by Guest » Fri Sep 14, 2012 11:31 am
Our insurance agent has been making my husband understand that a whole life policy is the best investment option for us. He has convinced Paul to such an extent that, he is considering diverting funds from our 401K. We're both around 50 years. As such, will it really serve the 'retirement' purpose? Possibly not, right?
Posted: Mon Sep 17, 2012 01:34 pm Post Subject:
He has convinced Paul to such an extent that, he is considering diverting funds from our 401K. We're both around 50 years. As such, will it really serve the 'retirement' purpose? Possibly not, right?
This could be a very serious misrepresentation of a life insurance contract. I would never advise someone to divert money from a legitimate, qualified or non-qualified employer-sponsored or personal retirement plan in favor of life insurance -- the two are NOT the same or even close to being equivalent.
Diverting money to life insurance from a qualified retirement plan will (A) increase your current income tax liability (and income taxes are going to increase in the future), (B) will jeopardize your retirement if you fail to understand that taking money out of a life insurance policy and later surrendering or lapsing the policy will (in many cases) result in a taxable event, and (C) all forms of Universal Life Insurance are subject to lapsing even if you are paying the premiums you thought the agent told you needed to be paid when you first purchased the policy.
And for those who are being tempted to do so with hype such as "Bank on Yourself" or "Roth IRA on 'Roids" scams that invite you to purchase an Indexed Universal Life insurance or other form of life insurance policy, you might just want to read this little appellate court decision holding a taxpayer responsible for more than $8,000 in income tax, $1,700 in tax penalties, and still more in interest to the IRS, for borrowing money from his insurance company, using his whole life insurance policy's cash accumulation as the "security" for the loans.
http://law.justia.com/cases/federal/appellate-courts/ca7/11-2508/11-2508-2012-09-11.html [or] http://docs.justia.com/cases/federal/appellate-courts/ca7/11-2508/11-2508-2012-09-11.pdf
Eventually, failure to pay loan interest and/or principal could, as it did in this case, cause the policy to lapse. The loans become payable at that time, and the cash accumulation is used to extinguish the loans. Most people think their policy loans are actually taking the money out of the policy -- which is incorrect.
In this taxpayer's case, he argued that since he did not receive any of the money in his policy when it lapsed, he had no taxable event. I don't want to spoil the "surprise ending" on page 8 of the Court's opinion, but the IRS considers the matter this way:
All your premium payments = "Cost Basis". All of the "cash accumulation" minus your "cost basis" = profit or loss. Paid up additional insurance (which is sometimes the heart of the "Bank on Yourself" schemes) has cash value that initially equals the value of the "dividend" that was used to purchase it, but, like the policy itself, the cash value (usually) increases with time. When a PUA is surrendered to pay premiums, the increased value is equivalent to new money, and increases the cost basis. But the cash accumulation is still lurking in the background. When the policy lapsed because of $30 worth of unpaid loan interest, the cash accumulation was used by the insurance company to pay off the debt it was owed. That was the policyowner's/taxpayer's accounting mistake -- he argued that because he derived no cash benefit, he had no tax liability. WRONG.
The IRS held that the full value of the premiums paid and PUA surrenders was the "investment" in the contract. Loan interest paid has no effect on the value of the contract -- it is the insurance company's fee for using their money. But all of the money borrowed was considered a benefit of the contract to the taxpayer (when it was intended to be a benefit only to the beneficiary at the death of the insured). And the excess value of the PUAs surrendered to pay premiums was not the taxpayer's money (it was insurance company interest), so it was not added to his cost basis for tax purposes,
Total value received through loans/withdrawals minus the "investment" (including "dividends" used to purchase PUAs) = net cost basis. In this case it was $44,000 minus $36,000 = $8,000. The lapsed cash value was $37,000 (used to pay off the debt), so the taxpayer had a tax liability on $37,000 minus $8,000, or $29,000 of taxable gain. Tax bill = $8,500 plus $1,700 penalty for failure to pay the tax when due, plus interest. He had no cash proceeds, so he figured he had no tax liability. He simply had no cash to pay the tax when due.
You don't want to jeopardize your retirement like that. Miss a $30 interest payment and have to pay $10,000+ in taxes, penalties, and interest . . . with money you don't have. And end up with no life insurance on top of it all. I don't suppose the agent mentioned any of that to "Paul".
If anyone has been deceived into purchasing life insurance for "retirement" purposes by an agent like this, and not for its death benefit, I want to hear from you -- you could be entitled to a full refund of every dollar you have paid the insurance company PLUS additional damages -- AND MAYBE EVEN GET TO KEEP THE DEATH BENEFIT, fully paid for by the insurance company.
Click on my email link below to contact me.
Posted: Thu Sep 20, 2012 02:07 pm Post Subject:
A whole life policy may make sense. However, if it does it is because there is value in having a permanent death benefit. It is not an investment. It sounds like it is being sold/purchased as an investment. If that is the purpose, it is not appropriate.
I agree with what Max said (most of it).
Posted: Sun Sep 23, 2012 05:29 am Post Subject:
I agree with what Max said (most of it).
Just out of curiosity, which part are you in conflict with?
I love cases like this. They are very easy to win and the insurance company is usually left with egg on their faces.
Posted: Mon Sep 24, 2012 09:13 am Post Subject: Life Insurance
It’s important to share original thoughts with today’s reader. Your post is a good example of how to make sound points and write interesting content. I agree with your views. Thank you for this post.
Posted: Mon Sep 24, 2012 06:16 pm Post Subject:
Just out of curiosity, which part are you in conflict with?
"(and income taxes are going to increase in the future)"
He's stating it as a fact. We don't know what will happen. Regardless, it isn't income taxes as a whole that matters in decision making. It is the tax rate that the individual will pay now vs. the tax rate that the individual will pay in the future that matters.
[/quote]
Posted: Mon Sep 24, 2012 07:53 pm Post Subject:
He's stating it as a fact
You have to be nuts to believe that this is not a fact. Whether there is a specific date attached to it or not, makes no difference.
Our government is writing checks it has no ability to cash today, so it covers them with debt and phantom money (I like to call it "Monopoly money" or "Magic money").
All you have to do is look at http://www.usdebtclock.org/ to get a whiff of the FACT that "we" (the US government, and by extension, every citizen and illegal immigrant) are broke and the first way the politicians will try to solve the problem is with higher taxes -- they cannot keep kicking the can down the road a year or two at a time because they are unwilling to make the decisions that have to be made.
Why is it that in nearly four years as President of the US, Mr. Obama has failed to sign a BUDGET that directs a multi-trillion dollar government? That is just plain irresponsible and a genuine lack of leadership. Another four years of that, and perhaps we won't have to worry about taxes, since we'll all be faithful, if conscripted, members of the Chinese Communist Party after they foreclose on us.
it isn't income taxes as a whole that matters in decision making. It is the tax rate that the individual will pay now vs. the tax rate that the individual will pay in the future
That is not really even part of the discussion. When life insurance is being promoted blindly by agents who don't even begin to understand taxation in America, as a conduit to TAX-FREE living, they lead people like the plaintiffs in the Tax Court matter whose policy lapsed because they failed to understand how it worked, borrowed heavily against it, did not pay loan interest, and allowed the policy to lapse for want of a $30 interest payment, which resulted in a $10,000 tax bill.
The taxpayers argued, "We never got any of the money you are claiming we owe income tax on." In essence, without stating the words by which the policy was sold, "We only took tax-free loans, why do you claim we owe income tax?".
I hope the plaintiffs turn around and file an action against the agent who misrepresented the use of the policy. That one should be a dead-bang winner. I'd be happy to testify as an expert witness in that one.
Posted: Mon Sep 24, 2012 09:05 pm Post Subject:
You have to be nuts to believe that this is not a fact.
I know the difference between fact and opinion. You are stating an opinion.
You may want to think that I'm nuts for disagreeing with your opinion.
However, I haven't stated that I disagree (or agree) with your opinion.
As for your opinion, I will agree with the premise that the government will want more revenues. However, since higher tax rates don't have to equal higher government revenues and because politicians care about re-election, higher tax rates in the future certainly are anything but a certainty.
Also, there are ways to raise taxes without raising income tax rates. And tax rates can be raised on some people and not on everybody.
Posted: Tue Sep 25, 2012 04:21 am Post Subject:
THE FACTS: A huge collection of tax cuts is scheduled to expire at the end of the year, affecting families at every income level and businesses of many stripes. Many of the tax cuts were first enacted under former President George W. Bush and extended under Obama.
If Congress does nothing, income tax rates would go up, estate taxes and investment taxes would increase and the alternative minimum tax would hit millions of middle-income people. A temporary payroll tax cut that has been of benefit to nearly every wage earner in 2011 and 2012 would expire, costing the average family an additional $1,000 a year.
In addition, dozens of other tax breaks for businesses and individuals that are routinely renewed each year already expired at the end of 2011. Congress was expected to renew many of them by January, so taxpayers could still claim them on their 2012 tax returns.
If Congress fails to act, businesses would lose a popular tax credit for research and development as well as generous tax breaks for investing in new plants and equipment. Individuals would lose federal tax breaks for paying local sales taxes, buying energy efficient appliances and using mass transit.
In all, federal taxes would increase by about $423 billion next year, according to figures from the nonpartisan Congressional Budget Office and the Joint Committee on Taxation, the official scorekeepers for Congress.
Combined with federal spending cuts scheduled to take effect next year, the one-two punch would probably send the U.S. economy back into recession, according to a recent CBO study.
Still, the tax increases would pale in comparison to those imposed to help finance World War II.
Before the 1940s, the individual income tax applied to only a small percentage of the population. By the end of war, the income tax was levied on most working people, with a top tax rate of 94 percent on income above $200,000.
By comparison, the current top rate is 35 percent, on taxable income above $388,350. If Congress does nothing, the top rate would return to 39.6 percent next year — the same rate that was in place for most of the 1990s.
In dollars, next year's tax hikes would be the biggest. But the population is more than twice as big as it was in the 1940s and the size of the U.S. economy is 80 times bigger. That's why economists usually measure taxes and government spending as a share of the economy.
The 1942 tax increase represented more than 5 percent of the U.S. economy, as measured by the gross domestic product, or GDP. The 1941 tax increase was 2.2 percent of GDP, according to a Treasury Department paper published in 2006.
Next year's looming tax increase would represent 2.6 percent of GDP — a huge tax hike but not the biggest.
Measured another way, the 1942 tax hike increased federal revenue by a whopping 71 percent, according to the Treasury Department paper. The 1941 tax hike increased federal revenue by 32 percent.
By comparison, next year's potential tax hike would increase federal revenues by 16 percent, according to CBO.
Posted: Tue Sep 25, 2012 04:31 am Post Subject:
However, when the Middle Class Death Tax returns on January 1, 2013, more people will need life insurance to keep from hurting their loved ones.
The death tax is currently 35% with an exemption of $5 million ($10 million for married couples). For those dying on or after January 1 2013, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.
Posted: Tue Sep 25, 2012 09:44 am Post Subject:
If this happens and that happens....blah, blah, blah. I'm simply pointing out that we don't know what will happen.
Is Jim going to pay higher taxes now or when he retires in 20 years? We don't know.
Life insurance does nothing to eliminate the "Middle Class Death Tax". In fact, it makes it worse if it is owned by the person who dies. What it does accomplish when it is done appropriately is to fund the paying of this tax. Cash can do this also. Life insurance is often the better solution than cash (investing the money instead of buying life insurance) because the timing of death is unknown and because the death benefit is tax free.
However, if we are just going to use our brilliance to be certain that tax rates are going to increase in the future, shouldn't we use our brilliance to be certain that life insurance death benefits will be taxed in the future? (Personally, I have no idea what will happen which is where my minor disagreement in this thread stems.)
Add your comment