comment from one of our blog entries about not explaining how to tap the cash value tax free.  I wanted to devote this entry to explaining how to use this valuable asset with out paying a penny of tax.  The key to the cash value is to building it by putting  money into it for a period of time.  Once you have built it up a little bit, then you can start pulling it out to buy whatever you want during your lifetime.  You pull it out as a preferred policy loan and all you have to do is bay the interest to the insurance company.  Typically the interest rate is like 6-7%.  The key to growing the cash value over time is to pay back the loan and pay it back above the insurance loan cost.  I like to pay back at about 10% and amortize over 4 or 5 years.  This money just goes back into your account and the spread above the insurance companies interest goes directly into your policy to turbocharge it.

In regards to tapping the money from the permanent life insurance policy for tax-free retirement, you should use this strategy.  Start by withdrawing from the policy up to your cost basis for initial income.  Since it is cost basis it is not taxable.  Once you withdraw the full cost basis, you start taking money out as preferred policy loans.    The policy loans come out of the policy tax-free and the only cost is the interest on the loan.

 
in Life Insurance

When setting up a permanent life insurance product as a supplemental retirement strategy, it is important to know how to use the cash value.  The cash value grows tax deferred and will not be taxed as long as the policy is in force.  If you were to cancel your policy and take the cash value out, you would have to pay taxes on the gain above the cost basis.

When you want to use life insurance as a supplemental retirement vehicle, you want to make sure your overfund it.  When I say overfund it, I mean to put money in above the premium amount.  There is a ceiling that has been put in by the IRS called the MEC limit.  The MEC stands for modified endowment contract and once it goes over the MEC level it no longer has the tax free treatment.  The government has put a limit on the amount you can shove into a policy because of the favorable tax treatment of life insurance.  Make sure to fund your policy under the MEC limit to keep the favorable tax treatment.

Once you get to a point where you want to start taking distributions from your policy, you want to start to withdraw the money from the cash value up to your cost basis.  Since it is money you contributed, there is no tax on that money.  Once you hit the cost basis, you should start taking policy loans as income and no tax is owed on this either.  It is to be noted, that whatever money is taken out of the policy, is subtracted from the death benefit.  A withdrawal can’t be paid back, but the loan can be  re-paid.  It is very beneficial to re-pay the loan as you are paying yourself back and a small interest charge from the insurance company.

 
in Life Insurance

Using the cash value on your permanent life insurance policy for emergencies, opportunities, and buying big tickets can be a great thing if done correctly.   Often, clients will  borrow from their cash value and say, “do we have to pay this back?”?   The answer is no you don’t have to pay it back, but it is to your detriment to not pay it back.    Most life insurance companies are charging an interest rate in the 5-7 percent range on loans to the cash values.   As a loaner, you always have first dibs on the money in the cash value.   Where does much of the money in the marketplace come from for loans?  The answer is life insurance companies.

As a policyholder and the owner of the contract, no borrower can ever stand ahead of you.   On top of that, the money in the cash value is highly liquid and easy to access.  You don’t have to get any approval or qualify to get the money as a loan if the money is in the policy.    The key is to pay your policy back and at a higher interest rate than you borrowed the money.   If you do this, you will restore the value of the cash value and turbo charge the policy.  It will all be to your benefit as you get the interest into your policy above the spread.  An example would be borrowing at 6 percent and paying yourself back at 10 percent.   Your repayment goes back to paying of the balance of the loan and growing and restoring the policy.  This will allow you to continue to go back to your own “bank” policy and keep re-using it for multiple purposes.

 
in Life Insurance

Had a funny discussion with a client who just wanted a realistic sense of what their new life insurance policy would cost.  They had the unfortunate experience of getting a very optimistic quote from an agent and applied and the policy ended up costing twice as much.  This is why it is important to make sure the quote is realistic and has all factors considered.  A lot of quotes given will not factor in underwriting factors such as health, medication, dangerous avocations, other risks, etc.

We try to make sure we understand all of the circumstances in play before we give any pricing information.  On top of that, we shop many life insurance companies for our clients and some underwrite more favorably for different circumstances.   With that being said, it is impossible to know 100 percent what the actual premium will be until underwriting is done.  Many clients have not realized they had a certain medical condition and then found they had it once they did the medical exam.

All term life insurance and permanent insurance quotes are all pending underwriting.  Make sure when you get the quote that everything is factored in, or you might get a big and disappointing surprise.

 
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