Tax Free Growth might seem impossible these days or it might seem like it comes with huge restrictions (such as a small annual Roth IRA limit on contributions) But tax free growth can come cheap if you know how to do it. We’ve been speaking about fixed index universal life insurance which allows you to get the growth of the stock market without suffering the losses. Today, we’ll talk about maximizing this aspect in a tax free way if you care more about that than securing a large death benefit.
Maximizing Capital Accumulation, Minimizing Death Benefit
Some people want to buy an FIUL product not so much because of the life insurance benefit that it offers, but because of the amazing index participation with no losses. At the time of this writing, the caps available to you through Fixed Index Life Insurance are far bigger than the caps through FI Annuities. So if you can qualify for the life insurance, and you are not focused on the Income Roll Up of the FIA’s, then this product becomes a far superior way of growing your capital without market risk.
If this is your situation, then you would want to put as much money in there as possible for the amount of life insurance that you receive. If on the other hand, you equally want to achieve a large death benefit and capital accumulation for a long life lived, you might choose a larger death benefit for the premium you pay in.
If you are focused on Cash Value Accumulation, you must decide which set of tax benefits you want…
1) Tax Free – If used correctly a life insurance policy can allow you to access the cash income and capital gains tax free. This makes those market like returns all the more powerful. However, to maintain this benefit, you must stay within the IRS’s Modified Endowment Contract rules. This means they limit the amount of money that you put into the policy and force you to put money in over a period of years. They test the policy after 7 years to make sure that you have not broken the rules. These rules are complicated and we don’t know of anyone that knows them, but a life insurance illustration software illustration will provide the numbers for you to consider.
2) Tax Deferral – Or you can decide to just have tax deferral without the benefits of No tax. Thus, you know you will pay taxes on growth when you pull money out of a policy. Why would you choose this? You can put much more money in compared to the size of the death benefit. Also, if you are wanting to lump sum money in one time and never pay into the policy again, it will surely be a MEC and there will be taxes when you decide to pull money out.
Sometimes it’s best for a person to choose to avoid MEC status, and other times it makes sense to welcome it. It depends on your particular situation. Typically, younger clients always want to avoid MEC. Seniors might choose to go either way depending on circumstances.
We’ll continue this discussion on Wednesday…
This is the 12th post in our series of innovative new insurance products. You can find the previous posts at: 1) Innovative Insurance, 2) Long Term Care, 3) Long Term Care Solutions, 4) Free Long Term Care Insurance, 5) What is an Annuity?, 6) Immediate Annuities, & 7) Fixed & Variable Annuities, 8) Fixed Index Annuities, 9) FIA History & Promises, 10) High Guaranteed Interest, 11) Fixed Index Life Insurance, 12) Tax Free Growth, & 13) FIUL Free Loans & LTC.