This blog post is the final post of a 7 part series on life insurance. You can find the first post here: http://www.your-insurance-experts.com/why-get-life-insurance-part-1/

The Real Power of Life Insurance Comes During Distribution

Now that Justin is ready to access the cash value in his policy, there are a number of options he can exercise. After maximum-funding a policy, the proper distribution of cash is the most important strategy. Since Justin is still living and his grown children have no need for life insurance, he could choose to surrender his policy. That would not be a wise choice because without an in-force life insurance contract, all of the gains in his cash value would be subject to taxes. In fact, that choice would have made this option worse than a tax-qualified plan like an IRA because Justin would have at least received the benefit of tax deferral.

Life insurance companies devised an ingenious provision that allows Justin to take out a loan based on the cash value in his policy. It is important to note that Justin will not borrow his own money. He will use the cash value in his policy as collateral. There is nothing particularly clever about taking out a loan and using something of value as collateral. What is inspiring to Justin is that he can take out his loan with no or little interest, and he will never have to pay the loan back.

Earlier, we stated that Justin was 35 and put in around $1,400 each month until he was 70, which equals $588,000 of cash value out of his pocket totaling around $2,000,000 of accumulated cash value in addition to the $500,000 he could pass to his heirs. Let’s assume that Justin is going to live on $100,000 a year during retirement. Justin could distribute or spend down his cash value in two phases.

Phase one – Justin could take a withdrawal of the money he put into his policy. Since he needs $100,000 a year to live on, it would take close to six years to withdraw his $588,000. After Justin has withdrawn the $588,000, there is a possibility that the $1,400,000 (the estimated result after you subtract $588,000 from $2,000,000) of growth could experience even more growth during the five years depending on market conditions.

Phase two – After Justin finishes withdrawing his out-of-pocket money, he could then take out a loan on the roughly $1,400,000 of cash value. The $100,000 a year would still come to Justin tax-free. The three most common purchases use a loan for are cars, homes, and student loans. We receive money to pay for these items, but we don’t owe any taxes on them, right? Instead, we pay interest to the lending institution. Similarly, the insurance company places Justin’s $100,000 into a separate account at a certain interest rate. What’s ingenious is that this $100,000 will also earn an interest rate during the year. If the interest rate is 5 percent and the $100,000 earns 4% in the separate account, then Justin’s net interest rate is only 1%. If the $100,000 earns 5% then Justin has a wash loan and doesn’t owe anything.

A logical question is, “This sounds too good to be true. Why doesn’t Justin have to pay back the loan?” Justin’s cash value is $2,000,000 and his death benefit is $500,000. For the sake of simplicity, let’s conservatively assume that the cash value doesn’t earn interest and the interest rate in the loan (say 5%) and the $100,000 in the separate account (5%) create a wash loan. If Justin lived until 86, (16 years in retirement at $100,000 a year is $1,600,000) he would have a $500,000 death benefit to pass to his heirs. At that time, the insurance company would deduct $1,600,000 from the $2,000,000 and his heirs would receive what was left over, which in this example, would be $400,000. Therefore, the total tax-free death benefit Justin’s heirs would receive is $900,000.

To summarize, Justin maximizes the amount he puts into his cash value life insurance policy with after tax money. His cash value grows over a long period of time. During his retirement years, he withdraws $100,000 a year tax-free until that money is gone. After he withdraws his money, he will then take a loan of $100,000 a year tax-free for the rest of his life. When Justin passes away, the death benefit and the remaining cash value will go to his beneficiaries without any tax liability. In other words, for delaying gratification for 35 years and contributing $588,000 in this example, Justin lived retirement on $1.6 million tax-free and still had almost a million tax-free dollars to pass to his heirs. I would say that it was good that Justin and his insurance agent met.

Now that you have the information, do not become a victim of procrastination. Contact an insurance expert in your local area who can sit down and discuss your individual situation (if you reside in the Southern California area, I will be happy to help you — my contact details are below). Whether you decide to make this a part of your retirement portfolio or not, take action now by making an informed decision. Your retirement future and the financial well-being of your family could depend on the steps you take today.

This blog post is a continuation of a 7 part series on life insurance. You can find the first post here: http://www.your-insurance-experts.com/why-get-life-insurance-part-1/

Using Life Insurance for Favorable Tax Treatment

If you had a dollar that doubled every year (100 percent gain) for twenty years, you would have $1,048,576, which would be fantastic. However, if that money was taxed each year at 30% you would have a meager $40,642. I am in agreement that we should all pay our fair share of taxes, but I also believe that we should make ourselves aware of ways to redirect our hard-earned money that favors us. Permanent cash value life insurance is a way to place large sums of cash, and if structured properly, receive the growth of that cash free of income taxes (based on current tax laws as of the time of this writing).

Perhaps you are wondering why you did not know about this, and how is it possible to have an increase of cash value without having to pay taxes. Firstly, it is important to understand that many insurance professionals only know insurance and many financial professionals only know finance. Utilizing cash value as an investment strategy within a life insurance policy combines two different professional industries in one product. As time passes, more professionals are starting to see the value of understanding both industries, but this process is still in the infancy stages.

The money you place in cash value life insurance has already been taxed by the time it enters your bank account. Because the money is a part of a life insurance policy, there is no tax liability on the growth as long as you stay within the funding limitations from the government. For example, Justin needs $500,000 of coverage. Depending upon policy variations from one insurance company to another, he could put around $1,400/mo. into his policy. At age 70, he could have around $2,000,000 even after the fees and cost of insurance. Additionally, he still has $500,000 to pass to his heirs. The best part of the $2,000,000 is that he has access to that money tax free!

You may have noticed the many disclaimers about having a properly structured cash value life insurance policy. To illustrate this point, a dragster racing car requires a special type of fuel and a properly structured racing course to get the maximum use out of that type of high performing vehicle. A specific combination of methanol and alcohol are used as fuel to help these cars to reach speeds in excess of 300 mph in less than 5 seconds. If I decided to fuel a dragster with unleaded 87 fuel, and drive it around the neighborhood, could I possibly get the maximum use from this vehicle? Absolutely not. Similarly, cash is the fuel and time is the course for this type of funding vehicle. Along these lines, someone with a cash value life insurance policy should put as much cash as the policy will allow for at least 20 years to accomplish the absolute best benefit. I would imagine that there is no exhilaration like going from 0 to 100 mph in less than a second. Likewise, having access to over a million tax-free dollars is a thrill like no other.

In the next blog post I will discuss how the Real Power in Cash Value Life Insurance comes during Distribution…

This blog post is a continuation of a 7 part series on life insurance. You can find the first post here: http://www.your-insurance-experts.com/why-get-life-insurance-part-1/

Life Insurance Sniper Two – Taxation

Teachers, fire fighters, police officers, and the roads they drive on are necessary to all of us if we want a learned citizenry and safe communities to raise our children. Our tax dollars, when used properly, significantly makes our lives more pleasant. However, history has shown that needs have a tendency to transform into wants as economies become more industrialized. If you feed a dog steak and chicken, then try to feed it dry dog food afterward, your best friend will become your worst nightmare. Similarly, we have become accustomed to a certain standard of living that is well beyond our means. If politicians even talk about taking steps to take our steak and chicken away, they know that their career in politics will end abruptly. As a result, they tend to do what is popular as opposed to what is best.

Those of us who complain about high taxes in America and claim that this country is headed toward socialism needs a brief lesson on the history of the marginal tax rates. As people earn more, they are taxed at a higher rate. Here is a snapshot of the marginal tax rate in America:

• 1918 (During WWI) – 77 percent
• 1939 (During Great Depression) – 75 percent
• 1944 (During WWII) – 94 percent
• 1952 (Baby Boom Expansion) – 92 percent

It’s important to note that a person who made $200,000 in 1944 did not pay $188,000 in taxes. Remember, we are talking about “marginal” tax rates. The marginal tax rate is the top rate of income tax charged to individuals on their last dollar of earnings. So in 1952, for example, when the top marginal tax rate was 92 percent, that was the tax rate owed on a person’s income over $300,000. That person would owe 20 percent on the first $2,000 of income; 21 percent on the next $2,000 in income; 24 percent on the next $2,000 and graduated up to the highest rate. A person making $400,000 in 1944 would owe $191,411 (47.9%) of their income in federal taxes.

One cannot argue that war creates jobs for the defense industry and military personnel, but it also places an enormous financial burden on tax payers. During the first two world wars, the United States government ran an aggressive campaign to get private investors to invest in government bonds since they knew taxes alone could not finance the war. The following is a breakdown of the cost of the three of the most expensive wars in US history:

• WWI – $32 billion – (roughly $471.8 billion in today’s dollars)
• WWII – $304 billion (roughly $3 Trillion in today’s dollars)
• Iraq, Pakistan, Afghanistan $3.2 Trillion

During each WWI and WWII, the marginal tax rate increased significantly to help finance them. Although the wars in Iraq, Pakistan, and Afghanistan were very expensive, the marginal tax rate did not increase to cover the increased debt. As we examine the marginal tax rate and its connection to war, it is evident that the highest marginal tax rates in history occurred as a result of war. Why did the marginal tax rate stay relatively level during these wars?

I would like the marginal tax rate to stay low because that means less money out of my pocket. That said, I would also like world peace and harmony among all nations so there is no need for war, but unfortunately we cannot have everything we want. As the nation’s debt keeps getting pushed further and further into the future, it keeps growing like a cancer. We are going to be forced to have surgery, which will hurt really bad and it will set us back for a while. The only other alternative is to let the cancer continue to grow. If that is in fact, the case, this malignant financial cancer will eventually take over and then we will not be able to do anything about it.

Before we discuss a solution and of course an action, we must identify life insurance third and fourth snipers: Instant Gratification and Procrastination.