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Why can American life insurance hide money?What is the maximum deposit in the policy account?This is actually a historical drama of "Gong Dou"...

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American Life InsuranceGuide editor's note: The history of using life insurance policies to hide money, how much money can be hidden, and tax-free withdrawal is a historical story of the government, insurance companies, and the market interacting, competing and progressing.

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In the early 20s,Universal Insurance ULThe product turned out to provide a huge improvement in the “flexibility” of paying premiums and revolutionizedSavings and Dividend Insurance whole life "One piece" life.At that time, because the relevant laws and tax regulations had not kept up, many policyholders found that they could put a lot of money into the policy while buying only a small amount of death compensation, and then the income was completely tax-free!

This kind of good news can't help being spread ten or ten.Soon, this type was originally used for death compensationlife insuranceThe product has completely become a "tax-free" investment product.

In 1982, Congress began to pay attention to this issue and passed the TEFRA Act (Tax Equity and Fiscal Responsibility Acts of 1982, also known as the Tax Equity and Fiscal Responsibility Acts of XNUMX).The law stipulates that all insurance policies that can pay premiums flexibly must be qualified life insurance in order to enjoy cash value accumulation and tax deferral.In a word, speculation is not allowed!

According to TEFRA, verify that the insurance policy is qualifiedlife insuranceThere are two standards for the product. One is that the surrender value cannot exceed the amount of net premiums; the other is that the death compensation must reflect a certain proportional relationship with the cash value.

GPT and CVAT in 1984

Two years later, the Deficit Reduction Act (DEFRA) of 1984 clearly stipulatedlife insuranceStatutory definition. DEFRA applies to all cash valueLife insurance policy, Not just a policy product with "flexible premium".Since 1984, issued in the United Stateslife insuranceA contract, only if one (or both) of the following two inspection requirements is met, is it eligible to be consideredlife insuranceContract treatment:

Guideline Premium Test

  • Guideline Premium Test, referred to as GPT, Contains two tests:Guideline Single Premium (GSP) 和 Guideline Annual Premium (GAP) .The test stipulates the maximum amount of money that can be saved for a lifetime in a policy.Specifically, the total amount deposited by the policyholder cannot exceed the GSP or GAP accumulated year by year.
  • Cash Value Accumulation Test, CVAT for short, Requires an insurance policy, when the accumulated cash value is too much, the risk of the insurance company increases accordingly, then the death compensation needs to be adjusted accordingly.

If an insurance policy cannot meet TEFRA or DEFRA’s test criteria, then the contract will not be consideredlife insuranceInsurance policy contract.Then the cash value of the profit in this contract will be taxed as annual income.

Introduction of 7-Pay Test

That's the end of the game?of course not.

At the time, fromlife insuranceThe withdrawal of money in the insurance policy is based on the principle of "first in, first out".It means, paidPremiumWas taken out first, because this partPremiumIt is paid with money after tax, so when it is taken out, it is tax-free.In the same way, borrowing from an insurance policy is also tax-free, unless the policyholder waives the policy.

Therefore, some life insurance companies have aggressively promoted insurance policies that can deposit large sums of cash. The most famous one is a type of insurance policy.Savings Participating Whole Life InsuranceProduct: Single-Premium whole life.This type of product is a compliant life insurance product, but it is more like a low-risk investment product.

This type of insurance policyThe cost of borrowingVery low, and sometimes even no cost at all.The policyholder can get the income from the insurance policy by constantly "borrowing" without paying taxes.When the policyholder dies, the policy will first repay the arrears, and the remaining part will be paid to the beneficiary. Similarly, the entire process does not incur any taxes (IRC Code.101).

Obviously, this kind ofSavings Participating Whole Life InsuranceProducts (Single-Premium whole life) Began to sell hot.

The government soon discovered that taxes were no longer collected from the rich.Congress began to decide that this approach was inappropriate because it was unfair compared to the treatment of other investments and it harmed public taxation.So the government quickly revised and introducedUS Code 7702 Clauses, strictly stipulate the definition of life insurance, and introduce7-Pay test, To draw a clear line of how much money can be put in.Simply put, if the money deposited in the policy fails the 7-pay test, it will no longer be recognized as a life insurance policy, no tax concessions will be given, and it will be counted as investment goods for tax payment.

7-Pay test

  • The 7-Pay test is used to confirm whether a contract is a qualified life insurance policy.
  • 7-Pay points out the maximum amount of premiums that can be put in each year.

Example of American Life Insurance Guide Network

Lao Zhang, 45 years old, does not smoke, and hopes to insure 100 million. Without violating the 7-year test, he will save money in the policy for 10 years and pay for the future education expenses for his children after 10 years.

We assume that the maximum insurance cost of Lao Zhang is that for every 1000 US dollars insured amount, the corresponding maximum cost is $31.008, and the insured amount is $1,000,000. Assuming that according to the calculation result of the 7-pay Test, the maximum premium that can be deposited in the first year is: $31,008 .

7-pay-test

Based on his financial strength, Lao Zhang plans to deposit $20,000 into the policy every year. From the above figure, we can see that Zhang has deposited $4 in the policy for 2 consecutive years. After 4 years, Lao Zhang has paid 8 to the policy. The US dollar is less than the upper limit of US$7 for the 4th year stipulated in the 124,032-Pay test.

Lao Zhang decided to continue to save more in the 5th year, depositing $50,000 a year, which was no problem in the 5th and 6th year.As shown in the figure above, in the seventh year, in order to keep the life insurance policy, Zhang can only put in a maximum of $7, because at this time.The accumulated premium is $37,056, reaching the upper limit of the 217,056-pay test in the 7th year: $7.

As shown in this table drawn by the American Life Insurance Guide, Zhang’s payment method and amount ensure that Zhang’s insurance policy never exceeds the prescribed amount, so it can pass this test.Therefore, this policy can always be treated as a life insurance policy, and the money in it enjoys tax benefits.

Final Thoughts

In order to protect its own interests, the government prevents people from hiding money inlife insuranceTo avoid tax and earn tax-free income in the account, especially for early lump-sum paymentslife insuranceThe product can be said to be a great effort.However, life financial insurance companies, as social or commercial institutions, also share part of the government’s social responsibilities, and the government also needs to grant life financial insurance companies certain benefits.

At the same time, due to competition between markets,Financial insurance companyIt is also constantly innovating, continuously launching new products, and staying ahead of existing policies and systems.The dynamic equilibrium environment between the government, the company and the market has nurtured and created life insurance financial products in the United States that are far ahead of other countries and regions and at the same time highly competitive in the market.

There are many in the U.S. market that can pay premiums flexiblylife insuranceProducts, through professional financial consultants or brokers’ product selection and product plan design, not only can deposit a large amount of cash value, but also do not violate the 7-Pay test principle.The most important thing is that even if the maximum amount of premiums has been deposited, you can still withdraw large sums of money from the policy according to the "first in, first out" method of premiums.

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