What I want to talk about today is the unique advantage that business owners have regarding life insurance as an investment tool. No! I am not talking about Whole Life. The argument of Life Insurance being a good investment will continue to go on as long as birds fly. If you would like my opinion to whether certain life insurance products are good investments, my response is “sometimes”, though here is one where I say “Definitely Yes”.
Let’s take our old forgotten friend “Joe the plumber” and let’s say that Joe has four young plumbers working under him. Joe’s business is going well, his bills are being paid, and he currently has a wife and two kids. Sound familiar?
Now Joe is in a bit of a difficult situation because he wants to put a retirement account together for himself and his family. He has looked at setting up a 401K through his business but he didn’t know that he legally has to make contributions for his employees. In fact his contributions are regulated by how much they can contribute out of each pay check, so he sees himself being very limited. His employees are young and not as organized, only two of them are able to put money into a retirement account at all, if one was set up.
Joe’s combined household income is too high to open an IRA, but even if it wasn’t, Joe would like to be able to contribute more than $5,000 per year when possible. So there is a painted picture of Joe and though it might be slightly different from you, the principals remain the same.
Many business owners face retirement situations like Joe. They want to have the ability to put money away without being tied to a bunch of regulations and tax law.
There is a product in this case which can be very effective for both you and Joe.
It has been found that when set up properly, an Equity Index Universal Life Insurance policy can satisfy these needs and provide a unique income tax shelter for retirement years.
How? First off let’s be honest and clear about underwriting in regards to life insurance. If you smoke or have a serious health condition, this product will probably not be in your best interests.
If you are 55 years old or less and in good health then by all means, read on! Here is how it works: We (the agency) design the insurance plan around the monthly amount you can contribute toward your retirement fund. The insurance amount is secondary and is just a vehicle for tax shelter.
There is a tax law that is over 100 years old, that gives this program its defining attribute. It allows the insured (you) to put moneys into the insurance policy, not to exceed the face amount of insurance. Ok! Our logic as agents is that we simply max out the insurance policy. So the money you put in is carrying the “least amount of insurance cost as possible” and therefore allowing the “excess funds” to grow aggressively.
Let’s take a quick break to understand the pros and cons of a product like this:
Pros:
- You don’t have to contribute towards your employees retirement (saved money)
- You don’t have any age 59 ½ restrictions on getting the money (life insurance attribute)
- You can pick how the money is allocated just like a traditional investment. (Variable, Index, or Fixed)
- If you die your survivors receive the insurance (always greater than the amount you invested in the first place)
- The income when you pull it out is completely tax free. ( As long as you stay within the tax guideline)
Sound pretty good! The premiums are flexible from month to month, or year to year. So you can pull back if things get tight financially, but when you have a surplus of funds you can also increase your deposit.
What should you know about this product?
Cons:
- There is a cost of insurance associated in the investment (it’s less than contribution in a 401K, much less!!!) (if you are not very healthy we should compare other products)
- If you make an early withdraw in the first few years are you at risk? (yes, this is a long-term investment, with certain surrender penalties) (always ask about penalties)
- If you need to roll the money over to another company you can (Oh wait, that’s a pro
Also, make sure that this account is not your emergency money, this is a retirement fund, not a 5 year cd. The average retirement fund takes 20 years to mature properly. So do your homework.
And secondly, knowing how the product works in tune with the insurance is imperative. The healthier you are and the longer you let this product grow, the better it will do for you. The nuts and bolts are this: Most of the clients we set up on this program receive all the life insurance they ever needed. They end up pulling out 5-8 times what they put into the program. Lastly, its all tax free income during retirement, so you never have to pay a dollar to Uncle Sam.
In closing, most business owners have not seen this approach to retirement planning and I felt it necessary to give an overview of how we like to address it. Of course if you have any questions, or if you would like me to forecast this for you beside another investment you have, I’d be happy to. Request an Illustration
