Life Insurance Blog


April 16th, 2010
in Life Insurance Quotes

When you are getting a whole life insurance quote, it is important to factor in several things.   Are you buying enough death benefit, or should you supplement the whole life with a term rider?  Should you overfund the policy above the premium to take advantage of the tax favorable nature of the cash value?  If so, how much should you overfund the policy?  Do you have disability waiver of premium included in the quote?  Is it a good company with a long track record of good dividends.

These are important questions that should be asked as you get a whole life quote.  Whole life is not a commodity like term insurance and it is important to pick a good company and to structure it the correct way.   An inexpensive term rider can be included in the whole life plan, that will increase the death benefit.   This rider can not only help you meet a higher exposure level, but also give you more term that can be converted to whole life later also.   This is a good option to have once you understand the value of whole life.    In regards to overfunding the policy, I would highly suggest it.   The more you overfund the policy, the quicker it will grow.  The money the is contributed to the cash value will grow on a tax-deferred basis and can be accessed on a tax-free basis if done correctly.   The IRS has put a limit on how much you can contribute on each plan for a reason.   They don’t seem to be very excited about plans that can be accessed tax free.  I would suggest you take advantage of this benefit as much as possible.

The policy should have disability waiver of premium on it.   This will waive your premium payment in case of a disability.  If you can qualify for this rider, it is really valuable.   Also, it is critical that you select a good mutual company with a great track record of paying dividends.

 
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.

 

April 1st, 2010
in Life Insurance

Life insurance has many uses personally and for business.   Personally it can be used as protection against premature death, for tax-free accumulation for retirement, for loans for buying items such as cars, charitable giving to your favorite charity, and many others.   From a business standpoint, life insurance is used to secure loans, set up buy-sell arrangements, key-man protection, deferred compensation, and loan money to the business for expansion, etc.

It is important to understand how to use life insurance, so you can maximimize the value to you, your family and your business.   The most common use is to buy a term policy that will cover you in the event of your untimely death.   This policy can be used to provide income replacement to your family or buy your partner out in a buy-sell arrangement.   Term is often used for court ordered life insurance decrees, key-man insurance and to function as a loan guarantee.   When you start using cash-value products like whole life and universal life, there are even more creative uses.   The internal build up inside of the policy can be used as an incredible supplemental piece to your retirement.   The money grows on a tax deferred basis, and can be accessed on a tax-free basis if done correctly.   The internal buildup is also a great fund to draw upon as you go to borrow against to buy new cars, invest elsewhere, etc.   Cash value life insurance is also commonly used as the mechanism for deferred compensation for companies with its leverage and tax-advantage.   There are many other uses that I am not mentioning, but this shows the tremendous flexibility of these products.

 

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.

 

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.

 
in Life Insurance

One of the longest standing arguments in the insurance business is buy term and invest the difference or buy cash value life insurance.

The argument of buying term and investing the difference is based on the premise of getting cheap term and taking the extra money (you would have spent on whole life) and investing it in the market.  The thought is that you can make a higher return with the money in the market than you can inside a life insurance contract.

While the true accumulation value of an investment account can be higher than the accumulation value of the cash value, other factors must be considered.   For example, what if your investment account performs poorly and you actually lose money.   A life insurance policy has certain guarantees built into it that guarantees that you will not lose money no matter what.

Also, a big consideration needs to be from a tax standpoint.  What is a modified endowment contract?  Where will you invest?  What is your tax bracket?  What will the tax bracket be when you want to access the money?  Would it help you to have money that you can access tax-free from the life insurance?  Is the death benefit being passed tax-free going to be a benefit to your estate and family.

Term is a great way to cover your liability at a very reasonable price.  The problem with term is that it only lasts for a period and most people outlive the term and their family never sees a benefit.  Often times a combined approach can be a good one.   In other words, having a majority of the coverage as term and part being whole life or universal life.

 
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.

 

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.

 

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

Life insurance cash value (whole life or universal life) can be a great supplement to your retirement income. To live a healthy financial life it makes sense to diversify and build value in different vehicles. Some of the great benefits of using life insurance to supplement your retirement is that if done correctly you can withdraw the money tax free. Qualified plans are great, but they are fully taxable at retirement as you have never paid tax on them. They also have restrictions about distributions and penalties for early withdrawals. I recommend putting the amount in your qualified plan that gets you the full match. After you hit the match amount, I suggest you may want to put the money above that in a separate vehicle. Compound interest is great, but compound tax is also an issue to consider.

The way to use life insurance to supplement your retirement is to take the money out as a withdrawal up until you hit your cost basis. Withdrawing money to your cost basis, should not be taxable. Once you hit the cost basis, you should start taking the withdrawals as policy loans. If you do it this way you should be able to access the money built up tax-free. The earlier you start the policy the better as a significant amount of money can be accumulated over time. I usually suggest to my clients that they overfund the policy. In other words add cash to the policy each month above and beyond the premium level. On top of the great supplemental income and tax benefits, you should have a nice death benefit to pass along to the next generation.

 
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