Pay To The Max – Minimize The Tax!

I know what you are thinking…why would I EVER want to pay the maximum amount on anything-especially life insurance!

Well this isn’t your fathers life insurance I’m talking about here.  I’m talking about a SPECIAL TYPE of investment grade permanent cash-value life insurance that was even mentioned on CNBC back in 2008 as a “ safe money” alternative to the stock market when everyone was losing their shirt.

Here is a simple way I explain this to my clients:  On a blank sheet of paper, I draw 2 horizontal lines, 1 at the top, which I label “Maximum Premium,” & 1 at the bottom of the page, which I label “Minimum Premium.”

I then ask my client, “who do you think determines the amount of the minimum premium?”

The answer:  ”The insurance carrier.”  Their actuaries determine the minimum amount of premium necessary to keep an amount of insurance in force to an age of 100 or 120.

Then I ask, “who do you think determines the maximum premium you’re able to invest into a life insurance policy?”

The answer:  “The U.S.  government.”  I ask, why do you think the U.S. government would be remotely interested in the amount of premium you’re able to invest in your personal (private) life insurance policy as it relates to taxes?  Because the government knows that life insurance is a good, tax-advantaged vehicle, which is why they limit the amount of premium you’re able to deposit into it.”

I then begin to explain the benefits they will receive when they deposit premium above the minimum premium, up to the maximum, modified endowment contract (MEC) limits, such as:

Tax Deferral: 1 of the chief advantages using permanent whole life insurance is the tax-deferred growth of cash values.  With business life insurance, policy cash values can be listed as assets on the company balance sheet & can be accessed for use by the company at any time.  The tax deferral of cash growth makes life insurance an  ideal vehicle for funding executive compensation plans, creating supplemental (tax free) retirement income for business owners or funding a corporate stock redemption plan.

Tax Free Distributions:  Another tax advantage found in whole life or universal life insurance policies is that cash values may be accessed by the company tax free.  If structured properly, policy withdrawals & loans can be used to essentially eliminate taxes on cash received from a life insurance policy.

Competitive Internal Rate of Return:  These policies can be an appropriate, even an excellent investment because of the lack of federal taxation on the internal earnings of the policies.  And if they are held until death, no tax is EVER paid on these earnings.

Guarantees:  Insurance carriers have come up with a solution to guarantee the insurance benefit on a universal life insurance policy even if the cash in the policy goes to zero.  This is known as a “secondary guarantee.”  You agree to pay a premium that is often less than a whole life insurance premium, & if you keep your payments up, the policy’s death benefit is now guaranteed.

Creditor Protection:  The simplest form of asset protection planning involves the ownership of “exempt” property that state law considers unreachable by creditors.  Certain property, such as a primary residence, may be entirely exempt, while the exemption for other property may be limited to a certain dollar amount.  Life insurance benefits may also be exempt property in your state.

Unlimited Contributions:  The IRS allows contributions in life insurance up to the MEC limits.

Collateral:  It is very common to designate a policy’s death benefit or its cash surrender value to a creditor as security for a loan.  If the loan is not repaid, the creditor receives the policy proceeds up to the balance of the outstanding loan, & the beneficiary receives the remainder.  Because life insurance is freely assignable, it is readily acceptable to lending institutions as security.

Freedom from Estate Tax:  Life insurance death benefits are income tax free.

Liquidity, use & control:  The cash values & death benefits can be used in a number of ways, including:

Funeral expenses-Federal estate taxes, which are due within nine months of death-State estate taxes, which are often also due witin nine months of death-Federal personal (form 1040) & estate (form 1041) income taxes (including taxes on pension distributions)-Probate & administrative costs (including court filing fees & fees paid to the executor of the estate & the attorney who administers probate)-Payment of your debts-Maintenance & welfare of family-Payment of specific cash bequests-Funds to continue operation of a family business, meet payroll & inventory costs, & recruit replacement personnel while new management is learning the business.

Disability Protection:  The policy’s cash values can be accessed for short term income needs when the policyholder is disabled, & if waiver of premium is added, no premiums are due when 1 is disabled.

So, do you now see why the government is interested in limiting the amount of premium you can deposit into this SPECIAL TYPE of investment grade permanent cash-value life insurance contract?

Life insurance premiums up to the MEC limits provide all these benefits with the exception of deductible premiums, but there are ways for us to help accomplish that as well.

The accumulation aspect of an insurance policy can have unique benefits.  The closer you get to the MEC limit, the more focus is on the living benefits:  tax-deferred growth along with TAX-FREE distributions, competitive IRR, guarantees & creditor protection.

So, when I am speaking with someone about having a tax-free retirement this is one of the  pieces of the puzzle.  I am speaking about a policy that is just below the MEC limit that offers you the benefits that you are looking for in a place to park your money.  It’s a great place to put money that grows tax-deferred & can be accessed TAX-FREE while  maintaining access to your money.

In closing, the government knows that life insurance is a good tax-advantaged vehicle, which is why they limit the premium.

Call my office toll-free @ 1.866.718.4386 if you would like for me to reveal to you my very own TAX-FREE retirement plan & how I can help you achieve a TAX-FREE retirement as well!