Return to flip book view
1A NEWLOOKON LIFELife Insurance as an Asset Class
A NEW LOOK ON LIFEWhen asked to list their nancial assets, many people may include: stocks, bonds, savings accounts, home equity, retirement accounts and the like. When it comes to their expenses, the list may include: mortgages, utilities, food, clothing, health insurance….and life insurance. While focusing on building assets for retirement, life insurance is oftentimes viewed as just a necessary expense to help protect a family’s future. The reality is- life insurance can be a valuable asset in your overall nancial strategy, offering much more than just death benet protection.2
3When asked to list their assets, many people may include:When asked about expenses, the list may include:-Stocks-Bonds-Savings Accounts-Home Equity-Retirement Assets-Cars-Mortgages-Utilities-Food-Clothing-Kids-Education-Auto Insurance-Disability Insurance-Health Insurance- Life InsuranceA NEW LOOK ON LIFEWith the ever-changing economic landscape, the limitations of many traditional investments like IRAs and 401Ks, and the potential impact of current and future income taxes on your overall retirement strategy, you may be left wondering what options you have to create a more tax-efcient strategy. Life insurance can be a supplemental solution to help address these potential nancial concerns, with tax-deferred accumulation, and its distribution and transfer capabilities.What makes life insurance so unique that it could be considered its own asset class? The IRS tax code.The IRS tax code has allowed for life insurance cash values and death benet proceeds to receive tax advantages that are truly unique. What other nancial asset can offer all of these tax advantages? • Tax-Free Death Benet • Tax-Deferred Accumulation • Tax-Free Distributions • Tax-Free Accelerated Death Benets¹If properly structured, proceeds from life insurance are generally income tax-free.
A NEW LOOK ON LIFETax Advantage #1 - Tax-Free Death BenetGenerally, the beneciaries of an individually owned life insurance policy do not have to pay income tax on the death benet thanks to IRC Section 101(a)¹. This is true whether they take the death benet as a lump sum or over a period of time. If the death benet is taken over a period of time however, any interest earned would be taxable to the beneciary as income. Tax Advantage #2 - Tax-Deferred Accumulation PotentialAny cash value growth in a life insurance policy is tax-deferred. The owner of the policy is not required to pay any income tax on the cash accumulation while inside the policy. Tax Advantage #3 - Tax-Free DistributionsLoans taken against a life insurance policy’s cash value are not subject to income taxes provided the policy is not a Modied Endowment Contract (MEC).² Tax Advantage #4 - Tax-Free Accelerated Death BenetsIf the insured becomes terminally or chronically ill, a portion of the death benet may be paid out while the insured is still living. These tax-free “living benets” are paid on a per diem or other period basis and are excluded from income tax up to a limit determined by the IRS, per IRS Section 7702B(b)³. ² Policy loans and withdrawals will reduce available cash values and death benets and may cause the policy to lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change; consult a tax professional about your personal situation. ³ An acceleration of the policy death benet is generally income tax-free as dened in IRS Section 7702B(b). Some accelerated benet riders may require an additional fee; rider and/or life insurance product availability may vary by state. Actual rider benet amount will vary according to the rules and restrictions of the specic life insurance product selected and will reduce the ultimate death benet and cash value. Accelerated benets are not a replacement for long-term care insurance and are subject to eligibility requirement.4
5Taxable to the extent cash value exceeds cost basis (premiums), plus 10% federal additional tax if prior to age 59 ½Taxable to the extent cash value exceeds cost basis (premiums), plus 10% federal additional tax if prior to age 59 ½Income tax-deferred until distribution (see below for taxation a distribution)Income tax-freeIncome tax-freeIncome tax-deferredIncome tax-freeIncome tax-freeDeath BenetCash value accumulationPolicy loansPolicy withdrawalsNON-MEC POLICY MEC POLICYTYPE OF LIFE INSURANCEWhat is a Modified Endowment Contract (MEC)?The IRS has put into place certain “tests” that a life insurance must pass in order to qualify for all of the tax benets listed above. To put it simply, there must be enough death benet in relation to cash value, commonly referred to as the “corridor,” to maintain its status as a life insurance policy. This prevents a person from using life insurance for the sole purpose of accessing tax-free cash. If the policy fails these tests, it is no longer considered life insurance by the IRS, and is classied as a MEC. This can happen if a policy has been funded too quickly in its early years, or if the death benet is reduced too much in the rst seven years of the policy. What does it mean for you if your policy is a MEC? First, a MEC is still a life insurance policy. It will still have tax-free cash accumulation and a tax-free death benet. The taxation impact of owning a MEC is realized only when accessing any cash value. Withdrawals are fully taxable as income, to the extent that there is a gain in the policy over the amount of premiums paid per IRC Section 7702A. Withdrawals are also subject to a 10% federal additional tax if the owner is below age 59 ½.
A NEW LOOK ON LIFE6ALL ASSETS ARE NOT CREATED EQUALSince every asset type is different in some way: • from the level of risk • taxation • limitations • liquidity • stability • to how it earns interestIt is important to ensure that your nancial strategy is diverse enough to withstand not only the test of time, but also the test of taxes. The goal of diversication among asset classes is to achieve the best risk/return ratio for your needs, lifestyle, nancial situation, and personal preferences. In order to obtain diversication one must combine diverse asset classes, each possessing unique characteristics and attributes relative to other asset classes- including taxation.DIVERSIFY YOUR TAX EXPOSUREWhile market diversication is a fundamental investing strategy, tax diversication is seldom discussed. It is important to examine your investments and insurance holdings both now and in the future, as your retirement outlook could be impacted by an uncertain tax environment. And while nobody can predict what taxes will be in the future, we can always look at the state of our nation’s economic affairs today, as well as where taxes have been in the past for possible indicators.
7Where We’ve Been: History of Top US Federal Marginal Income Tax RatesChart source: http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2013-nominal-and-ination-adjusted-brackets; and http://www.forbes.com/sites/kellyphillipserb/2013/10/31/irs-announces-2014-tax-brackets-standard-deduction-amounts-and-more/This content is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not intended to provide specic legal or tax advice and cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney. Where we are Today: $19 Trillion National DebtOur government has a huge nancial problem on their hands. Looking at this, do you think taxes will be going down anytime in the near future?
A NEW LOOK ON LIFE8 Looking back over history, you can see where U.S. income tax rates have increased in response to events both here in the United States and around the world. However, what are we as a nation facing today? • A $19 trillion national debt • High unemployment • New health care programs • An ongoing war on terrorismDoes it sound like history may repeat itself? Again, nobody can predict the future, but it would be reasonable to assume income tax rates will continue to evolve over time, experiencing both high and low periods. A diverse nancial strategy that includes life insurance can help protect you against uctuations in tax rates. How? During years with higher tax rates, you may have the ability to access funds on an income tax-free basis. 1930s:1940s:1950s:1960s:Today:Taxes spiked dramatically in the 1930s in an effort to implement programs to get Americans back to work after the Great Depression.Taxes increased again to help fund World War II.Taxes stayed high due to the Korean War.Taxes remained high to fund the Vietnam War.Compared to the decades-long era of high tax rates- averaging over 60% and topping out at over 90%- we are atrelative discount right now.
9Looking at life insurance as an asset class may be a new concept to you. As careers ourish and resources allow, life insurance may be an ideal component of your overall personal or business retirement strategy, complementing xed-income assets and helping to manage and potentially reduce your total tax liability. LIFE INSURANCEAS AN ASSET CLASS Take a new look at life insurance as an asset in your overall retirement strategy. Things to Consider: • The costs of a life insurance policy, including premiums and any cost of insurance charges, is dependent on your age and health at the time of application. • Most life insurance policies require health, and in some cases, nancial underwriting. • Most life insurance policies include surrender charges.
A NEW LOOK ON LIFEBENEFITS OF LIFE INSURANCE • Immediate Protection - Life insurance provides a death benet right from the day the policy is issued. • Liquidity Upon Death - A majority of a person’s assets may be comprised of illiquid assets such as real estate and business ownership. Life insurance can provide the funds to help pay for nal expenses and estate taxes, right when it is needed the most. • Income Tax-Free Payment - The death benet provides income tax-free proceeds to the beneciaries¹. If the ownership is structured properly, it may also be free of estate taxes. • Predictable Value - The policy can be structured with a known death benet amount unaffected by market values. • Easily Divisible- Death benets can be easily divided among several beneciaries- generally without probate. • Tax-Deferred Growth - Any cash value growth is tax-deferred. • Income Tax-Free Distributions - Loans taken against the cash value are not subject to income tax provided the policy is not a MEC, with NO pre-59 ½ IRS federal additional tax.² • Leverage - Premiums paid for death benet protection may provide a reasonable rate of return through life expectancy. • Living Benets - A portion of the policy death benet may be accelerated to help offset the costs associated with a chronic illness or long term care, including a stay in a nursing home.³ • No Funding Limits Based on Income - There are no IRS limits to how much you can contribute to a life insurance policy as there are with some traditional qualied retirement plans .10
¹ If properly structured, proceeds from life insurance are generally income tax-free.² Policy loans and withdrawals will reduce available cash values and death benets and may cause the policy to lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change; consult a tax professional about your personal situation. ³ An acceleration of the policy death benet is generally income tax-free as dened in IRS Section 7702B(b). Some accelerated benet riders may require an additional fee; rider and/or life insurance product availability may vary by state. Actual rider benet amount will vary according to the rules and restrictions of the specic life insurance product selected and will reduce the ultimate death benet and cash value. Accelerated benets are not a replacement for long-term care insurance and are subject to eligibility requirement.4 Life insurance premiums are not limited above certain income guidelines. Generally, there is not a specic limit on dollars allocated to purchase life insurance; however, there are maximum premium limits determined by a specied policy face amount according to the Internal Revenue Code. The face amount of coverage each carrier will underwrite will also differ. Life insurance guarantees rely on the nancial strength and claims-paying ability of the issuing insurer. Product and feature availability may vary by state.11
AE09163038Prepared for:Corporate Oce:14155 N. 83rd Ave., Suite 144Peoria, AZ 85381Tempe Oce:600 E. Rio Salado Pkwy., Suite 102Tempe, AZ 85281Phone: (623) 974-0300Fax: (623) 974-0330info@fullertonfp.comwww.FullertonFP.comInvestment advisory services offered through Kingdom Financial Group, LLC, an SEC RegisteredInvestment Advisor. We are an independent rm helping individuals make retirement incomeplanning more successful by using a variety of strategies to custom suit their needs and objectives.By contacting us you may be provided information about insurance products and investmentopportunities. Annuity product guarantees are subject to the claims-paying ability of the issuingcompany, and are not offered by Kingdom Financial Group, LLC.AE03163038