Myth: Cash value life insurance is a great investment for the masses.Truth: Cash value life insurance has a very poor rate of return historically and an investor would most likely be better served in mutual funds or other investments.Don’t let a life insurance agent try to tell you otherwise. Cash Value Life Insurance policies for the most part have terrible returns. Again, for the average investor, cash value life insurance is a waste of money.If an investor is not high income earner and/or subject to the estate tax, all they need is term life insurance and they should buy term and invest the difference.Another thing that anyone considering Cash Value Life Insurance needs to know is that the beneficiary only gets the death benefit and none of the cash value back. If the insured dies young and there is $100,000 cash value in a policy with a $125,000 death benefit the beneficiary gets $ 125,000.So to summarize… There are three types of people who need three specific types of Life Insurance, and never buy any Life Insurance that is not right for your specific situation.1. If you are a regular Joe – buy term and invest the difference. The mantra of financial advisors like Suze Orman and David Bach who preach to the regular Joe is “Buy Term and invest the difference”. Term is the right tool for this job. The suggested death benefit for most is 10-15 times income depending on age for working individuals, and 5 -10 times income for a non working spouse.2. However if you are a high net worth individual subject to the Estate Tax either now or in the future the most efficient wealth transfer tool available today is Guaranteed Universal Life Insurance held within an Irrevocable Life Insurance trust. Simplistically put, when a Trust is drafted and the Beneficiary is the trust, the death benefit is then considered outside of the estate by the IRS, meaning the death benefit is not subject to the Estate Tax. If the Grantor is in good health Guaranteed Universal Life contracts from A %2B rated insurers are paying 10%2B% at statistical mortality. When the estate tax of 45% is factored in as well these contracts can be paying a very substantial rate of return that may reach potentially into the teens. These returns can be spectacular especially given the guaranteed nature of the contract.The only drawbacks to this strategy are:1. Grantor must pay premiums2. The Grantor must pass away for the trust to collect.3. Grantor must pay to have the trust drafted. Also do note for Estate Tax Mitigation purposes the Guaranteed Universal Life contracts we use have relatively little or no cash value especially at statistical mortality thus we avoid the cash value trap described above.4. Alternately, High income earners that own a closely held company may greatly benefit from a 412i Fixed Defined benefit plan. This is the sweet spot for the cash value life insurance. By the way this is the only sweet spot that this Financial Advisor can find for Cash Value Life Insurance; however it is a super one for investors that can take advantage of it. For investors in high tax brackets a 412i Fixed Defined Benefit plan allows the MAXIMUM tax deduction possible of any qualified plan, allowing investors to put up to $300,000 in per year as opposed to the paltry $6000 in an IRA.$ 300,000 per year in qualified money?What is not to like?Well, what rates of return are these Fixed Defined benefits going to pay?That depends on the insurer, and the insured’s health, however expect 3.5% to 4.5%.Not too exciting you say?Hold on a moment, keep in mind that much like the Estate Tax issues that high net worth individuals can mitigate by taking out Guaranteed Universal Life Insurance policies inside trusts the Tax man makes investing in 412 i Fixed Defined benefits a very profitable endeavor by avoiding paying taxes until withdraw. You will have to pay taxes eventually barring you use your qualified assets to pass to charity through planned giving. Do keep in mind that this is a guaranteed investment which is subject to the viability of the insurance company, however, the main benefit is the fact that the IRS allows such HUGE qualified contributions.How most 412i Fixed Defined benefit plans work is a combination of a Cash Value Life Insurance policy with a Fixed Annuity. One other nice thing about these is the fact that they are much easier to administer than a standard Defined Benefit program as the returns are fixed and there is no chance of over or under funding. The exit strategy is clear, rollover the funds into a traditional IRA within 4-6 years, thus avoiding cash value trap described above.The result? The investor sheltered up to $ 1.8MM in a qualified tax environment at positive (albeit conservative) rates of return to rollover into a traditional IRA after six years…Yes, Cash Value Life Insurance is a terrible investment for most. However for investors with either a substantial estate subject to the Estate Tax or who are in a high tax bracket with a closely held corporation may want to seriously consider the appropriate type of Permanent Life Insurance. Due to IRS regulations it is hard to go wrong!This is neither tax nor legal advice. Please consult your tax or legal advisor.
Tag Archives: Insurance
Where to get a Home Equity Line Of Credit Loan online
A fixed rate home equity line of credit can help you out of a jam if you are strapped for cash. What would have to do if someone in your family were to be injured or to even lose a job? Do you have enough finances in the bank to cover your expenses including your mortgage payments for several months? If not, this is where a refinance home equity line of credit comes into play.
You can draw on the equity through a refinancing second mortgageloan to make all of your debt payments plus pay for your living expenses until the crisis is over. This is a much better alternative than using credit cards to live off of. Simply because the payments on a HELOC loan are typically going to be smaller. Plus the interest is typically going to be tax deductible.
It’s fairly common knowledge that banks are going to be more than willing to loan you money with decent home equity line of credit rates when you don’t really need it. However, if you hit a rough patch in your financial life and need cash desperately, it can sometimes be difficult to get the help that you need. A HELOC loan can help you out of this situation.
In other words it is going to be much easier for you to get a fixed rate home equity line of credit when you don’t really need one rather than to wait and try and get one when you really need it. This is the really great thing about a refinance home equity line of credit and makes this a fairly desirable mortgage loan. Is that there are no payments due unless you use it. This second mortgage for bad credit can also usually be free for those with good credit.