So today's the cardinal lesson: we're talking about tax shelter and using life insurance as a tax, shelter to shelter your IRA from taxes.
So that's kind of a mouthful, and I know that many of you as soon as I say the word - life insurance you're. Thinking about what all the consumer activists tell you about it, and today I'm going to tell you what I think about it and I'm going to back it up with some proposals that we're going to talk about a little later.
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One particular client that came into us yeah, that's the first thing we want to do in the financial planning that we provide is we want to find out what are your goals what's important to you. , And this guy is not married so immediately, I'm thinking, okay, so You're not married uh, you're thinking about you need to be thinking about long-term care like who's going to take care of you.
He has two children, two adult children, so bingo. We need to talk about long-term care, to take care of yourself or to help your kids out of that so you're going to need some type of Protection for that. And then how important is it to him that he leaves an inheritance to his kids and I'm just hearing very important.
, So I'm thinking okay. Well, maybe we can combine these two things together in one solution where we can provide something that is going to pay for long-term care. But then, if you don't use it or you don't use it all for long-term care, then it's going to pay off as a death benefit to your children and a lot of people that are thinking of this.
Life Insurance Tax Shelter Best Explained
That's my IRA! That's what I'm going to do. It is, is that I'm going to leave it there not pay taxes on it, let it grow, and then, if I need it for long-term care, I'll access it. , If I don't need it for long-term care, I'll just take the minimums and then my kids will get The remainder and what they're going to get is a big huge tax bill.
So that's the first thing that we pointed out to him.
We said that if you don't look at this IRA as a transfer vehicle and I'm gonna talk about that a little bit. . So the solution we came up with is, we really came up with two solutions or two versions of the same policy, Which is um a life insurance policy for a quarter of a million dollars, that's at the minimum guaranteed premium.
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So it's going to cost this guy to buy a quarter of a million dollar life insurance policy about seven grand a year and that's seven grand a year is for life. . So if you go 15 years out he's paid in 100 and some thousand dollars if he died at 80 um, his kids are going to get $ 250,000 and it's going to be tax-free.
Life Insurance Tax Shelter Best Explained
If he needed long-term care at 80, you know he's still living. He is able to collect $ 5,000 a month for 50 months or just access that death benefit, while he's still alive.
And so and we're going to pay the premiums for this $ 7,000 a year out of his $ 4- $ 5,000 IRA or another ten or Eleven thousand dollars of premium to net $ 7,000 after taxes send into the life insurance and then creating this death benefit immediately. That's tax-free. ! So it's a way to use life insurance to pull down the value of your IRA, while you're building the value of your life insurance or of the death benefit.
So it's a much better transfer vehicle And very much like a Roth IRA because your kids are going to inherit that tax-free. Now the other thing that we created is basically the same policy. It's got a few different features to it, but it's designed around these two benefits the death benefit and long-term care.
But it's designed to create a whole big bucket of cash, and you know it's just created it's a savings account for your use where you're alive, so that, if you need this money later in life, you can get at it without paying taxes on it and we're Going to also fund that with distributions from the IRA, but we're basically going to clean out the IRA over 10 years. , I mean that's, that's essentially what we're going to do or if we don't clean it out, we're going to pretty close to come cleaning it out. We're going to reduce it way down and effectively move that money we're going to have to pay taxes before we move it, but we're going to move the net amount of money into this life insurance policy and Tom is going to show you this stuff.
Life Insurance Tax Shelter Best Explained
With some specifics for this one client who's 65 years old uh, well, why don't we just go and do that now Tom. Sure um. So We have the show notes in the link below and from the video, so you can click here to view these um.
We're going to come back to this one here in a second, but let's go look at the specifics of this policy here. , And so this first one is the one that Han just described it has the minimum premium for a guaranteed $ 250,000 to rest. The last to last the rest of his life, and so the premium is $ 7,600 a year um and again it's just you pay that as long as you, you need to have a death benefit of $ 250, and also they can use that same long-term amount.
$ 250 for long-term care benefits. He can access that, so it really kind of solves a couple. Different issues there.
The next policy is on the lower page, and so this one is a little bit more complicated, but kind of is doing some different things um with the overall same goal. If we want to provide a benefit to his kids as well as protecting from long-term care but as opposed to the minimum benefit, we've done the maximum allowable benefit, and so the IRS has some limitations on how much you can put into these policies. And John.
Life Insurance Tax Shelter Best Explained
You or Hans you were just talking about this before the video you know. What did you say about that. ? Well, you know in all my years of studying tax policy tax strategies, the actual reading, the IRS provisions on like how you pay taxes anytime, the IRS lets you do something, but they put a limit on it.
That's a big beacon to me that there might be something good in this strategy because they're saying you can do this, but you can only do so much of it and it's according to the size of the policy. . So that's where we've, given you two different versions of the same policy.
The first one Tom was showing you is the minimum premium to get the guaranteed benefits so we're paying the least we can possibly pay to get the death benefit and the long-term care benefit. . The next illustration, which is the one he's on now, what it does is it has you, pay the maximum premium for a quarter of a million dollars on a 65-year-old guy and stopping the premiums after 10 years.
. So how much is that premium Tom? So what we have illustrated here is a premium of $ 27,274 right here, a year for 10 years and then after 10 years, it's done you've paid in and you stopped the Premiums um. What you get for that on the projected value here is you have a death benefit that has grown to $ 514, so it's higher than the $ 250, and so that's going to be what would be provided to his children if he were to die at that point, but it also has an account value of you know.
Just you know above $ 300,000, so $ 303. Here it grows every year, so $ 319 and year 11. , So that account value, he has access to.
Life Insurance Tax Shelter Best Explained
He can pull money out for himself tax-free later on. In retirement, he can do there's a lot of flexibility with that um. It still has the long-term care benefit of the same $ 250,000 listed there, and so he can still use the policy for long-term care if he needs to.
But this is a way to really build up some cash value in the policy that he can access and use for himself later on in retirement. Yeah. So it's the same policy pay the minimum and get the death benefit tax-free, get the long-term care benefit tax-free.
Basically, have no cash value, it's not designed to be a savings account. , And then we went to the other extreme. Instead of paying the minimum, we're going to pay the maximum - and we spread that over 10 years, So we went to the maximum premium, which was at $ 27,000, which would be like $ 270, some thousand over 10 years, a little bit at a time.
And he's really going to have to withdraw about 40 grand every year out of his IRA to net this 27 so that he because he's got to pay taxes on that money. Now, whether he'd pay that taxes out of other money - I mean that's kind of - we can work all that out, but the point being he's trying to build a cash value account that's available for him. , So that if all his other retirement plans um go awry He needs to actually access this money later in life.
Life Insurance Tax Shelter Best Explained
He can access us a little bit at a time, a chunk at a time, and he can do that tax-free if he follows the guidelines that we show him. . We have a lot of clients that use this as a way to hedge against market performance, and so this particular policy.
It can't lose value if the stock market goes down, and so you could use this type of policy where say we're in a year like we've been in this year, where the markets have fallen, 20 %, or so maybe as opposed to living off your other investments And having to sell those at a loss, you could go to the life insurance policy, Withdraw some money that hasn't had those losses, allow your other investments times to recover and it gives you a hedge against performance in the market. So I mean there's a lot of flexibility. Hans actually started this business with his own life insurance, we're going to go over it in a second, but how about you speak a little bit about that.
Yeah well, and it's just kind of at the end of the presentation. You know I told that I'm you know I'm not only the CEO but I'm a client and I own most of the stuff. I talk about it on youtube and I guess over time we're going I'm going to be showing it to you.
Life Insurance Tax Shelter Best Explained
So, let's go back to that slide presentation with Tom and I'm going to show you, but I bought this life insurance policy in 2001 and I also bought one for the same amount on my spouse. My wife.
And I bought two more. Each of my children so that I could stuff this maximum amount of money into these things. , So I had to buy that much insurance, 2 million on me, 2 million on her a million on each of the kids just so that I could stuff this maximum amount.
Over a number of years. , So here we are 24 years later. , I'm 64, and if you look at it shows that cumulatively, I paid in $ 370,000 of premiums just of my hard-earned money, and I was making a very good income in my 40s and didn't need all that money to spend.
I paid a lot of taxes. But of the net money. I was kind of afraid.
I was going to spend it and start living off of it and I bought some nice toys and luxury things, but I still stuffed a lot of it. Away. And you know it was there.
I could have gotten at it, but I didn't, and then, when I came time to open this business, I actually borrowed money out of all four of these policies to start the business cardinal and I've now since paid that money back, which is a very good feeling. . But if you look in there, my cash value is $ 619,000, just in my policy.
So that's a pretty sweet savings account and it's $ 250,000 more than I put in there um I put in like $ 370 cumulative, so I've made in growth $ 250 and That's net of all the life insurance charges. This thing gets charged every month about almost $ 800 bucks a month for the two million dollars worth of life insurance that goes on every Month, but even with all that going on I'm that much ahead of the game. , And so, if I needed money tomorrow, a Sizable amount - I could get this money in two days and we're offering that same thing in an IRA strategy to people that are 65 or if somebody's listening in this 40.
I can offer you something even better than this when I'm showing you mine, but so now we're taking starting at 65. If you want to start taking money out of your IRA, which is tax infested and it's got, you know future taxation, it's just getting more. So just the strategy that we showed you of these two things um.
This is a way to do it, I'm just showing you this not to sit here and gloat, but I've got way more than that in life insurance, and I don't really foresee myself using this money in the future. I think it's just going to sit there. It's going to earn it 3 percent, which is really safe.
I could invest this money, they have options inside of this policy, but because I'm up there in years, I don't there's no benefit to me to take the risk. . So it's there.
If I need it, probably not going to use it, and then it's going to provide this tax-free Death benefit really to my wife, if I go early or ultimately to the kids that money's going to pass on, it's all tax-free. So I just wanted to show this to everybody that I buy and I own everything that I'm talking about it just amazes me how so many consumer activists that really don't understand. All of this is so negative about life insurance that they could just somehow tell me that that's a bad deal and what I will tell you is I've had the pleasure of doing financial planning for a lot of very wealthy people over the years and most wealthy People that I know when I look into their stuff, they own lots of life insurance.
Life Insurance Tax Shelter Best Explained
So it's just because it's you know it makes sense, tax, wise security, wise. You can borrow that against that money, like I said, wealthy people, own life insurance typically.
. I also want to make the point with that it's similar to a Roth, where it's tax-free, you can pull it out, tax-free, that's via a loan. We can get into the specifics if you're interested um what's different and what's actually better about the life insurance than a Roth IRA or Roth 401k.
Are you can pay that money Back? Are you know once you've retired? If you pull money out of the Roth, you don't have any income, and you can't contribute money back into the Roth account. So if you've pulled it out, it's kind of out of the Roth now. , Whereas in life insurance you can pull it out, live off of it, and then you say in my scenario earlier: the market recovers.
You could pay it back and now you still have this pot of money that you have access to. . I mean this is one thing that a lot of wealthy people do.
Life Insurance Tax Shelter Best Explained
Are they have ways to access money? Tax-Free? I mean you know when you, when you make a lot of money, your taxes are really high, so anything you can do to avoid. Taxation is really helpful and life insurance has a lot of benefits just from a tax standpoint to be able to use it to benefit yourself. Well, and if you have an IRA with several hundred thousand dollars in it, you are wealthy people okay.
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I mean because it's discretionary money - it's there you're gonna - have to pay taxes on it sooner or later. So this is a way to get it out of there pay tax at lower rates and then have it available either for you or for your heirs Or for your long-term care, all tax-free, and that's what we're after here.
So with that being said, I mean that's, a big part of our practice is sitting down with people and thinking through we got a problem. We got several hundred thousand dollars some people up over a million two million. We've got this pre-tax money and we're just sitting here saying I got a while to go to minimum distributions, just let it grow.
A lot of people are bumming now about how they lost whatever percentage. You know over this year of 2022, but we're talking to people about the taxes, we're saying, there's a problem, that's getting bigger that needs to be addressed and it will need to be addressed and your partner in your IRA, which is the government they're fine, they're, a Silent partner they're just sitting there, they know they're going to get their money either while you're alive through minimum distributions or when you die. Some part of your kids is a big percentage of these.
The kids just draw it all out because they need the money and they want to spend the money and the taxes they didn't earn the money. So it's just you know they pay it in taxes.
So this is just one of the strategies we use and when we use any of these strategies, what we're doing is we're creating a larger inheritance. That's that's. The whole goal is that more money is going to go to these kids.
If that's you know, those are your heirs. More control, both while you're alive and even after your death, you can control how life insurance is distributed to your beneficiaries. If you didn't want to send them a whole bunch of money at one time and then less tax - and you know I already made this point as an IRA savings account - has the government as a partner - I mean it just or it's like there's a lien against Your account - and we want to start addressing that, the sooner the better the secure act, which is this thing that was passed in 2019, that took effect in 2020, was designed.
I mean they call it the security act. It was to make your retirement more secure, but I'm going to tell you what it did. Is it made it more secure that the IRS is going to get their money quicker when this thing is left for because it has the biggest effect on Beneficiaries?
So I'll? Just leave it at that. We've done other videos on that, but it made IRA less desirable as a place to transfer money to the next generation or as a wealth transfer vehicle and they weren't too desirable before the security act. But it made them less desirable and the government says behind that is the IRA’s were really never meant to be a wealth transfer vehicle.
They were meant to create a retirement income. So what we're doing is trying to make this the best it could be for you um. When tax rates go up - and you know Tom - you had a little something to say on this about what the man on the street is saying, or the woman on the street is saying.
Yeah, and so you know this common wisdom, that's out there and if you Went and asked you know: people on the street I'd say about 9 out of 10 would say: oh my taxes are going to be less than retirement and historically, that's probably been true for most people, but in the current environment, where tax rates are and what the Debt situation is and what we're projecting tax rates to be in the future I mean we know they're going up in 2026, they're, probably going to go up higher than That is that's just not the case anymore. Is this. Taxes are likely going to be higher in the future, and so what's been, this idea of, let's just put it in these tax-deferred accounts traditional IRA’s 401ks, not pay taxes.
Life Insurance Tax Shelter Best Explained
Now, because we're going to pay the in the future, you might be setting yourself up for this huge tax bill in retirement when you at least can afford to pay it, and so I think, coming up with the strategy around that money now is important. So we can effectively pay fewer taxes over the life of that money versus delaying it, and we've had a lot of CPAs. Now we've had some debates back and forth about this, and most of them we've converted to now they were the most anti-Roth conversions or life insurance.
Things like this and now they're the highest. Proponents of this there's like we're doing this as much as we can, because they just have come around to see that, in the future, tax rates are likely going to be higher. Pay the taxes now in moderation, as opposed to not taking anything out of it.
Till you absolutely have to and paying higher taxes into the future. Yeah. That's been a tough sale to a CPA, And we have you know in the 20s and 30s of CPA clients that we've either had to convert them to this or they just were kind of neutral.
And once we sat down and explained it and we just asked them: what do you think? Tax rates are going to be 10 20 years from now on, $ 300,000 or $ 200,000 or $ 150,000, and you know, and then we show them what they are now and most people say they're going to go up, and I want to make the point when Tax rates go up, tax-free accounts are more valuable after that happens, and taxable accounts are less valuable, as tax rates go up or it actually puts your government partner in a stronger place. . So with that being said, I'm Hans Scheil and I'm Tom Griffith, and we thank you for reading.
Thank you.
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