Ohio National and Constellation

[ATM]

@Allen Trent With max-funded life insurance, these plans value go up because of their immunity to the tax code. (Tax exempt cash flow against the policy.)

So, as far as my documentation: bring it on. If someone tried to sue me for Elder Abuse (hey, I'm in California)... I trust my documentation. And no, it was not using unrealistic expectations or numbers (aside from maybe the 1.75%).

I don't have a problem with the 1.75% expense. For one thing, some mutual fund expenses are not and cannot be disclosed since the fund doesn't know what they will be in any given year, such as transaction costs.

What I would have an issue with is if you used the sentence "With max-funded life insurance, these plans value go up because of their immunity to the tax code. (Tax exempt cash flow against the policy.)" with a client.

Nothing is immune from the tax code. Currently life insurance is afforded special tax treatment, but that can change in one day, with the next bill to be passed into law.

All it takes is one senator looking to make some points and getting enough media coverage because the people who use insurance for tax free cash flow are all 1%, evil capitalists, and the whole thing blows up.

 

[scagnt83]

I don't have a problem with the 1.75% expense. For one thing, some mutual fund expenses are not and cannot be disclosed since the fund doesn't know what they will be in any given year, such as transaction costs.

Mutual Funds are required to disclose an expected expense ratio. Sometimes it can vary a bit because of unknown expenses. But investors are not going into the fund blind by any means.

1.75% is extremely high for this time in history. Even a decade ago that would be high.

On average, fund expenses have seen a decline of 60%+ over the past 20 years.

The current average expense ratio is 0.70% for an actively managed mutual fund.

Its 0.30% average for a passively managed mutual fund. (such as an index fund)

ETFs are even lower at 0.20% range average.

Sure some are in the 1.75% range, but those are few and far between, and often are specialty funds.

----

Some life insurers sell term at 2x the cost of other carriers. Should we use the highest priced product in our comparisons with clients when selling against term insurance?

I think not.

 

[DHK]

Nothing is immune from the tax code. Currently life insurance is afforded special tax treatment, but that can change in one day, with the next bill to be passed into law.

Look up GAO January 1990 page 27. (GAO stands for General Accounting Office of the United States.)

The tax exemption for life insurance applies for ALL loans.

So, as soon as loans become taxable as income... THEN we'll have a problem for the ENTIRE economy. Credit cards, auto loans, reverse mortgages, primary mortgages, commercial mortgages, and margin loans... we have no problem until all those things are counted and reported as income.

This is why much of what YOU may think about what we do... isn't necessarily so.

 

[DHK]

Here is the text:

"If a policyholder borrows the inside buildup from his or her life insurance policy, the amount borrowed is considered a transfer of capital, not a realization of income, and, therefore, is not subject to taxation. [...] The ability to borrow against a life insurance policy means that the interest income that is supposed to be building up to fund death benefits can instead be a source of untaxed current income. If the loans are not repaid, the inside buildup will never be taxed; death benefits will simply be reduced by the amount of the loan. Thus, policyholders have the use of tax-free income for purposes other than insurance at the expense of reduced death benefits for their beneficiaries."

That means that you can use your life insurance while you're alive and spend money against your dead self!

And as soon as all loans become a taxable event... then we'll have something to worry about.

Even if the build-up inside the policy becomes taxable... that won't affect the tax-exemption of this strategy.

 

[scagnt83]

Look up GAO January 1990 page 27. (GAO stands for General Accounting Office of the United States.)

The tax exemption for life insurance applies for ALL loans.

So, as soon as loans become taxable as income... THEN we'll have a problem for the ENTIRE economy. Credit cards, auto loans, reverse mortgages, primary mortgages, commercial mortgages, and margin loans... we have no problem until all those things are counted and reported as income.

This is why much of what YOU may think about what we do... isn't necessarily so.

I understand that. I also understand that any change in the law, would likely include grandfather status for existing loans.

However, Congress has every ability to exclude any type of loan from that law if they desire to do so.

So current policies should be fine. But the status for new policies could certainly be changed if congress wants to.

 

[DHK]

Yes, the last time laws changed, every policy was grandfathered under the old rules.

However, I believe that as soon as one kind of loan becomes taxable as income (I don't know of any)... that will collapse our entire economy.

 

[ATM]

Look up GAO January 1990 page 27. (GAO stands for General Accounting Office of the United States.)

The tax exemption for life insurance applies for ALL loans.

So, as soon as loans become taxable as income... THEN we'll have a problem for the ENTIRE economy. Credit cards, auto loans, reverse mortgages, primary mortgages, commercial mortgages, and margin loans... we have no problem until all those things are counted and reported as income.

This is why much of what YOU may think about what we do... isn't necessarily so.

Are loans against an annuity taxable? The entire economy is not trouble because of that part of the tax code, is it?

 

[pfg1]

Look up GAO January 1990 page 27. (GAO stands for General Accounting Office of the United States.)

The tax exemption for life insurance applies for ALL loans.

So, as soon as loans become taxable as income... THEN we'll have a problem for the ENTIRE economy. Credit cards, auto loans, reverse mortgages, primary mortgages, commercial mortgages, and margin loans... we have no problem until all those things are counted and reported as income.

This is why much of what YOU may think about what we do... isn't necessarily so.

I agree that it will likely not change, and if so likely will be grandfathered. However we are in some interesting times.

I'm sure that you understand that in that document... the GAO is literally red flagging that as a potential problem for the govt. They want to get rid of it. The GAO doesn't put its stamp of approval on things, it seeks to figure out how to make changes in favor of the gov't (and in this case) tax revenue.

I've seen people use that document as essentially the Gov'ts stamp of approval on no taxation of CV...which is way way off. If they had it their way that would go away. Heck if they had it their way, they'd tax us to breathe most likely.

 

[Allen Trent]

Are loans against an annuity taxable? The entire economy is not trouble because of that part of the tax code, is it?

1. Loans against MECs are taxable.
2. Having a bank become a collateral assignee on a MEC is taxable.
3. Interest charged on a loan each year on a MEC is taxable.
4. Ownership change/Assignment on a MEC is a taxable event(even an ownership change at death of the parent owner to insured).

on the positive note, the cost basis is adjusted in these situations in relation to the 1099 that goes out to report any taxable gain that was triggered.

So, your point is valid that there are already regs that treat a loan as taxable in some circumstances.

 

[DHK]

Are loans against an annuity taxable? The entire economy is not trouble because of that part of the tax code, is it?

Let's have a little fun:

Why can't you borrow against an IRA? (Besides the fact that it will invalidate your IRA if you did it and make the entire IRA taxable that year.)

What is the principle behind not being able to borrow against your IRA?