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Forbes: Can life insurance be considered an "investment"?

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Steve Parrish (Steve Parrish), has 40 years of work experience in the field of retirement planning, as the co-director of the American Institute of Financial Services Retirement Income Center.At the age of 64, he obtained the RICP®️ certification in the professional field of retirement income certification and refused to retire.In the latest column of Forbes Magazine, he shared his views on whether life insurance is enough to be considered an "investment".The following is the full text of the compilation:

At financial planning consultant meetings, I am often asked: "Is life insurance an investment? What do you really think?"

My investigator was surprised by my answer—"I can tell you,life insuranceIt is an investment for me, and it has benefited me from now on. "

I explained to her that more than 20 years ago, I started to writeSavings dividend-type whole life insurance policySave money here, this kind of insurance policy was involved as a low cost at that time, focusing on the accumulation and growth of cash value.Every March, after I receive my annual bonus from work, I will write a cheque to the insurance company full of conviction.In the past 20 years, my insurance policy has not undergone any changes. The only change is that the cash value account is continuously growing in the form of tax incentives.

Nearly last year, my family began to change, and I also switched from working in the industry to working in academia.In other words, I don't need death compensation protection anymore, and my tax rate is also lower.So I made a tax-free conversion, converting my insurance policy into an annuity for immediate payment.Now, my wife and I receive a fixed amount of income every month, and it won’t stop until we both pass away.Taxes on the value of cash accumulated in the past 20 years are calculated in proportion to our life expectancy.It is worth mentioning that I may have passed away before retiring, and my wife will receive a tax-free death compensation for this.If I had not passed away, my insurance premium after-tax internal rate of return would be about 6%.

"Investment" in estate planning with life insurance

First of all,The purpose of most life insurance policies is to achieve the purpose of risk management.Compensation is a hedge against accidents.The purpose of this money is to pay debts, provide a source of income for the widow, or otherwise.Even in my case, I still have other life insurance policies to pay for death compensation.

But due to tax benefits, life insurance can also be used as an investment.This is not just to say that in addition to death compensation, there is also a cash value.Think about it, for a wealthy family, a death benefit from an insurance policy can save millions in taxes.Wealthy families often use dynasty trusts to pass on wealth to the next generation.In this case, the family becomes an investor.For several generations of these families, they are faced with three types of federal taxes involving wealth transfer, with a tax rate of 3%: gift tax, inheritance tax, and intergenerational inheritance tax.The problem is,What kind of investment can maximize the use of the $1140 million intergenerational inheritance exemption?

A common solution is to uselife insuranceTo solve the intergenerational inheritance tax.Life insurance has the advantage that it will be paid at the time of death, and it is tax-free.Let's take an extreme example to demonstrate this funding leverage.A wealthy grandmother used her $1140 million intergenerational genetic tax exemption to pay for a one-off life insurance policy.Assume that the death benefit of this policy is $2500 million, which is placed in a dynasty trust.The design principle of this trust is that when the grandmother passes away, the trust receives a compensation from the insurance company that is exempt from income tax, and then starts to pay the interest generated by the money to the grandmother's children as the income of the grandmother's children.The principal amount of $2500 million will eventually be given to the grandson's generation after the second generation passes away.life insuranceIt has become a maximum leverage tool here.When grandma passed away, no one had to pay gift tax, inheritance tax, and intergenerational inheritance tax.In the end, the grandchildren owned a $2500 million trust and continued to operate.Even if inflation is considered, the wealth of this family will hardly depreciate in the course of three generations.

"Investment" in retirement planning with life insurance

The case of how I use my own insurance policy is a more typical one, usingLife insurance policyAsRetirement planningCase.In essence, I use my insurance policy as a source of monthly income with tax concessions.In the early years when my income was higher and the tax payable was higher, this policy account helped me to postpone the tax payment. Now in my retirement days when my income is lower and the tax rate is lower, the income and the corresponding tax are averaged Allocate to each year.

Use a cash value life insurance policy asSupplementary retirement incomePlanning, there are other ways.It needs to be emphasized that this is above all an "insurance" product that provides a means of compensation for death.U.S. Internal Revenue CodePage 7702Insurance companies are required to fully consider sufficient risk factors so that such products can comply with the provisions of the tax law and be treated as life insurance by the IRS.Therefore, at the same time that the policy becomes effective, the death benefit will take effect immediately.

In other words, with life insuranceRetirement income planningThe strategy is,Convert as much premium as possible into cash value, and allocate the least amount to death benefit. This usually involvesTwo types of death compensationTwo advanced insurance policy tests – This part is best handled by professional insurance agents or insurance companies.

The idea of ​​this strategy is that when we are still working to make money, we continue to deposit money in the policy account to obtain the cash value of deferred tax payment.When we reach retirement age, the policy account becomes a source of income.The function of the insurance policy changes at this time, from the accumulation of cash value and accidental protection function during the working year to the function of cash value withdrawal and retirement income during retirement.

Working principle (using universal life insurance as an example)

First, when we retire, we stop paying premiums; second, we decide how much money we take from the policy as income each year.

The total amount of accumulated premiums deposited in the life insurance policy account is our principal.The tax advantage of a life insurance policy account is "first in first out (FIFO)", so the earliest money withdrawn from the policy account is the principal part and will be considered as a refund of the premium.When the principal is depleted, we use "Loan"Method, borrow money from the insurance policy.

In other words, the amount borrowed is the amount of income we need, plus loan interest.Since this income is a loan, it does not apply to taxation.When using an insurance policy as a strategy for retirement income, it should be noted that you should not take out too much cash value from your insurance policy account to avoid the failure of the policy.If the cash value of the policy account is depleted, tax reimbursement is required.

This may sound cumbersome.But life insurance companies have made this process very simple.Technology-leading insurance companies will automate the entire process and conduct monthly inspections. The insurance company knows when to switch from principal withdrawal to loan withdrawal.When the value of the policy account is about to run out, under the protection of additional clauses, the policy becomes a contract that will not lapse.For us, we get a fixed monthly or annual tax-free pension.Conceptually, this workflow is very similar to a Roth IRA account-we deposit money after tax, and withdraw money is tax-free.

The financial industry has indeed been arguing about the advantages and disadvantages of life insurance as an "investment."The accusations usually focus on excessively high fees, poor policy maintenance and management, and unrealistic policy plans.However, there is no need to question the tax concessions that life insurance may receive as an "investment product".Simply put, life insurance can construct cash value by delaying tax payment and can withdraw it in a tax-free manner.

Back to the first paragraph at the beginning of the article, my investigator asked me the question.Yes it is.If used correctly under the right conditions, life insurance can be considered an investment.

appendix
1. "Is Life Insurance An Investment?", Forbes, 07/09/2019, https://bit.ly/2GeubzE

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