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How Do You Work Out Your Tax And Insurance?

How does the non-qualified permanent life insurance policy work as a tax-sheltered investment vehicle?

  • My private wealth manager was pitching it to me. I am wondering: Why is it tax sheltered? Because it is a life insurance policy? How do they juice their unlevered returns like that and still maintain a low volatility profile? Most importantly, is it a good idea to have one? And who are the best providers?

  • Answer:

    With all due respect to Doug, a fee-only planner isn't qualified to give you an objective opinion on any product that pays a commission, as they don't work with them nor can they offer them to clients.  Life insurance pays a commission.  Don't be afraid to ask how and how much an agent gets paid.  Fee-only planners are able to give you opinions on products that they work with.  Have one develop a solution to try meet the same objective here - which is to provide tax-deferred asset growth, possible asset protection (depending on where you live), tax-free income during life, self-completion of the plan (i.e. protect your family) in the event of an untimely death (it does happen), and tax-free wealth transfer to your family. You are looking for a non-qualified retirement plan funded with life insurance.  Life insurance inside a qualified plan (profit sharing or defined benefit) is a whole different strategy.  It's "non-qualified" because you use after-tax dollars to fund it - just like a Roth IRA. The plan should be designed in a way that the underlying investment strategy in the policy is compatible with your risk tolerance, that the death benefit is the minimum allowed by the Treasury to preserve tax-free growth and distribution, and that the funding schedule matches your ability to pay the premiums. These plans can work very well when designed properly using reasonable earnings assumptions.  You can address several life needs (see above) in one product.  You could also address disparate needs like college funding and retirement planning in one vehicle.  If you have children with special needs, you could address that need as well.  Two companies that I have had a good track record with are Pacific Life and Midland National.  They offer a range of policy types, but I use the indexed universal life policies in this situation.  The captive company agents (working for Mass Mutual, New York Life, and Northwestern Mutual) will use a different type of product. You should see high early liquidity in any policy proposed to you.  By this I mean that the surrender value of the policy in the first couple of years should roughly equal what you are paying in premiums.  If there is no surrender value, or very little, the agent is developing the policy for high early commissions.  Hope that this helps.

David Givnish at Quora Visit the source

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Once you get the proper legal and tax advice on setting up the plan, the choice of carrier is the fun part. Some companies have products that will maximum cash value. Others have products that will optimize the survivor benefit. Some have limited-payment strategies through which you pay only a few years and still receive a lifetime guarantee. When you decide things with your planner, factor in cash flow, long-term goals for cash and survivor benefit, and the other factors that relate to life insurance product design. Then make sure your broker prequalifies you so that you will know before you apply which company will give you the best value.

Steve Kobrin

Actually an un-qualified insurance policy does not qualify (thus the name) for the tax advantage under Internal Revenue Code 7702 which allows an itemized deduction for long term care premiums that exceed 7.5% of adjusted gross income. Make sure your adviser is not talking about life insurance inside a qualified plan. Leonard it correct, you really need to speak with a financial planner.  Maybe not your current one to be sure a qualified insurance policy really makes sense for your situation or if you are actually talking about life insurance inside a qualified plan which can be fairly complex and does have some current tax implications.

Wray Rives

I'm speculating here, but your advisor may have been better off using the the term "tax advantaged", rather than tax sheltered.  A growing trend is the use of Indexed Universal Life Insurance as an integral part of a wealth management plan.  However, not all IUL's are created equal.  While there are many good ones, they are not all created equal and I would advise caution, peppered with a lot of questions aimed at the person presenting this vehicle.  You will find some that offer them, that may not fully understand all of their intricacies.  I'm not saying this is the case here.  Some important considerations regarding these types of policies: Cash value grows based on a particular index (such as the S & P 500) tax deferred and is accessible through policy loans. Loan repayments are made at the discretion of the policy owner.  If not repaid, outstanding balances are deducted from the death benefit upon death. Cash value is protected from an index loss with a "floor", as dictated by the life insurance contract.  No risk to principal. Offer a competitive rate of return Have guaranteed loan options Offer liquidity and provided increased flexibility of cash to use and control. No limits on annual contributions (unlike 401k's, SEP's & Roth's) Participating loans offer the the possibility for a positive arbitrage on funds borrowed.

Michael Demkiw

These questions seem best suited to your "private wealth manager" who would be in a better position to know your objectives.    It sounds like you would do better to find someone you trust rather than asking people on a public forum to second guess these issues.

Lenny Robbins

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