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Friday, August 23, 2013

Nobody is using IRS Sec. 101(a) plans!

Well, this post title is a myth.  Lots of people own Sec. 101(a) plans.  Most just don't know it.  The sad thing is, though, except by the wealthy, the provisions of Sec. 101(a) are rarely fully used.  If you've already google searched Sec. 101(a) you know that this post is just in time for September, which is Life Insurance Awareness Month. 
Sec. 101(a), along with other tax code provisions, delineates some of the amazing tax and asset-leveraging advantages of life insurance.  Reminds me of a comedian who wondered about the persuasive shyster who invented life insurance:  "Hey, pay me $100 and then when you die I'll give you back $200!".  I think the reason people are turned off about life insurance is because of life agents, not the products they sell.  It doesn't help that financial "gurus" like Suze Orman have been telling people for years to buy term, not whole life (although she has changed her tune lately).  But that advice only takes narrow advantage of Sec. 101(a)(1).  It's like buying an umbrella but not being able to open it unless you're dead.
What can you do with the latest life insurance hybrid products these days?  Here's a partial laundry list, (all of which of course are totally contingent upon the insurer, the specific product design, policy provisions, your health and family history, etc.):
  • Pass unneeded IRA money to  your kids or grandkids completely tax-free, multiplied 2-3 fold
  • Pay life insurance premiums with tax-free dollars
  • Earn 5-8 times current CD interest rates, also tax-free
  • Guarantee that your children can pay for college, whether you live or die
  • If you're already maxing out a Roth, build a supplemental retirement nest egg to provide future tax-free income
  • Participate in a variety of market indexes with your worst-case annual loss being . . . zero
  • Have coverage that will actually be in force when you die.  Very very very few term policies ever pay off because they usually lapse (due to gargantuan premium increases).
  • Buy more coverage cheaper than term over your lifetime.  Go ahead.  Compare buy-term-and-invest-the-difference with an equity indexed universal life policy.
  • Have a source for low or no interest loans if you need a house down payment, want to take a trip, or make a major purchase.  And don't pay it back until you die.
And that's just the beginning.

I'm not sure how I feel about all this because, originally, tax advantages were given to life insurance for the benefit of destitute widows and orphans.  Now it seems the wealthy are the main beneficiaries of these provisions.  Which is why on an annual basis Congress considers attacking them or at least means testing them to get more tax revenue.  But my job is do give you the best advice I can under current laws, regulations and economic conditions.  You should take it.

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