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.

in annuities

Tax-deferred and immediate annuities have been around for many years and are extremely flexible products.     Tax-deferred annuities are very popular for the tax deferral and the compound growth.   They function similiar to an IRA as they provide the same compounding factor.   There are many variations of these types of annuities, including fixed deferred annuities, indexed deferred annuities, and variable deferred annuties.   Each annuity has a death benefit that will pass along to a beneficiary of your choice and should avoid probate.   Deferred annuities will also have a surrender charge and the length will vary per product.   For example, it could be 3 years or 10 years and typically it is a decreasing surrender amount.    The surrender charge is similar to a back end sales charge on mutual funds.   This is an important factor when looking at an annuity, to make sure it doesn’t lock you up longer than you can afford.  When you reach 59 and a half you can use up to 10% of the annuity with no penalty.   A fixed annuity has a set interest rate that is locked in for a period of time.  It is like a CD, but with tax deferral.   An indexed annuity is an annuity that its gains are determined by some type of index like the S&P.   You have a maximum gain on the upside, but you can’t typically get credited less than 0 percent.   A variable annuity, is based in the market and has funds within the annuity that you choose from.  It provides more upside, but has market risk and is subject to its volatility.

Immediate annuities are exactly what they sound like.   An annuitant deposits money with an insurance company and the company pays them an immediate stream of money.   The payments can come in monthly, quarterly, or on an annual basis.   The payments can last for various lengths, depending on the annuitants needs.  It can be for a period certain, like 10 years, or it can be for lifetime.   An immediate annuity also has the option to provide a survivor benefit for your spouse.  If you choose this option it guarantees payments will continue to your spouse if you were to pass away before payments were completed.  This option can be appealing, but the payment to the annuitant will be reduced somewhat for adding this option.


March 29th, 2010
in annuity,Life Insurance

Life insurance and annuities have many different types and applications.    If used properly and in the right context they can very valuable and used to your tax advantage.   Often times, they may be used in inappropriate places and then they don’t make as much sense.  For example, if a client needs to have access to all their money in 5 years, it doesn’t make sense to buy a 10 year surrender annuity product.   If the client can doesn’t need the money or to draw on it for 10 years, there are some terrific deferred annuities that they can purchase.

Life insurance and annuities are both considered insurance products.   They both have tax advantaged treatment and have a death benefit.   Life insurance cash value (if accessed correctly) and death benefits are both tax-free.   Both fixed, indexed, and variable annuities are all tax-deferred.  You won’t pay any taxes until you start pulling money out of the annuity.     Life insurance is different in the sense that it provides leverage for the client.  A premium is paid and creates a huge leverage with the death benefit.   For example, a client pays a monthly premium of $50, and the insurance company is on the hook to pay a $750,000 death benefit.   On the other hand an annuity pays out what is in it to the beneficiary.   For example, if your balance is $200,000 in an annuity, your beneficiary will get the $200,000.

Many annuities  offer bonuses now to incentivize clients to put their money in one of their products.  Some carriers offer as much as a 10 percent bonus on money put in to the annuity.   We work with a lot of clients who use the tax advantage of life insurance’s cash value to provide a tax-free stream of money at retirement.


July 21st, 2009
in annuity

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


June 17th, 2009
in Life Insurance

There are three buckets of money on people’s financial models and they are taxable, tax deferred, and tax-free.  Obviously, the goal would be to have as much money in the tax-free area as possible.   With tax favorable treatment, the government will put limitations on how much you can put int he tax deferred and tax free buckets.  There is no limitation on the taxable bucket as they want to collect as much current tax as possible.

Most people feel that tax deferred is the greatest thing in the world, but it is not all good.  When something is tax-deferred it means that the tax is deferred to be paid later.  Once the 401k or pension plan compounds for many years, there is also a very large tax bill.  In other words, if you have 1 million dollars your net will be about 30 to 40% less after taxes.  In bucket number 3 which is tax-free, you have limitations in regards to how much you can put in.   The two main tax-free items are permanent life insurance and Roth IRA’s.   Both of them are limited in terms of how much money can be put in on a yearly basis.  With life insurance, each policy has a MEC limit that is the maximum that can be put into the policy and remain tax-free.  If you put money above the MEC limit in the policy then you will be taxed on the gains.  A Roth allows you to put only so much money in per year and then if you earn too much you can’t start one.  If you can learn how to use the cash value of the life insurance through withdrawals up to cost basis and through preferred policy loans, you can avoid paying taxes on the gains.


March 25th, 2009
in Life Insurance

When clients think about life insurance and think of it as straight cost, I certainly understand.  We are always bombarded with different types of insurance that we need to buy in our life and people feel “insurance poor”.   Clients are insuring their car, house, health, and even their blackberry’s now too.   If you don’t use those insurances you never see any benefit.

The truth is with whole life or universal life, is that it is beneficial to put as much money as you possibly can in them.   The IRS has put a ceiling on how much money you can put in a policy on an annual basis called the MEC level.   MEC stands for modified endowment contract and once a policy becomes a MEC it is taxed differently.   A MEC makes all of the growth in the policy be taxable.  If the client keeps the contract within the limits then the cash value will grow tax deferred.   The IRS put a limit on it for a reason.

Most clients struggle with the idea of paying more than the minimum amount.  While the minimum amount will generally suffice in keeping the policy going, it could be so much better.  How many financial tools do you have in your portfolio that increase in value everytime you put money in?  Not many right?  In fact, the more money you put in the better it will be.

This can serve as a large paradigm shift for a lot of folks.   If you can see more than cost, you may be able to see the beautiful possibilities.

in Life Insurance

The tax treatment of life insurance is important to understand as you plan for your future.

The death benefit of a life insurance policy is income tax-free to the beneficiaries, but can be subject to estate taxes if the insured estate is large enough.  In 2009, the exemption is 3.5 million dollars that you can pass to heirs with no estate taxes.  If you have an estate that has a value above the exemption level, you can be subject to paying the estate tax on the amount above.  While the exemption stands at 3.5 million in 2009, it goes away for 1 year in 2010 and returns at the 1 million dollar level in 2011.  The tax rate in 2009 can be up to 45% and in 2011 it can be up to 55%.    The way they have set it up is pretty strange and how it is set up could completely change in the near future.  One of the ways people avoid paying the estate tax on their life insurance is to keep it outside of the estate in an ILIT (irrevocable life insurance trust).   When that money comes in to the family, they can use it to pay the immediate estate tax bill.  Life insurance death benefits are sometimes taxable in some business scenarios, but not usually with individuals.

The cash value of life insurance grows tax-deferred and can be accessed tax free if used correctly.  There is a limit on how much money can be stuffed inside a permanent life insurance because of its tax preferred status.  If the amount deposited exceeds the policy limit than the policy becomes a MEC (modified endowment contract).  Under IRS guidelines, the policy then becomes income taxable.   If the policy is surrendered and the policy is cashed out, then the growth in the cash value would be subject to taxation.  The correct way to access  the money is through withdrawals up to the cost basis and then preferred policy loans.

The premiums are typically are not deductible, except in some business applications.

Life Insurance Info
News Letter
All Content Copyright � 2008