Archive for the ‘Business Planning’ Category

Modified Endownment Contracts in Life Insurance

Saturday, May 1st, 2010

contract1 Modified Endownment Contracts in Life InsuranceMEC. The dreaded acronym. When you’re the owner of a tax advantaged whole life insurance policy you’ve probably heard of this acronym. It stands for Modified Endowment Contract. When a life insurance policy becomes a MEC it can have severe tax implications. Properly funding a cash accumulating life insurance policy is pertinent. And knowing the MEC basics is important whether your policy is designed to be used for isnurance protection, retirement, investing, business, estate purposes or a mixture of the above. 

TAMRA & DEFRA are the legal acts that define how life insurance policies can be funded and taxed but they are regulated under section 7702A of the IRC. If a policy does become a MEC then many of the tax benefits are lost. The distributions are treated as income to the extent of the gain and they may incur a 10% penalty.

“Section 7702A defines a modified endowment contract (MEC) as a contract that meets the requirement of § 7702 but fails to meet the 7-pay test of § 7702A(b), or that is received in exchange for a contract that is a MEC. Under § 7702A(b), a contract fails to meet the 7-pay test if the accumulated amount paid under the contract at any time during the first seven contract years exceeds the sum of the net level premiums that would have been paid on or before that time if the contract provided for paid-up future benefits after the payment of seven level annual premiums.” More on this excerpt can be found here.

So what is the 7-pay test and how do we prevent the life insurance policy from becomng a MEC? The 7-pay test requires that the accumulated values do not exceed the sum of the premiums paid over that 7 years…or what would have been paid in premiums over that 7 years had they been paid annually.

Different insurers have come up with different solutions. Some require premiums to be paid every year for the first 7 years. Others use term insurance to boost the death benefit and reduce the number of premiums. The bottom line is that you want to get as close to the MEC limit as possible without exceeding it.  I’ve found this article to be extremely helpful in understanding the nuances of modified endowment contracts. I hope you do too.

Here’s to a MEC-free policy and all the tax benefits that come with it!

Scott Storace (775) 781-5464

Posted in Business Planning, Estate Planning, Financial Strategy, Insurance Protection, Investment Planning, Retirement Planning, Whole Life Insurance | No Comments »

0% Financing with Whole Life Insurance

Monday, March 29th, 2010

zero percent 0% Financing with Whole Life InsuranceThese days 0% financing seems to be offered very regularly on vehicles, furniture and electronics. But wouldn’t it be great if you always had access to a pool of funds with no interest expense? When you borrow from specific whole life insurance plans you can. The key is to find a non-direct recognition life insurance company.

Direct recognition companies pay dividends on the policy’s available death benefit and cash value. When you take out a policy loan these values drop. Other companies, the non-direct recognition kind, pay dividends on your death benefit and cash values as if no loans have ever been taken. The money is taken from another account, the general fund, and an IOU is essentially placed on your account. Since your policy remains intact the company will pay you the full dividend.

This is very important. Who wouldn’t want to be paid on money that they had taken out of an account? I would venture to say NO ONE! When you withdraw money from a CD, money market or mutual fund do they continue to pay you? Absolutely not!

When you take a policy loan, that loan is subject to interest charges. Why? You must pay the company back in order for them to maintain the guarantees they made in their contract with you. Counteracting the interest charges is the guaranteed interest income that the company is paying you. Typically this is 4-5%. Add your dividends to the guaranteed interest income and if they equal the interest rate charged then you effectively have 0% financing. This is also referred to as a wash loan.

When dividends and interest exceed the interest charged then your cash values will actually grow.

Where can you find 0% financing…even 1% financing…where you get to choose the terms and approve the loan? The answer: A properly placed whole insurance policy. You’re not limited to buying a specific product from a specific retailer. Since you control the funds and get first access to the cash values, you decide what to finance. The key is finding a strong insurance company that is non-direct recognition. I know a few!

Scott Storace

Tags: cash value, guarantee, life insurance, whole life
Posted in Business Planning, Financial Strategy, Whole Life Insurance | No Comments »

Treasure Found: The Living Benefits of a Death Benefit

Saturday, March 13th, 2010

treasure Treasure Found: The Living Benefits of a Death BenefitHow can you use a life insurance death benefit while you’re still alive? If you’re guaranteed to receive it, you can. It’s like finding buried treasure. The chest that you’ve been filling yet storing away can be opened and used.

The death benefit that is provided by whole life insurance is guaranteed to pay out as long as you maintain the policy. It’s a guaranteed asset the moment the policy is opened, or in-force. Think about that for a minute. You did not save additional money nor did you invest better and receive a higher rate of return. You added no risk yet upon your death your beneficiaries will receive the proceeds of your death benefit…guaranteed. This is not offered by any otehr financial vehicles except annuities and other forms of life insurance. However, it is unlikely that you will receive a death beenfit with term insurance. Since premiums get astronomically expensive during the latter years of life, most are either converted or dropped. In fact, only 1% of term policies ever pay a death benefit. Therefore, this discussion will be centered around whole life insurance.

The death benefit can become an instant legacy or inheritance left to younger generations. Businesses use the guaranteed proceeds to recoup benefit expenses paid to key personnel. Financial planners use the guaranteed death benefit to recover the loss of assets from estate taxes. There are many ways that your life can change if you knew that your family, business or estate would receive funds upon your demise.

Let’s take one example: Let’s assume that you wanted to leave your children with your assets yet you wanted to increase your retirement income. By utilizing a properly funded whole life insurance policy you could tap into the equity of your home via a reverse mortgage. The monthly payments that you receive from a reverse mortgage are tax-free and you are guaranteed to receive payments for life, similar to an annuity. You can spend down your home equity knowing that the death benefit will replace it upon your death, all while increasing your tax-free retirement income.

When you do pass away your beneficiaries have the choice of paying off the home  or selling it and retaining the income tax-free death benefit for other purposes.

These are some examples of the living benefits of a death benefit. Whether for business or personal use, the guaranteed death benefit enhances strategic business, tax, investing and retirment planning.

Scott Storace

Tags: guarantee, life insurance, tax benefits, tax-free, whole life
Posted in Business Planning, Estate Planning, Financial Strategy, Investment Planning, Retirement Planning | No Comments »

The Great Insurance Debate: Term or Permanent?

Sunday, March 7th, 2010

Debate The Great Insurance Debate: Term or Permanent?A debate has been raging in the insurance industry since 1977 when Arthur L. Williams Jr., founder of Primerica, mass marketed the concept of “Buy Term and Invest the Difference.” This concept took off like a wildfire and put the proponents of permanent life insurance on their heels. Both sides have been slinging the mud ever since.

Personally, I think both concepts have their merits. If you follow this blog or have been through my website you’ll clearly see that I’m a proponent of a niche within the permanent life insurance industry that is referred to as The Infinite Banking Concept. I’m a big believer in the concept and won’t take your time to re-hash why. See previous blogs. However, I will note that I have never believed that one product or concept fits all. I will use this blog to share both sides of this ongoing debate.

“Buy Term and Invest the Difference” - The concept is simple. Since term life insurance is so cheap as compared to permanent life insurance, it is suggested that you buy it and invest the difference in higher yielding investments.

Pro’s:

  1. Cheap life insurance protection in case of premature death to protect your family. You can buy enough to make sure that your family’s lifestyle does not change when your income is suddenly stripped away., without breaking the bank.            
  2. The securities markets have returned an average of approximately 10% going back to the 1950′s. These returns are much stronger than the 4-5% that most permanent life insurance policies will pay. The growth of your invested money should far exceed the growth in cash values within your permanent life insurance policy.

Con’s:

  1. The name term insurance is derived for the period of time that you purchase it for. You buy it for a specific “term” usually 10 – 20 years. This insurance is cheap in your early years and gets progressively expensive as you age.
  2. It is unlikely that this coverage will ever provide a benefit. Penn State University studied term life insurance and publised their results in 1993. Here is what they found:                                                                                                      1.  More than 90% of all policies are terminated or converted.
    2.  45% of all policies are terminated or converted in the first year.
    3.  72% of all policies are terminated or converted within the first 3 years.
    4.  The average duration before termination or conversion is 2 years.
    5.  Less than 1 policy in 10 survives the period for which it was written.
    6.  After 15-20 years exposure, less than 1% of all term life policies are still in force.
    7.  Only 1% of all term insurance resulted in death claims.
  3. Term life insurance only offers one benefit – financial payout upon death.
  4. Investment returns are subject to fluctuation. The level of risk taken will determine the level of growth. The performance risk is transferred to the owner.
  5. Investment returns are typically quoted as gross rates of return. The net rate of return after capital gains taxes and transaction fees have been paid can be considerably lower.
  6. Many people do not have the financial discipline to “invest the difference”. If not automatically invested then the cost difference ends up in lifestyle expenses.

“Permanent Life Insurance” – This type of insurance is permanent and guaranteed. It is considerably more expensive than term life insurance but offers numerous additional benefits, other than a death benefit.

Pro’s:

  1. These policies have a cash accumulation feature. The cash values within the policy can be used as needed.
  2. These policies are guaranteed. The death benefit is guaranteed to be paid and can’t be taken away. If it is a participating policy, the dividends can not be taken away or reduced. Your premiums are guaranteed. They can not increase as you age or your health detioriorates.
  3. Tax deferred growth and tax advantaged distribution. The cash values grow tax-deferred and can come out tax-free via a policy loan.
  4. Dividends received are non-taxable.
  5. These policies offer a guaranteed internal rate of return typically 4-5%. This return is tax advantaged.
  6. Can employ the Infinite Banking Concept of using the cash values to self-finance. This strategy can greatly increase wealth by decreasing wealth transfers through interest, taxes and fees paid to 3rd party financial institutions.
  7. Offers a death benefit, life term life insurance, that will pass income tax-free to the polciy holder’s heirs. Unlike term life, it’s an instant and permanent asset. This asset can be used strategically as a living benefit (more on this next week).
  8. Since the death benefit and premiums are guaranteed it can be used in a number of strategic tax, business, investing and estate planning applications.

Con’s

  1. Permanent insurance is much more expensive and it’s not affordable for everyone.
  2. Some families & businesses do not need the level of benefits that are provided.

In review: As is the case whenever multiple products are compared, it boils down to cost versus quality. Both term and permanent insurance are excellent. They fit the needs of different people and groups. Suze Orman and Dave Ramsey should know this. It’s common sense. The distinct differences of each should be thoroughly presented. One size DOES NOT fit all. The needs of each individual must be understood and the proper solution applied to each.

Scott Storace

Tags: cash value, guarantee, infinite banking, investing, life insurance, liquidity, safety, tax benefits, tax-free, term insurance, whole life
Posted in Business Planning, Infinite Banking System, Insurance Protection, Investment Planning, Retirement Planning, Whole Life Insurance | No Comments »

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 »

Retirement & Business Planning for Professionals

Thursday, December 24th, 2009

images Retirement & Business Planning for ProfessionalsIf you are married and make a combined income of $176,000 or more you can’t contribute to a Roth IRA. So where do the doctors, attorneys, dentists and business owners get tax breaks on their hard earned income when planning for retirement?

One option that the IRS offers is the SEP-IRA. This is for self-employed business owners only, which eliminates those professionals who are employees of a larger firm. The SEP-IRA allows a business owner to defer the tax on up to 25% of their income with a max of $49,000/year in 2009. The income tax is deferred until the time of withdrawal. So, not only do you defer the tax but you also defer the tax payment.

             The Benefit: Tax deferred growth of your money.

            The Cost: Tax deferred liability on your growth!

Do you know what tax bracket you’ll be in when you retire? Do you know the government tax rates that will be imposed at that time? No? Well that might cost you! Imagine paying 35%-40% income tax in the future when you could have paid 25%-30% today. Sound like a benefit to you? Tax rates and brackets are variables that we don’t control and the possibility of this scenario is very real for high income professionals and business owners.

When planning for retirement many people are told that they should expect to be in a lower tax bracket because they will be earning less. Don’t count on this. It’s a poor mentality and terrible financial approach. It’s like striving to lose! In addition it gives people a false sense of security that their income will be sufficient. But retirement should be the time to live out some dreams and travel the world. In addition, it will also be the time when health care and long-term care costs begin to mount and tax deductions are minimal. The dependents are long gone and the home has been paid for.  

Instead of hoping we’ll be in a lower tax bracket we need to plan our finances so that there is no tax bracket. At a minimum we want to reduce the tax burden we face. The good news is that we can control where we place our money. Ideally, professionals and business owners want:

  1. Tax Deferred Growth
  2. Tax Free Distributions
  3. No Limits on Contributions
  4. No Adjusted Gross Income Limitations
  5. Full Access, Use and Control of Their Money
  6. Competitive Internal Rates of Return
  7. Safety/Guarantees
  8. Unlimited Investment Options

What vehicle provides all of these and more? Participating Whole Life Insurance. In addition to the benefits listed above, there are numerous estate and business planning uses for life insurance. Partnerships use life insurance to fund buy-sell agreements. Corporations use life insurance to pay benefits and attract top personnel to their companies. It’s not just for protecting your loved ones in the event of a sudden death.

When planning for retirement, planning for your business or planning your estate it’s important to remember the benefits of participating whole life insurance. It’s so much more than death protection.

Scott Storace

Tags: guarantee, life insurance, tax benefits, tax-free, whole life
Posted in Business Planning, Financial Strategy, Infinite Banking System, Retirement Planning, Whole Life Insurance | No Comments »