| Insurance as a tax shelter? |
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yellowbus
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| Insurance as a tax shelter? |
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Ran into some people that said insurance can be used as a tax shelter. Is this true? If it is, can somebody please show me how?
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Tue Oct 03, 2006 5:53 pm |
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yellowbus
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though the cash value has tax-deferred growth, the money that we pay into the policy is not tax-deductible correct?
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Tue Oct 03, 2006 9:15 pm |
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efflandt
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My mom was looking for something to spend her required IRA distributions on. Note that converting to a Roth IRA has estate advantages, but "required" distributions cannot be converted. Someone had suggested this to her:
quote:
Universal Life Insurance - G
Female / 77 / Preferred NonSmoker
Annual Premium same amount for 30 years and then no more premiums if I live that long!
$5,191.00 annually on a $160,000.00 Policy ($40,000. each of us children.)
Estimated annual tax on IRA $1,300 from IRA (or could be from Survivor money.)
In 30 years, the total paid in would be $150.545.00.
She is still in good health (after taking care of my father with Parkinson's Disease for 5 years at home) and when my brother took her to Hawaii, got around mountain trails better than a younger couple that was stumbling around. Her mother lived to her upper 80's. When my father died he had arranged for half of their money to go into a family trust (maybe so nobody could take all of her money) managed by my brother. He should know what he is doing since he retired at the age of 32.
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Wed Oct 04, 2006 1:08 am |
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BlankenshipFP
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yellowbus, another way that insurance is used in a tax-deferred manner is to borrow against the cash value buildup. You're able to pull funds out of the policy (against the death benefit), without tax, and slowly pay them back over time. This is not an endorsement of the method, just pointing out another factor.
Jim Blankenship, CFP�, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Wed Oct 04, 2006 2:24 pm |
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Airborne
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There are a couple of ways to make premiums tax deductible
One is using the Missed Fortune Strategy. If she owns a home, she could get only enough equity out of the home to fund the premium. This would serve to negate some of the tax bite from RMD.
There is another way to make premiums deductible, but it's only employed by higher net worth individuals.
I represent a great many life insurance companies, but do not use the internet as a marketing venue.
When planners say life insurance is tax deferred but not tax free, they are not giving you a complete answer -
1. Life insurance death benefit proceeds are ALWAYS income tax free unless the policy is established as a Modified Endowment Contract (MEC) or set up as a deferred compensation arrangement. Stay away from the MEC policy type.
2. Withdrawing the corpus (cost basis) & taking loans from the cash value reduce the cash value/death benefit, but they are indeed tax free, and I am not aware of 1 company that requires you to pay back the loan. You would, however, be required to maintain a small amount of insurance to keep the policy in force. How much ? That depends on the life insurance company, but it's one of the key factors I look for in recommending a life insurance policy for cash accumulation if that is important.
The most important factor in choosing a universal life policy is a "guaranteed to age 100" no lapse provision. It might be wise to look at other companies which will allow the cash value to be minimized, thereby reducing the monthly cost.
One other important factor to consider -
Unless she chooses Option B (death benefit + cash value), the beneficiaries will only receive the death beneift amount, NOT both the death benefit and cash value.
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Fri Dec 01, 2006 11:44 am |
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oldguy
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Universal Life Insurance - G
Female / 77 / Preferred NonSmoker
Annual Premium same amount for 30 years and then no more premiums if I live that long!
$5,191.00 annually on a $160,000.00 Policy ($40,000. each of us children.)
Estimated annual tax on IRA $1,300 from IRA (or could be from Survivor money.)
In 30 years, the total paid in would be $150.545.00.
Rather than insurance, consider a mutual fund or an index fund with a no-load company such as Vanguard or Fidelity. If you put $5191/year into a fund, you would expect it to grow to about $100,000 in 10 years, over $200,000 in 15 years, $400,000 in 20 years. And the fund would be tax-deferred while she is alive, tax-free when inherited.
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Fri Dec 01, 2006 5:27 pm |
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Airborne
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Rather than insurance, consider a mutual fund or an index fund with a no-load company such as Vanguard or Fidelity. If you put $5191/year into a fund, you would expect it to grow to about $100,000 in 10 years, over $200,000 in 15 years, $400,000 in 20 years. And the fund would be tax-deferred while she is alive, tax-free when inherited.
Nothing touches the estate muliplier effect of life insurance at any age
Mutual Funds outside of Qualified Retirement Plans do not offer creditor protection.
If you were an heir, which would you prefer, a POSSIBLE higher gain, or a GUARANTEED gain ? And remember - she is one year away the standard life expectancy age for a female.
Your advice would more suitable for someone who is far younger, but not for someone her age
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Sat Dec 02, 2006 5:22 pm |
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mukeshkkashyap
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I'd suggest contacting a life insurance agent for a definitive answer.
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Tue Nov 02, 2010 7:50 am |
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BobF
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I also heard about this but still don't know how to do this. I think, it's better to consult the insurance agent, and maybe not one in order to find out different points of view. If I want to be sure in something, I always look for several viewpoints and then make my own decision. It's the best way, as for me.
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Fri Nov 05, 2010 3:14 pm |
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pdx
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Wasn't aware of it. Good to know.
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Wed Nov 10, 2010 1:14 am |
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