Archive for January, 2010

Business Tax Deductions With Your Whole Life Insurance Plan

Friday, January 29th, 2010

Deduction Business Tax Deductions With Your Whole Life Insurance PlanI was recently asked by a reader of this blog to explain how an S-Corp can get a tax deduction for purchasing a vehicle with funds from a whole life insurance plan.

Let me start by saying that I am not a licensed CPA or tax preparer. As always, for thorough tax information regarding your unique situation it’s best to consult your tax professional. In answering this question I will also eliminate its S-Corp specific nature and instead refer to it as a business. I am not qualified to speak about the tax subtleties regarding the various entity structures. The information that I will share with you below does come from certified public accountants. I have information from 3 separate CPA’s that supports the information below based on today’s Internal Revenue tax code.

First, let’s review what the IRS allows a business to deduct. There are 3 important IRC sections to review.

  1. IRC Section 162 tells us that ordinary and necessary expenses incurred during the taxable year in carrying on trade or business can be deducted.
  2. IRC Section 163(h) tells us that, other than 7 exceptions, no personal interest is tax deductible. Trade or business is one of the exceptions.
  3. IRC Section 264(d)(4) tells us that policy loan interest is deductible for business purposes.

In claiming a tax deduction you will need to verify that the expense is indeed for a legitimate business use. If you are the lucky recipient of an IRS audit how will you prove this? The answer is: DOCUMENTATION. You will need to establish a paper trail. If you can’t prove it, it did not happen!!! Since every transaction can be different I won’t go into the detail of what documents are required. Your tax professional can assist with that.

Now let’s dive into the details.

  1. We first start with the whole life insurance. Since there has to be an insured life, we will assume that the business owner is the insured as well as the policy owner. The business owner will take out a policy loan and lend it to the business.
  2. The business will use the funds to purchase a vehicle. Again the vehicle must be used in the conduct of business in order to receive the deduction.
  3. The business will make regular payments to the policyowner based on the terms of the promissory note.
  4. The business owner will make regular payments back to his policy based on the terms of the policy loan.
  5. At the end of the year the business willl have paid interest on the loan to the policyowner. The business, in this case an S-Corp, will claim this expense on form 1120S. The policyowner will have received investment income. The business owner will claim this income on Schedule A of his 1040. The interest expense and the interest income ultimately cancel each other out. In the end the net tax deduction comes from the interest that gets paid to the insurance company for the policy loan.

Let me summarize this business banking transaction. The business has purchased a vehicle with financing from the owner’s life insurance company. The principal and interest for this loan go back to the business owners whole life insurance policy. He has become his own banker and financed the car for his business. The owner receives the interest income and the tax advantaged growth of his policy. The business gets a vehicle and a tax deduction for the interest expense paid to the life insurance company.

This scenario can play out in a number of ways. That’s why it really is the Infinite Banking Concept. Whether for personal or business, policy loans can be used to serve an infinite number of needs. Go to my website and see some of the ideas we’ve posted under Banking for Businesses.

Keep the questions and scenarios coming!! If there is ever a question that I don’t have the answer to you can be sure that I will do my best to find it.

Scott Storace

I am blessed to receive an abundance of referrals from satisfied clients but I will always welcome more! So send your friends and family my way. I’ll be sure to treat them right. You have my word on that.

Tags: cash value, infinite banking, tax benefits, whole life
Posted in Business Planning, Financial Strategy, Infinite Banking System, Whole Life Insurance | 2 Comments »

Protecting Your Business with Life Insurance

Sunday, January 24th, 2010

going out of business 300x175 Protecting Your Business with Life InsuranceMany business owners are masterful technicians in their field of expertise. In their angst and excitement to get their business launched they fail to look down the road. Why? There are many reasons but it’s extremely important to plan the business divorce before the wedding.

What would happen if you could not run your business? What if your partner suddenly perished? How would the business operate? Who would fill the voids? Do they have the expertise to do what you or your partners do? How would the assets be split and passed to the heirs of the deceased partner?

Preparing for such an occurrence is called succession planning…when a business will be transferred from one to another. It’s important that the proper funding for a succession be established upfront. Insurance is a great way to achieve that with minimal out of pocket expense. Whether the peril is disability or death, insurance can protect the key people in an organization and therefore ensure that the funds are available to keep the business moving forward in the event of a catastrophe.

These funds can be used to buy out a partner’s shares via a buy-sell agreement. The remaining partner(s) will then be able to maintain control of the business and keep it moving forward. Without this insurance it’s possible that the business would have to be sold to pay the deceased partners estate or the remaining partner(s) would have to buy out his ownership with personal funds or loans. This can spell disaster for the business.

This is why it’s important to plan the business divorce before the wedding. Sound business, financial and estate planning can eliminate setbacks before they occur.

In addition to the business planning benefits, whole life insurance can offer your business a highly liquid source of cash and tax advantaged growth for the partner(s). The cash values can be used like a business line of credit. Borrow what is needed, pay back the loan with interest and achieve a tax deduction for the business and an individual gain.

In the future we will explore additional examples of business, estate, financial & retirement planning using life insurance and other inurance products.

If you have a specific question or topic that you would like me to address please contact me!

Scott Storace

Tags: cash value, life insurance, liquidity, tax benefits, whole life
Posted in Business Planning, Financial Advice, Whole Life Insurance | 1 Comment »

Bob the Baker or Bob the Banker? -The Infinite Banking Concept In Action

Sunday, January 17th, 2010
 
Baker 150x150 Bob the Baker or Bob the Banker? The Infinite Banking Concept In Action
“Bob the Baker” or “Bob the Banker?”

I want to illustrate the power of the banking concept as compared to traditional financing. Let’s assume Bob The Baker wants a $25,000 loan to buy a new oven. His local bank offers him the $25,000 at a rate of 10% for 7 years. Bob agrees to this and the following month begins making payments of $415.03. He makes these principal and interest payments monthly for the next 7 years. When the term of his loan is completed, what is he left with? Well he now owns the oven outright. But he has transferred every penny to the bank. This is money he can’t get back. For the opportunity of borrowing, he has paid interest to the bank of $9,862.47 in addition to his principal loan of $25,000. Therefore, he has shelled out a grand total of $34,862.47.

How would this change if Bob had properly funded a whole life insurance policy for use as his own banking system? Let’s look. To start we need to know a little more about Bob. He is 45 years old, in good health and living in California. He is considered a standard/non-smoker when being rated by the insurance company. These assumptions allow us to determine the characteristics of his policy. Now that we have done so, let’s make the same assumption that Bob will borrow $25,000 from his policy, or personal banking system, and pay himself back at the rate of 10% over the next 7 years. What happens? The payments are still the same amount of $415.03, but instead of taking 84 months to pay back the loan it only takes 68 months. That shaves off 16 monthly payments, saving Bob $6,640!

Now what is Bob left with and who has Bob’s money? He does! He paid himself back the $25,000 in principal along with $3,252 in interest. He has all the money that he would have spent but rather than transferring it to the local bank he has put it back into his pocket. He has effectively earned a 26.56%+ rat eof return for himself without taking any additional risk.

Where can you find a 26.56% rate of return today with minimal risk? In addition, every payment that he makes back to himself is available to be used immediately. He can get multiple turns of the same money…just like a bank does.

There are many variables which will make each scenario different from the next. As you can see though, by changing HOW you finance instead of WHAT you finance you can reap significant financial benefits.

Scott Storace

Tags: infinite banking, whole life
Posted in Business Planning, Financial Strategy, Infinite Banking System, Investment Planning, Whole Life Insurance | 2 Comments »

3-Legged Stools: The Pitfalls of UL & VUL Policies

Sunday, January 10th, 2010

stool 1 sm 3 Legged Stools: The Pitfalls of UL & VUL PoliciesA 3-legged stool is great unless one of the legs is not aligned with the others. If they are not in perfect harmony then you’ll be severely off balance and tip over. This analogy describes some of the features of Universal Life(UL) and Variable Universal Life(VUL) policies.

These policies offer flexibility: flexible premiums, death benefits that can change, some control in how your funds are invested and more. Sounds great on the surface but the long-term question should be, can the stool stay balanced? To see we need to know what each leg of the stool is.

  1. Input of Premiums – The first leg is your input of premiums. UL & VUL policies do not require an annual premium to be made. In order to guarantee that the policy will not lapse you must continue to input premiums.
  2. Interest Earned – The interest earned on UL and VUL policies can vary widely. Life insurance companies tend to invest conservatively in order to ascertain the benefits they have guaranteed. Variable Universal Life Policies allow the policyholder to exercise some direction over the investing of the funds within the securities markets. Performance risk is then transferred to the policyholder where traditionally that risk was retained by the insurance company.
  3. Internal Costs - The insurance company has costs that get passed through to the policyholder in UL & VUL policies. The largest of these is typically the cost of insurance. As the cost of the internal term life insurance rises, that cost gets transferred to the policyholder. Again, traditionally this risk was retained by the insurance provider. Other costs include monthly administration fees, sales charges and monthly premium expenses. These expenses vary widely from policy to policy.

These are the legs but how can they get mis-aligned?

  1. Market Fluctuations – A typical illustration will show a rate of interest that must be earned every year the policy is in existence. But the market is not perfect. Underperforming years require greater performance in future years to breakeven. For example a 25% loss on $1000 leaves a balance of $750. In order for that $750 to grow back to $1,000 requires 33% rate of return. Market fluctuations reduce the interest earned and reduce the cash values within the policy. To prevent a lapse in the policy, additional premiums will have to be deposited. With a whole life policy a reduction in interest earned effects the cash values but with a UL policy it can also reduce the length of coverage.
  2. Policy Loans or Cash Withdrawals – Reducing the cash within the policy reduces the pool of funds that are used to pay the internal costs. Couple a need for cash with a period of reduced interest earnings, like we have seen in the past few years, and it can spell disaster for the policy. When the well runs dry it requires additional infusion of premiums.

Once these policies are in the hole, it gets pretty tough to dig them out.

So if you’re looking to buy a stool, look real hard and get some help. Many of the benefits also come with additional risk. And be sure to look into participating whole life policies. You’ll find all the traditional benefits, with added amounts of safety and peace of mind! After all how much flexibility should a stool have anyway?

Scott Storace

Tags: cash value, guarantee, life insurance, safety, whole life
Posted in Financial Advice, Financial Strategy, Whole Life Insurance | 1 Comment »

Life Insurance Industry Shows Strong Gains in 2009

Saturday, January 2nd, 2010

images2 Life Insurance Industry Shows Strong Gains in 2009 Despite considerable losses due to the financial crisis in 2008, a recent press release ( http://www.conning.com/pressrelease-detail.aspx?id=3508 ) from Conning Research estimates 2009 industry net income at $16 billion.

Based on the report, the growth in life insurance products has remained stable while annuities have been the industry stepchild posting $4B in losses.

What makes life insurance an attractive product these days? Well, the safety and guarantees are definitely getting a lot of attention. Guaranteed tax-deferred growth of cash values, guaranteed premiums that won’t rise, a guaranteed death benefit and dividends that are guaranteed once declared are all very assuring. Sexy, high rates of return in the securities markets sounded great a few years ago but the volatility over the past few years has left many looking for higher ground. Would you prefer to hope that your child’s education is paid for or do you want to know that it’s covered? If you weren’t here tomorrow what would your family lose? Are your plans for them guaranteed to be fulfilled without you?

The many tax benefits are very enticing to those planning their retirements. They’ve seen their 401k’s and IRA’s cut in half. The ones that have deferred their tax liability are realizing that their accounts still have a large haircut awaiting them from the IRS. So, they are still looking for the tax-deferred growth but now want the tax-free distribution that a life insurance policy can provide. How would you feel if your nest egg was cut into 3 equal pieces and the IRS took one away from you? Are you happy to give away this money?

Liquidity, use and control are another big benefit that my clients are talking about. They want more control 0f their funds. They want to use these funds in any manner they dictate without having the IRS dictate how and when they can use these funds…and still get taxable benefits. How do you feel about having the IRS as your financial partner?

These benefits are being sought by individuals, families, professionals and business owners. But they are also being sought in large quantities by banks and corporations. The 2009 numbers for bank owned life insurance (BOLI) and corporate owned life insurance (COLI) are not out yet but I expect an increase similar to last year of about 5%. Banks alone purchased $126.1 billion in life insurance in 2008.

The past few years have been tough for many people. Many questions have been raised, perspectives have changed and financial courses have been altered. Through it all, as was the case during the Great Depression, the life insurance industry has once again remained strong. It’s the night-light on a dark stormy night! It may not be the only tool you’ve got in the box but there are many reasons why it should take up a good amount of room there.

Best wishes to you and yours in the New Year! May it be filled with hearty laughs, fond memories and tremendous personal achievements.

SCOTT STORACE

Tags: cash value, guarantee, liquidity, safety, tax benefits, tax-free, whole life
Posted in Financial Advice, Retirement Planning | No Comments »