When I began my career in life insurance in 2001 one of my
mentors suggested that I go to the library and get a book or two written by Ed
Slott. They assured me that he was ‘the authority’ on IRA’s and tax efficiency
in investing. Not much has changed since 2001. I recently watched a webinar
that was recorded a few years ago in which Ed Slott explains why he calls Life
Insurance the ‘single biggest benefit in the tax code’. He further names the
four areas of value that he believes life insurance (ca certain plan of life
insurance) brings to the investor: control, options, flexibility and certainty.
This approach removes ‘stock market risk and tax risk’ and allows the owner to
grow money inside of ‘certain types’ of life insurance policies tax free and
allows for tax-free distributions during their lifetime.
Let’s take a closer look at the type of life insurance we
are talking about. To better understand ‘the why’ of life insurance we need to
understand how life insurance has been viewed by the average American. Life
insurance is usually thought of as a product that you pay as ‘little as
possible’ for to get ‘the highest death benefit possible’. That works well when
you are looking at making a ‘money purchase’. However we are talking about the
opposite situation here. An Index Universal Life policy from the right carrier
(certain carriers have created IUL policies which are income/distribution producing
machines). These policies are ‘reverse-engineered’ so-to-speak to be able to
have the policy owner invest as much premium as possible with the ‘lowest
amount of death benefit allowable by the IRS’ to create as much tax-free
income/distribution as possible in the future.
If this is such a big deal then why doesn’t everyone use
this strategy? Most people that I know have a 401k and IRA accounts. While this
question is asked quite often the answer is right on the surface. You don’t
have to look further than inside of perhaps your own company. Did you know that
the most tax efficient Executive Benefit Retirement Plans, such as
Non-Qualified Deferred Comp plans, Cash Balance Pension Plans and Premium
Financed plans? Those plans, and others are most likely a part of the upper
management of the company that you and/or friends and neighbors you know work
for. It just makes sense.
High-end income earners already have a tax problem. They are
looking for a way to pay less in taxes now and in the future. The company is
also looking for ways to lower the cost of their executive benefit plan’s,
retirement plan’s and also add money back into their balance sheet over-time.
These are all additional benefits of using life insurance as part of a
retirement plan. So why isn’t everyone using this approach? Follow the
money…people are traditional by nature. If everyone else is doing one thing it
is much easier to convince people that ‘keeping with the status quo is the
smart thing to do’. Going ‘the-way’ of ‘the road less traveled’ takes
additional steps to teach and explain and it does not have the same payout to
the broker as one that involves life insurance. (AUM, Assets Under Management
are much easier to set-up or keep in place with a plan and over time they pay
the person representing the plan much better).
I will leave you with this simple scenario that is all-too
‘real life’ for most of American’s at some point in the future: Which would you
rather have at retirement, $500,000 in your nest-egg or $1,000,000? The answer
is not so simple. This is a loaded question obviously. With the account with
$1.0mm in it was money that would be taxed upon distribution and your
distribution rate would be 5% annually to assure that you did not run out of
money at retirement. The smaller account was money that would be tax-free upon
withdrawal and your withdrawal rate would be about 11% annually, now which
account would you prefer at retirement?