Tax Secrets: Increase benefits; not cost
It's true: Your author has been pounding on the “tax-free environment door” for years. No doubt about it, the best way to beat up the IRS; legally.
There are two tax-free environments: charitable trusts and life insurance. For most readers of this column life insurance is the Holy Grail.
Recent phone calls from readers have pinpointed two specific problems concerning life insurance: (1) “I’m having trouble paying my insurance premiums on my existing policies;” and (2) “I need (or sometimes “want”) $1 million (or more) of insurance, but can’t afford the premiums.” I could write a small book that tells you the endless combination of ways to solve these problems. Instead of a book, we are going to tackle this insurance-problem task in two separate articles. This article covers the strategies we use most often when your problem deals with existing insurance. The article next week will cover strategies that help you pay for new insurance policies.
Let’s zero in on how to solve the problem of substantially reducing your annual cost of life insurance premiums, while keeping your death benefits the same (or even increasing the benefits, if needed). Actually, it’s easy when you know how to do it.
Following are the four strategies we use most often. (Note: There are many more strategies and endless combinations that we use, depending on your age, health or special circumstances).
- Financed insurance. This is a relatively new strategy, where you use the cash surrender value of your existing policies as collateral to finance reduced (out-of-pocket) future annual premium payments. The bank is willing to wait until you go to heaven for the loan to be paid back. For example, in a recent case, a couple increased their death benefit from $4 million to $6 million, while cutting their out-of-pocket premium cost by 80 percent.
- Wrong type of insurance. About one-third of the cases we look at have single coverage (the policy only covers the husband Joe). Yet it becomes clear, as Joe’s estate plan develops, that second-to-die insurance (insuring Joe and his wife Mary) is what is needed. In a real-Joe-and-Mary case (both were 60 years old), we reduced the annual premium from $33,412 to $22,338. The old-single coverage on Joe was $2 million. The second-to-die policy on Joe and Mary raised the coverage to $2.6 million. And, oh yes, Joe pocketed $201,000 (the cash surrender value on the old policy); all tax free.
- You have substantial funds (say $500,000 or more) in one or more qualified plans (profit-sharing, 401(k), pension or similar plans). Use a retirement plan rescue (RPR) to avoid double tax (income tax and estate tax that may take as much as 70 percent of your qualified plan funds to pay the tax collector (Federal and state). Single man (60 years old): Used an RPR to lift the $652,000 in a rollover IRA to $1.52 million in insurance death benefits; all tax-free. A married couple (he age 63/her age 61) took a $1.1 million 401(k) account to $2.78 million of tax-free death benefits.
- Combinations. We often use two or all of the above (and other) strategies, as necessary, to accomplish your insurance and estate planning goals.
Two cautions: (1) Make sure your death benefits will be estate tax free. (2) Only work with experienced professionals.
To help readers of this column join the tax-saving fun, I have arranged to have your current insurance policies analyzed (no charge or obligation). The last time we offered readers this insurance opportunity, 11 readers responded. We were almost perfect: 10 out of 11 were helped with a significantly larger death benefit without an increase in premium cost. Email your name, address and all phone numbers (where you can be reached). Include a list of your policies: for each policy (1) who is insured; (2) birthday of insured; (3) insurance company; (4) death benefit; and (5) cash surrender value to email@example.com. Please write “Florida Insurance Club” at the top of the first page.
Call Irv (847-767-5296) if you have any questions.