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A NEW
LOOK
ON LIFE
Life Insurance as an Asset Class
A NEW LOOK ON LIFE
When 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 benet protection.
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When 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 Insurance
A NEW LOOK
ON LIFE
With 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-efcient 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 benet proceeds to
receive tax advantages that are truly unique.
What other nancial asset can offer all of these
tax advantages?
• Tax-Free Death Benet
• Tax-Deferred Accumulation
• Tax-Free Distributions
• Tax-Free Accelerated Death
Benets
¹If properly structured, proceeds from life insurance are generally income tax-free.
A NEW LOOK ON LIFE
Tax Advantage #1 - Tax-Free Death Benet
Generally, the beneciaries of an individually owned life insurance policy do
not have to pay income tax on the death benet thanks to IRC Section 101(a)¹.
This is true whether they take the death benet as a lump sum or over a
period of time. If the death benet is taken over a period of time however,
any interest earned would be taxable to the beneciary as income.
Tax Advantage #2 - Tax-Deferred Accumulation Potential
Any 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 Distributions
Loans taken against a life insurance policy’s cash value are not subject to
income taxes provided the policy is not a Modied Endowment Contract
(MEC).²
Tax Advantage #4 - Tax-Free Accelerated Death Benets
If the insured becomes terminally or chronically ill, a portion of the death
benet may be paid out while the insured is still living. These tax-free “living
benets” 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 benets 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
benet is generally income tax-free as dened in IRS Section 7702B(b). Some accelerated benet riders may
require an additional fee; rider and/or life insurance product availability may vary by state. Actual rider benet
amount will vary according to the rules and restrictions of the specic life insurance product selected and will
reduce the ultimate death benet and cash value. Accelerated benets are not a replacement for long-term care
insurance and are subject to eligibility requirement.
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Taxable to the extent cash value exceeds
cost basis (premiums), plus 10% federal
additional tax if prior to age 59 ½
Taxable to the extent cash value exceeds
cost basis (premiums), plus 10% federal
additional tax if prior to age 59 ½
Income tax-deferred until distribution
(see below for taxation a distribution)
Income tax-free
Income tax-free
Income
tax-deferred
Income tax-free
Income tax-free
Death Benet
Cash value
accumulation
Policy loans
Policy
withdrawals
NON-MEC POLICY MEC POLICY
TYPE OF LIFE INSURANCE
What 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 benets listed above. To put it simply, there must be enough death benet 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 classied as a MEC.
This can happen if a policy has been funded too quickly in its early years, or if the death benet 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 benet. 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 LIFE
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ALL ASSETS
ARE NOT
CREATED
EQUAL
Since every asset type is different in some way:
• from the level of risk
• taxation
• limitations
• liquidity
• stability
• to how it earns interest
It 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 diversication among asset classes
is to achieve the best risk/return ratio for your
needs, lifestyle, nancial situation, and personal
preferences. In order to obtain diversication
one must combine diverse asset classes,
each possessing unique characteristics
and attributes relative to other asset
classes- including taxation.
DIVERSIFY
YOUR TAX
EXPOSURE
While market diversication is a fundamental
investing strategy, tax diversication 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.
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Where We’ve Been:
History of Top US Federal Marginal Income Tax Rates
Chart source: http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2013-nominal-and-
ination-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 specic 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 Debt
Our 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 LIFE
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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 terrorism
Does 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.
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Looking 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 INSURANCE
AS 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 LIFE
BENEFITS OF
LIFE INSURANCE
Immediate Protection - Life insurance
provides a death benet 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
benet provides income tax-free
proceeds to the beneciaries¹. 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 benet
amount unaffected by market values.
Easily Divisible- Death benets can be
easily divided among several
beneciaries- 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
benet protection may provide a
reasonable rate of return through life
expectancy.
Living Benets - A portion of the
policy death benet 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
qualied retirement plans .
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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 benets 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 benet is generally income
tax-free as dened in IRS Section 7702B(b). Some accelerated benet riders may require an additional
fee; rider and/or life insurance product availability may vary by state. Actual rider benet amount will
vary according to the rules and restrictions of the specic life insurance product selected and will reduce
the ultimate death benet and cash value. Accelerated benets are not a replacement for long-term care
insurance and are subject to eligibility requirement.
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Life insurance premiums are not limited above certain income guidelines. Generally, there is not a
specic limit on dollars allocated to purchase life insurance; however, there are maximum premium limits
determined by a specied 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.
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AE09163038
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Corporate Oce:
14155 N. 83rd Ave., Suite 144
Peoria, AZ 85381
Tempe Oce:
600 E. Rio Salado Pkwy., Suite 102
Tempe, AZ 85281
Phone: (623) 974-0300
Fax: (623) 974-0330
info@fullertonfp.com
www.FullertonFP.com
Investment advisory services offered through Kingdom Financial Group, LLC, an SEC Registered
Investment Advisor. We are an independent rm helping individuals make retirement income
planning 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 investment
opportunities. Annuity product guarantees are subject to the claims-paying ability of the issuing
company, and are not offered by Kingdom Financial Group, LLC.
AE03163038