5 life insurance plans every financial advisor should know
June 4, 2014 by Nicholas Paleveda MBA J.D. LL.M
Here are the top five life insurance plans every financial advisor, CPA and attorney must know:
5. Max-funded non-MEC IUL
The MEC rules under 7702 took the fun out of life insurance as an investment. However, with careful planning, a producer can structure a policy which is a non-MEC and maximum-funded. Why? The policy will allow tax-free distributions up to basis and generally wash loans after that as distributions from the policy. In the meantime a client can enjoy basically tax-free buildup inside the policy. The variations are non-MEC IUL,VUL and UL. It competes favorably with CDs, municipal bonds and U.S. Treasuries, but it also has a death benefit.
4. Life with living benefits
In a world where health costs continue to rise, life insurance companies now offer life insurance with living benefits. Benefits for long-term care, disability and health care are taken from the face amount of the policy. Once again, this allows for tax-free buildup inside the policy but provides health benefits, as well. In addition, the life insurance policy can be converted to a lifetime income; check the annuity conversion rates at the back of the policy.
3. The Section 79 plan
Love them or hate them, Section 79 plans allow a deduction of the first $50,000 of group term insurance. However, the regulations allow deductions which in many cases will exceed this cost. In some cases, up to 100 percent down to 66 percent of the policy costs are deductible.
2. The 412(e)(3) plan
There is really no such creature as a 412(e)(3) plan. This is a defined benefit plan funded exclusively with annuity and insurance contracts. Life insurance is only an incidental benefit of the plan.
Incidental benefit is 100 times the monthly earnings or no more than 50 percent of the account in a whole life contract. But, be careful; the IRS, now on audit, has deemed any plan that does not follow the 100-times-monthly-earnings rule and has more than $100,000 over this amount to be “excess insurance” subject to the “listed transaction” rules (see Situation 2 of Rev. Rul. 2004-20).
See also: What producers must know about 412(e)(3) plans
1. Private placement life
One of the best-kept secrets in tax planning has been private placement life insurance, which makes it possible for an investor to capture returns tax-free. The appeal of private placement life insurance is that the investment options can be tailored to a high-end client’s needs and the cost of insurance per dollar of coverage is much reduced. The tax-free buildup takes place inside a policy where the investor controls the investments.
