Retirement Plan Regarding Life Insurance

[fredbull337]

I currently own an independent P&C agency although I do have some familiarity with the Circle of Wealth philosophy. My question is, since I don't have an employer matching me on a 401k and I have doubts about it to begin with, couldn't I just write myself a whole life 65 policy and dump as much into it over the next 30 years or so as possible. Then upon retirement if one of my kids wants to take over the business, instead of writing me a check each month for the buyout they can repay the policy loans that I will be taking out. That way I can take policy loans with no income tax, they can avoid payroll tax (and they will get it back when I pass anyways) and I can live much longer on the cash value with them paying the loans back over a 10 year period. Am i missing something here? I know some of you guys are very proficient with the tax laws and stuff like that so I figured I would venture on over here to see if this plan has any holes (which I would assume it does because I am not that smart.)

 

[BNTRS]

In many respects yes you can do this. There's some technical fine tuning that will require a little paperwork here and there, but this is mostly doable as described.

From a very cursory point of view (i.e. I'm not really advising you on specifics here):

You'd establish a NQDC plan and fund it with life insurance. The eventual buy out is not tied to loan repayment but since the company owns the policy, there'd be little stopping the new owner from doing that.

Unless alternatively you want to own the policy (no business ownership) and then receive a systematic buy out to use and pay off loan. None of this is tied to the policy, the official documents stipulate things like the buy out or the retirement benefit coming from the policy if owned by the business.

 

[BYSFG]

Im still pretty new to the fine side of things such as the topic at hand but I can only imagine that guidelines (MEC/Single/Level) would be a deciding factor specifically to what youre asking.

Doesnt sound like annuities are an option but you should do some research into IULs and what BNTRS pointed out. Not suggesting anything but that you should look at every option and do research.

 

[DHK]

I currently own an independent P&C agency although I do have some familiarity with the Circle of Wealth philosophy. My question is, since I don't have an employer matching me on a 401k and I have doubts about it to begin with, couldn't I just write myself a whole life 65 policy and dump as much into it over the next 30 years or so as possible. Then upon retirement if one of my kids wants to take over the business, instead of writing me a check each month for the buyout they can repay the policy loans that I will be taking out. That way I can take policy loans with no income tax, they can avoid payroll tax (and they will get it back when I pass anyways) and I can live much longer on the cash value with them paying the loans back over a 10 year period. Am i missing something here? I know some of you guys are very proficient with the tax laws and stuff like that so I figured I would venture on over here to see if this plan has any holes (which I would assume it does because I am not that smart.)

Depending on how you're funding your policy, you can use a 'key man' life insurance policy to help you as another backup credit line. (Key man policy meaning that the business owns and is the beneficiary on your policy.) Just keep in mind that the interest paid on loans against the policy won't be deductible because they are credited to your own asset.

What you're really describing... is a seller-assisted method of funding a business succession plan. However, in this instance, you're not just selling the business, but including the policy as a business asset that is also transferred to the new owners (which should also mean that you can command a higher selling price too?).

I wouldn't worry so much about the cash values as much as you are securing a paid up permanent death benefit. (In this case, Whole Life is VASTLY superior to IUL because IUL can NEVER be "paid up". It can be well-funded and earn a lot... but never have a "paid up" death benefit.)

Now, you could leverage the death benefit with a BANK secured loan to "buy you out" of the business. In this instance, it's not about the cash values at all as they'll generally be much less than the death benefit - however, each policy is different.

The new business owners are responsible for making the payments on that loan to the bank (interest only payments and generally tax-deductible to the business)... and it is responsible for repaying the loan back with the proceeds of the policy. (If it was a loan against the cash value, it wouldn't be tax deductible as the payments go back to the policy to restore their values.)

That's where the capital can come from. Now as far as capital gains taxes on the sale of the business for value above basis... that's a whole separate conversation.

The bottom line results are: You get a lump sum up front and the payments on the business should be substantially less because they are paying interest only payments, instead of principal and interest payments to you. Plus, they're paying to the bank instead of you, so that might help to have a 3rd party in the relationship. And the bank has security/collateral that isn't directly tied to the business performance & cash flows because they'll have a lien on the policy, so to speak.

Like others, this is not advice, but this is probably the general direction you want to head into.

 

[ktri14]

I would seek out someone who is very well-versed in designing custom whole life policies that are specifically used to warehouse large amounts of cash.

This should be done with a mutual insurance company (not a stock company) that offers non-direct recognition dividend-participating whole life policies. (i.e. New York Life, Ohio National, Lafayette Life) When you use one of these types of companies, you can take policy loans, while still earning interest on the before-loan amount. For example: You have $100K in a custom whole life policy and you take a $30k policy loan. The above-mentioned companies will allow you to continue earning interest on $100k, as opposed to now $70k. This is how you capture huge opportunity costs and keep your pot "100% full" on average.

Another thing that I didn't see mentioned in any of the above responses is, you should make sure that your policy will never turn into a MEC (modified endowment contract) and becomes taxable. You need to know what your 7-pay limit is, so you know how much cash you can stuff in there every year, without it getting reported to the IRS and becoming taxed. You cannot just stuff as much money in there as you want.

However, a good advisor knows how to manipulate the 7-pay, by adding a term rider to the policy. This will allow you to put large amounts in a policy, every year. There is quite a bit more to this strategy, but goes beyond the scope of a forum post. Our firm specializes in these of types polices and, if done correctly, they are an absolute beast of a financial vehicle.

 

[DHK]

Oh boy. Here we go - another brainwashed one who is sold ONLY on mutual insurance companies. It's amazing the various kinds of kool-aid available in the insurance industry - 1st MLMs, then the "Mutuals are the only moral company out there because stock companies are only after their bottom line".

IULs can also be appropriate and have the potential to earn a higher return depending on the performance of the underlying index segment. However, it's downside is that it is possible to have 0% years, so compounding can be stiffled. In the long run, they may both perform about the same, but the IUL will also have increasing costs of insurance to contend with.

Oh, and IULs have variable loans available so your original balance can continue to grow as though you haven't touched it... offset by the annual loan costs that should be paid out of one's pocket instead out of the policy earnings.

 

[ktri14]

I said no such thing about the moral ethics of stock companies. However, in this situation, I would want my money with a company where the policy holders are the owners, not shareholders. All the profit from a mutual insurance company is returned to the whole life policy owners, in the form of a tax-free dividend. When reinvested into your policy every year, it does incredible things for the growth. 100% tax-free growth, on top of that (as long as it never becomes a MEC). It's the only tax-free dividend in the world.

Stock companies return dividends to shareholders (not policy owners) that are taxable at the capital gains rate. (I believe capital gains will be abolished in the future)

When you take a policy loan from certain mutual companies that offer non-direct recognition dividend participating custom whole life polices, the company allows you to continue earning interest on the "before-loan" amount, while not affecting your dividend amount. For example: you have $100k in a policy and take a $30k loan, the company will allow you to earn interest on the full $100k, while you're paying back the loan. Furthermore, you get to recoup part of the loan and interest payments back, when you receive your dividend. When you finance everything this way, instead of using banks and lenders, you capture huge opportunity costs and a greater lifetime rate of return.

I like mutual companies because they're not traded on the market and thrive through crashes and recessions. For example: New York Life has paid a dividend every year for over 160 years in a row, without fail. That's reliability.

But, it's all relative to what you want. I like peace of mind and capturing a greater lifetime rate of return.

Don't forget, the future of tax-rates is uncertain. At one time in America, the top marginal bracket was over 90%! We're now at a low point, historically. Pay taxes now and position your after-tax money in a tax-free environment. Just know your 7-pay and keep it under the MEC line. Where do you think taxes are headed? Probably up.

 

[BNTRS]

I like mutual companies because they're not traded on the market and thrive through crashes and recessions. For example: New York Life has paid a dividend every year for over 160 years in a row, without fail. That's reliability.

Please share with us the specific years that MetLife, Prudential, John Hancock, Lincoln National, etc. have skipped a dividend on their old par whole life business.

 

[ktri14]

Please share with us the specific years that MetLife, Prudential, John Hancock, Lincoln National, etc. have skipped a dividend on their old par whole life business.

It is true that many publicly traded insurance companies have paid out dividends consistently to their whole life policy owners. However, it is a much smaller dividend, compared to those of a mutual company.

The reason is, stock companies have to also pay dividends to their shareholders (regardless if they even own a policy with that company), taking much of the profit away from the whole life policy owners.

Mutual companies give 100% of the profit back to whole life policy owners, whereas stock companies give a large part of their profit to the shareholders, causing the whole life dividends to be much smaller.

I don't know about you, but I want the whole dividend. I don't want to split my dividend with a bunch of shareholders.

Furthermore, I'm not saying that mutual companies are the end-all-be-all. I'm simply saying that, if you're going to warehouse your hard-earned money in cash value life insurance for the purposes of retirement and borrowing, you will get many more benefits and a much greater lifetime rate of return with a mutual company that offers non-direct recognition dividend-paying whole life policies.

 

[DHK]

It is true that many publicly traded insurance companies have paid out dividends consistently to their whole life policy owners. However, it is a much smaller dividend, compared to those of a mutual company.

The reason is, stock companies have to also pay dividends to their shareholders (regardless if they even own a policy with that company), taking much of the profit away from the whole life policy owners.

Mutual companies give 100% of the profit back to whole life policy owners, whereas stock companies give a large part of their profit to the shareholders, causing the whole life dividends to be much smaller.

I don't know about you, but I want the whole dividend. I don't want to split my dividend with a bunch of shareholders.

Furthermore, I'm not saying that mutual companies are the end-all-be-all. I'm simply saying that, if you're going to warehouse your hard-earned money in cash value life insurance for the purposes of retirement and borrowing, you will get many more benefits and a much greater lifetime rate of return with a mutual company that offers non-direct recognition dividend-paying whole life policies.

Did you know... that company declared dividends... and policy performance... are two vastly different things?

When a company puts an ad in the Wall Street Journal saying that they declared a 7% dividend... that doesn't mean that all their policies earned 7% returns. You DO know that, right?

There aren't many stock companies that offer participating whole life insurance. One that comes to mind is American National. However, if I remember correctly, 1/3 of the company is "owned" by policyholders and a family trust, while 2/3 of the company is owned by shareholders. (I'm not quite exact on this, but let's say it's true anyway.)

If a company declares a dividend, it will be distributed among ALL those who have an ownership interest and according to their ownership interest.

So... why would someone get a "smaller dividend" when it's all based on their % of ownership interest?

They won't.

You've been falling prey to mother mutual's brainwashing... without learning how to go deeper and beyond what they have taught you.