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My original goal for this article was to begin an analysis of the proposed overhaul of the Internal Revenue Code and how to beat the new tax monster at his own game. No luck. Actually, no law. It’s hard to believe that the GOP with absolute voting control over both houses of Congress has two separate versions of the new law: The House version and the Senate version.
Yes, there are differences. Significant differences. A large army of pundits has begun the “picky-picky attacks” on specific points in both versions. The lawmakers on the other side of the aisle are delighted.
The best I can see at the moment is “we are in the process” ... a long-drawn-out affair... with no light at the end of the tunnel.
Instead, let’s take a look at a subject — life insurance — that will help you and your family no matter what the final new law looks like.
Why is life insurance such a powerful weapon (strategy) to enrich our column readers at the expense of the IRS? Because the Internal Revenue Code is very kind to every aspect of life insurance. Why? Because the insurance industry is very kind to the Washington politicians that keep the tax law favorable. Unfortunately, the law is complex and if you don’t use the law properly, it will eat your lunch.
The rest of this article shows you how to take advantage of the current law (no change in this area is expected in the “new tax law”). Actually, when you know how, it’s easy.
Let’s start by examining the very important, but little-known economics of life insurance. The following Schedule shows you the typical annual premium amount to buy a new (universal life) insurance policy with a $1 million death benefit:
Take a look at the Schedule to find your age (or close to your age). Three facts jump out at you:
NOTE: If you are healthy (for your age) life insurance works to about age 83 for males, 86 for females and age 88 for second-to-die. Remember, female life expectancy is three to four years more than a male who is the same age, thus lowering female premiums.
Now let’s look at some real-life examples.
Example #1. Insurance-funded buy/sell agreements.
Warren (56) and his brother Bill (58) have an insurance-funded buy/sell agreement. Both are in excellent health. An audit of the policies showed that Bill’s policy would lapse at age 70 and Warren’s at age 69. My insurance guru was able to arrange for a tax-free exchange for each brother so the policies would be guaranteed to pay the death benefits ($2.1 million for each) no matter how long Warren or Bill might live (without any added premium cost). Nice!
CAUTION: It is rare that we find insurance-funded buy/sell agreements properly done. There are dozens of possibilities for expensive blunders — tax and otherwise (as above). Always get a second opinion.
Example #2. Life insurance no longer needed on husband.
Cal (59) and Cindy (55) are married. Cal has insurance on his life: death benefit of $788,000; cash surrender value (CSV) of $213,000; and an annual premium of $9,000. They are worth more than $14 million (mostly cash or cash-like investments). Cal earns more each year than they spend: So, don’t really need single life insurance on Cal.
My network insurance consultant was able to use the $213,000 CSV, continuing the $9,000 annual premium to purchase a second-to-die policy with a $1.6 million death benefit … almost double the amount of old insurance. Powerful!
Example #3. Using life insurance as a tax-advantaged investment.
Wendy, a 76-year-old widow, is worth over $12 million, mostly liquid investments. Her investment income far exceeds her lifestyle costs. Following is a wealth-increasing, two-step strategy.
To give you an example of all the possibilities for using life insurance to (1) increase your wealth without risk or (2) increasing your current policy’s death benefit without increasing premium cost, would take a huge book. So, I cornered my insurance guru and twisted his arm into agreeing to audit the insurance policies of readers of this column without any obligation. Or maybe you are just looking for a new policy to increase your current wealth without risk.
Send me (Irv) a fax (on your letterhead if in business) at 847-227-9008 along with a short note about your life insurance situation. Or email me at firstname.lastname@example.org. Please include all of your phone numbers: business, cell and home. Mark “Life Insurance” on your fax or email.