Tax Free Legacy Planning

Episode 128 March 08, 2024 00:28:49
Tax Free Legacy Planning
Annuity Straight Talk
Tax Free Legacy Planning

Mar 08 2024 | 00:28:49


Show Notes

  • Tax-free legacy planning overview

    • Understanding the benefits of tax-free legacy planning through life insurance policies.
  • ️ Importance of whole life insurance in legacy planning

    • Whole life insurance offers stable financial assets with tax-free death benefits.
    • Many wealthy individuals allocate a significant portion of their assets into whole life insurance policies.
    • Historical usage of whole life insurance by corporations and executives for generational wealth building.
  • Case study: Legacy planning with life insurance

    • Analyzing a case study of a 66-year-old individual planning to use $300,000 from their IRA for legacy planning.
    • Exploring different scenarios involving single premium immediate annuities (SPIAs) and whole life insurance policies.
    • Highlighting the importance of understanding tax implications and maximizing efficiency in legacy planning strategies.
  • Tax-free Legacy Planning

    • Understanding the benefits of tax-free legacy planning through life insurance policies.

    • Life insurance policies offer substantial tax advantages compared to annuities.

  • Maximizing Growth Opportunities

    • Cash value and death benefit grow steadily once the cost of insurance is covered by dividends.

    • Extra cash can be added to the policy for tax-free growth and increased death benefit.

  •   Understanding Policy Values

    • Differentiating between guaranteed cash value and net cash value in the policy contract.

    • Mutual insurance companies offer added benefits to policyholders compared to stockholder-owned companies.

  • Versatility of Life Insurance

    • Life insurance offers flexibility and profitability for legacy planning and retirement income.

    • It can serve as a versatile asset with various applications in estate planning and retirement income strategies.

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Episode Transcript

[00:00:00] Speaker A: Hello and welcome everyone, to the Annuity Straight Talk podcast, episode number 128. My name is Brian Anderson, founder and creator of, here to extend on last week's podcast with some real legacy planning ideas. Go ahead, please, and like subscribe or comment on any of your favorite podcast platforms or on YouTube if you want to make an appointment with me about this topic or any of the other ones I've covered for whatever or videos you've seen or podcasts you've listened to. Top right corner of any page on Schedule a call and we'll get after it. Promise to shoot you straight, tell you the truth, and help you find only the best solutions for your retirement planning needs, whatever they may be. I'm going to share my screen and talk about this topic, which is going to go kind of deep, so I want everybody to pay attention. We're taking a serious look at something that I haven't touched before, but this is my basis of education in this business and I think it's really cool. There was an opportunity once in a while it pops up where somebody asks the right question, where I get to demonstrate this. And last week I got the idea right before the annuity death benefits episode came out. So we're going to talk about tax free legacy planning. If you know something about it, if you think, oh, I know what that is, maybe you do. Give me a few minutes and if I don't catch your attention, then you can stick with simpler subject. I don't mind, and I'm not trying to take a shot at anyone, but you got to pay attention. Give me the benefit of the doubt, because you've been here long enough and I've established myself as an authority in the world of retirement planning, I'll go toe to toe with anybody else out there. So I left something out of last week's podcast, and I'm surprised that nobody mentioned it. Death benefits on life insurance are tax free, but not on annuities. We talked about enhanced annuity payouts, and one of the downsides is they are fully taxable as ordinary income to the beneficiaries. And that's when I go back to that, a lot of people, I say, well, you have to exercise the enhanced death benefit as the beneficiary. And a lot of them might not do that depending on their tax situation. So annuities are a good last resort and they work fairly well in a couple of situations. But if you want to be bulletproof, this is how you do it. That is what life insurance does best. Tax free death benefits. So before anybody turns away, keep an open mind and hear me out for at least a few paragraphs. Whole life insurance is the oldest and most stable financial asset ever to exist. Those who don't like it truly don't understand it. If you are in serious debt, then go ahead and listen to Dave Ramsey. He's really good at helping you pinch pennies and knock off ridiculous amounts of debt. If you're flat broke and you're just starting to save, listen to Susie Orman. She's really good at talking to you about how to save $5 a month here and there. This podcast you guys know. I'm not talking to the same crowd. I'm talking to successful people approaching retirement and how to make the optimal moves to capitalize. Guaranteed income, security, peace, happiness, so you can focus on family and passions that you've waited all these years to do. We're not talking about the little stuff. It's the road less travel. We deal with serious financial concepts here. Everybody else has a place, everybody else offers good advice, but it's limited to certain areas. So since I've been running this website, I've met people of all different levels of retirement planning. I've helped. People who are starting to save late don't have a whole lot. We work on ideas with that. And then I also know on the other end of the spectrum are people that are completely set from every angle you could possibly imagine. I know something about what I call impregnable retirement plans because I've seen several. And my early years in the business were spent learning how the richest people build and grow to make that happen. And we talk about one thing about this business. If you survive 21 years like I have, there's an incredible amount of studying, learning, figuring things out, and finding angles for people so you guys can take advantage of the products that are available. The most financially stable people I have met on this website who listen to the podcast, some of them have done a little bit of business with some of them I haven't. But I'm talking about very well off people. They all have one thing in common. They all have a substantial portion of their assets in tax free cash within whole life insurance policies with mutual companies. I'll touch that at the very end. This is not a coincidence. You can go to Google, do a little bit of digging, find that many of the wealthiest families and corporations use whole life insurance to set the foundation for generational wealth. Many hundreds of the largest executives in corporate America have negotiated life insurance policies as a major part of deferred compensation packages or individual pension plans. If you're a sports fan, this is interesting. Forbes did an article. You can also google this, Jim Harbaugh's compensation package as the Michigan head football coach. As part of it, the school loaned him $4 million start a whole life insurance policy and agreed to pay an additional $2 million into it for each of the following five years. So did that grab your attention yet? It is not a small time deal and stupid people aren't the ones doing it, as Dave Ramsey and Susie Orman might suggest. Oh, it's a waste of time. Oh, the yields are terrible. So I know Michigan students. I know a few of them personally. I like them fine. I like to pick on them a little bit. They all talk about how great the education is. And all those well educated people that graduate from the University of Michigan don't know anything about what the trustees of their endowment are doing with their money. It's the big guys are doing this stuff because of my experience with it in the early years of my career. It's something I should have hit before. Every year I get several requests and I'm going to establish myself as more of an authority. I will not call myself the authority. I have affiliates and guys I work with that I would refer you to, and I know that because they are the absolute best. I'll hit that a little bit later as well. But I see this a lot. So it's like I need to actually put some stuff in place so that people who are looking for it will find it. But last week this one again just fell in my lap. Guy said, how about using life insurance? It's a great idea. It's not something everybody has to do, in part can be very beneficial for a lot of reasons. The fundamental difference between this and annuities is taxable versus tax free. It was stupid of me not to mention it last week. So there's a correction and an apology all at once. So here's the deal. 66 year old guy wanted to take 300,000 from his IRA and set it up for maximum legacy to leave to his kids. Iras are tough for legacy because they have stringent distribution rules. Now, thanks to secure act 2.0 or whatever they call it, it's got to be liquidated within ten years. And life insurance has to be purchased with after tax money. So taxes have got to be paid first. It's a big part of the calculation. We've got to get it right. I'm using general numbers for this. I ran through the scenarios yesterday with this gentleman. He's got a lot to learn about it, but he's very open minded and we're walking through it slowly. I can explain the basics and then if he's serious about it, I'm going to hand him off to an absolute pro who will take extremely good care of him. So there's a lot of people selling life insurance out there. Bank on yourself, all that stuff. Most of it's a gimmick. Focus on where the real money goes and follow that. If anybody wants to talk about it, I'd be happy to. And I'm going to touch on some of the issues right now. Whole life insurance has been around for centuries. It's a bedrock financial product. Universal life has been around for about 40 years. Whole life has a level cost of insurance that's built into it remains level for all years of the policy. They call them, both of them, permanent insurance because you own it forever. It's not like term you got it for 20 years, it goes away. Universal life was created in the 80s when the interest rates were really high. Some insurance companies wanted to get an advantage over others and they said, and a lot of companies did this, even some really good ones. A lot of them said hey, with rates so high, we don't have to collect nearly as much premium to make this thing pay out in order to make the actuarial calculation work. And somebody might correct me if I'm wrong on the specific details of this. Instead of a level premium for the insurance built into the contract, they made the insurance component annually renewable so that every year you age with the policy, the cost of insurance goes up. Now back in the 80s when interest rates were 18%, that cost was small enough in relation to what they were gaining as earnings on their investment portfolio that it just buried it and it didn't matter. But as rates began to drop, those rates are adjustable. They'll go up and down with an insurance policy. That's a concern that's easy to address if you understand the mechanics of a mutual company versus a stock company. So as rates dropped, the internal cost of the insurance rose and started to eat away all the cash value of the policy. In the late ninety s, a majority of universal life policies lapsed because the cost of insurance got so high and dividends were much lower than initially projected. What was sold as a cheaper alternative to whole life insurance failed most people because rates didn't hold up. If you took a universal life policy that was cheaper and you added extra cash to fund it at the whole life premium level, then it would have been fine. But it wasn't cheaper, which was the whole point. If that's what it takes for universal life to be successful, why not just stick with a whole life policy? Get the guarantees, do it with a solid company that's been doing it for centuries. That's about where index universal life came in. I don't know exactly when it was created. Late 90s, early 2000s. Same as an index annuity. Hey, we can project, we can buy options on these indexes and they can go up higher, and we can show you an illustration where the yield is high enough that it supports that lower premium, and there are separate guarantees placed on those so they can be used for estate planning and all that stuff. As far as what I'm talking about here, they're an inferior product no matter what anyone tries to tell you. Just like index annuities, growth is not guaranteed, but part of the market upside can be captured and it might pay off from time to time. That pesky, increasing cost of insurance is something that hasn't hit most of the early buyers of this product. The first time I got wind of it was probably 2006 or seven. There were guys in San Diego when I lived in California who were convincing people, hey, pull out a home equity loan for $500,000, dump it in this IUL, and look how much money you're going to have in 30 years. When they projected ridiculously high index growth rates that didn't work out, guess what happened? People lost their homes and they lost their insurance policies, too. A lot of them bailed on the insurance, just pulled what cash was left. They pulled it out to try to save themselves or to at least have some money to go start new, just like the early version. It needs to be overfunded to have a shot. Some guys are explaining it that way, but many are not. I even know industry advocates who believe in the product are saying, do not underfund it and do not over project something ridiculous. I've talked about BS Annuity illustrations and go look up that podcast newsletter page, search Bar BS. Just put BS in there and that thing's going to pop up. And the same engines run the projections on the index universal life. This is what most of the schmucks are out there selling these days. Do not be fooled if you're going to spend the money, buy a whole life policy. But let's get back to the case study. All right, I'm going to show you some illustrations. There is a lot I could do with this. I was talking to Jeremy, my marketing guy. I said, man, we could do an entire website on this. And I think I'm going to work on doing a few of these things. If you guys want to hear a follow up episode with some of the details and get into the nitty gritty of these things, I'm happy to do it. If you're serious about it, deserves a quality education. It's something I can provide and we'd be happy to do so because it's a valuable tool. So if we take 300,000 from this guy's IRA fund, the life insurance policy, there's several ways to do it. That's important. To understand that, I picked three ways to show you. We're probably, if he does it, we're going to settle on something different. We just have to test a lot of them to see what's most efficient. And I'm going to say right now he's 66, 67 years old when he starts it. So the problem with that is that it's a lot more efficient when you started one like I did at 24, you're going to get far more return on every dollar put in. Because the cost of insurance for a 24 year old, and I was in phenomenal physical shape at the time, I'm still in pretty good shape right now. It's going to be different. And this guy's actually, he's in very good shape as well. So it's probably be easy to get a policy issue for him. And that's a concern a lot of people have. Remember last week on the annuity ones, this guy said, I'm self declared, not insurable. 79 years old, so that's fine. So the easiest and cleanest way to use it, this is my idea. We can look at lots of other ways, but this is the guaranteed way, is to use a single premium, immediate annuity. 300,000 goes into that, and then we test different payout scenarios for that. And the payout less the taxes, whatever the net is, is going to go to the life insurance policy on a monthly or annual basis, however you choose to do it. So he expects to pay taxes in a 22% bracket. So the numbers here are net of that policy, rounded to the nearest $100. We're all really close to these. I just figured it'd make it nice and easy and I didn't want to go cross eyed typing in the exact to the penny number. So three scenarios we start with are based on the cash flows below net proceeds from SPIA. So if you did a ten year period certain. An annuity that pays only for ten years, 300,000 will pay right about $30,000 per year. Net, I want to say it was 37,000 in change. Was the gross number 22% in taxes. We could also do a specific episode and compare this to a Roth conversion because that's essentially what he's getting. But this is going to be better than a Roth. This annuity pays for ten years. So to buy $300,000 worth of insurance, it costs him $18,000 per year. In addition to that, he's going to put $12,000 of extra cash to make up the total $30,000 contribution goes straight into the policy cash value. That extra $12,000 will increase the death benefit by a factor of every dollar that goes into it. I looked up doing a 15 year period certain, because these life policies, the longer you pay, the better it is. Because of that level cost of insurance, you cover it for all the years until the dividends can pick it up and carry it entirely. So the same annuity would pay a net 22,000 annually for 15 years. And once the annuity pays out, it's done and the policy is funded and just you let it ride. So that's 18,000 of a premium for the insurance, same thing, and 4000 additional cash that goes straight into the policy, the cash value, and increases the death benefit incrementally. And then I did life with 15 years certain, which is a guaranteed lifetime payment on the annuity. The annuity pays for life with a minimum guarantee to 15 years, whichever is longer. So if he lives ten, it'll pay another five years. If he lives 25, it pays 25. This is paying for the insurance premium only and the policy will grow naturally as it was intended to do. At roughly 15 years, you can probably stop paying the premiums and the dividends will support a good death benefit going forward. In that scenario, if he expected to need an increase in personal income later in life, he'd be getting net $1,500 a month out of it. If he swapped from paying the premium to just taking retirement income, you don't want to do that until the dividends will support the cash value and death benefit of the policy. So if death occurs before the annuity payments stop, the death benefit is payable and remaining guaranteed annuity payments will also continue to the beneficiaries. I said it last week, the best time to die with good life insurance or even an annuity enhancement is right after you get it. Pay one premium in this case pays one premium. He's got $300,000 death benefit, and his family would still get the annuity payments through the end of the guaranteed period. So each scenario turns out differently depending on the specific mix of insurance premium and additional cash. I'm going to show you. I've got all three of them up here that I did. So you can see up here at the top. Now, it's easier for me when I'm here in Arizona to man, look at the sunset. It's beautiful. It's easier for me to do this with the handheld microphone. So it's going to be a little hard scrolling, but you guys can see everything here I can't highlight as well. Death benefit 305,000. Male, age 67. Preferred non tobacco. Good, healthy guy. Annual premium 17,872. I said 18. Big deal. Okay, he's got an additional 12,127 here. And we've got net premium. So that's 30,000 a year for ten years. Net cash value starts low, and the cost of insurance is highest in the first few years. You can see it's just the cash going in, and then it grows substantially after that. Every time the cash goes in. After the first year, $11,000 of cash. Instead of 305,000, he's got 322,000 of net death benefit. So 11,000 in cash created 17,000 of additional death benefit. Every additional dollar that goes in will have the same multiple for the death benefit. You're going to realize quickly that this is an asset, not a liability. All you got to do is get the business started, get the engine chugging, and this thing's going to roll at the end of ten years, $532,000 of tax free death benefit, $266,000 of cash, and it continues. What you'll see over here is when he stops paying premium, it goes 532524, 517. So it goes down just a little bit. And you'll notice if you look at the dividend, the dividend continues to climb. And through this, the cash value climbs as well. So cash value continues to climb, but the death benefit drops because that cost of insurance is still eaten away at it a little bit. It begins to rise again in year 18 and goes up forever based on the dividend going over and above what the initial premium was. So the dividend is more than paying for the cost of insurance. Death benefit complies. The cash value continues to grow max, with 15 years. So that's the 22,000 a year, 17,872 of insurance premium, and 22,000 of total. So 4000 of additional cash. You can see, because it's less cash, this net death benefit grows a lot more slowly. But you're paying for it for 15 years. When you get to 15 years, same thing happens. You're covering the cost of insurance for a while, right? At 15 years, this thing only goes down for two years by just a little bit, then starts climbing again. So I think I recommend a 15 year scenario. I'll talk at the end about how I want to do that or how I would recommend, and then I'm going to check with the expert because I don't know for sure what the best way to do, but that looks pretty good. And then if you did all premium, this would be if he says, well, I want the insurance, but I might want to bump an income later in life, then you do. And this is where you're going to see the cash value and the death benefit grow the slowest. But you'd be able to repurpose this premium once the dividends get up to 15, 16,000. So probably 1516 years if you did stop paying and instead started taking that annuity income. This is if you had a lifetime income annuity. That's when you'd probably want to turn it off and say, okay, well, I want the extra income. That's a boost to income. So you got your insurance, you got a half million dollar death benefit tax free to your heirs, and you got late life income. Might even be better than a QLAC. I bet I could figure numbers out like that. But there are a lot of different scenarios. When you add this as a tool, there is a ton of different things you can do. So once the cost of insurance is covered by the dividends, both cash value and death benefit will grow steadily. Payments don't have to stop, but we illustrate it to fit the budget we have. Anytime there's extra cash needing a use, it can be put into the policy for tax free growth and an even larger death benefit. In this situation, there's going to be rmds that may not be necessary for retirement expenses. He's got additional IRA assets, and if he gets to a point, it's like, I got five, six grand, throw it into the policy. Why? Because he's going to get $9,000 in death benefit off of that, and he's going to get tax free growth of 4% by that time. That's the dividend scale of the company. Once you have the asset, once the engine is running, you can make this as good as you want it to be. It's the initial cost. Those who did it younger have the initial cost covered and will be able to really supercharge that however they want in the future. Cash value is an important detail to discuss several options with the cash value you need to understand the contract is 100% liquid at all times. Borrowing from the policy will only reduce the death benefit by the amount taken, and it's a tax free distribution. Additional details about how loans work is a subject all its own and can be done on a case by case basis or an extended episode if you guys want to talk about it, another way to access the money is to have the dividends paid in cash to create additional retirement income later in life. If you took the dividends in cash after the policy is self supported and has a nice base of cash in there. If you took that, they're going to send you a check monthly or once a year. However they do it, that would be a tax free payment until distributions exceed the total premiums paid. The difference between guaranteed cash and net cash value is something that a lot of people will notice. Guaranteed is in the contract. Guaranteed net cash is based on that guarantee plus the current dividend rate from the company. Since the top line, the numbers I quoted are not guaranteed, then this is where a lot of people need to understand the real value in the contract. This would be issued by a mutual company, and I cannot understate the value of that. Mutual companies are owned by the policyholders and all profits are equally shared on an annual basis. There are no stockholders to appease or corporate bonuses to be paid. All company operations, every single one of them, are conducted with the express purposes of maximizing benefits for policyholders. When major mutual companies have a track record of paying dividends in excess of the guaranteed rates for more than 160 years. In the case of guardian life, which is where these illustrations come from, you got good policies through New York life, northwestern Mutual, mass mutual, Penn Mutual and several others. One of the other guys I worked with that I learned some stuff from, and he was always kind of doing the big cases, big estate planning, all that stuff. He said they've been paying dividends in excess of the guarantee since before the war. Which war, you might ask? The civil war, I think Guardian paid its first dividend excess in 1860 or so, but world wars, great depression, every single economic disaster since the industrial age, these companies have delivered solid dividends well above the guarantee. It is something you could take a lot of comfort in. Is it going to be the same? No, but you're going to have higher interest rate sensitivity. Sometimes it's going to go lower. It's going to go a lot higher, too. So if we have rising rates, these guys will capture that and it's good inflation protection for a death benefit. The transition that's important for everybody to realize is that you are buying a true asset with an incredible amount of flexibility. It is the most versatile and profitable way to leave a legacy and can be used for retirement income or serious estate planning at any level. I can put this up against a Roth conversion, eliminate market risk and show incredible returns. A $500,000 death benefit in seven years after tax is probably worth about 7750, depending on who gets it. It's also taking money off the books because this is a private contract. If you go to the Forbes article with Jim Harbaugh, let's say this is a private contract between Jim Harbaugh and the insurance company. Suppose the agent knows about it, but you don't. Got the feds sticking their grimy paws into it like the IRA, the Roth, all that stuff with rules that can change, you never know what to expect. This is different. Every dollar that goes in creates value. It's a secret of the wealthy, but it's available to everyone. And the option to enhance retirement is well worth exploring. If legacy tax free cash late life income increases with a good solid base asset for diversification, it's a really good idea if it works for you. You want to talk about it, we'll talk about it. My mentor in this business, his name is Brian Salonin, is one of the country's best cash value insurance guys. And it's not even attempt for me to sell something. I'll refer every bit of business to him because I owe him something. For all he has taught me, the time he put into me, the way that I was able to step into it and learn from some incredibly intelligent people, put me on a level that most people never get to. And I'll say it right now, if your financial professional cannot talk intelligently about the values of this, they did not have a similar education, and they are not appropriately educated to handle all facets of retirement planning. So if you want a solid referral to one of the most ethical and professional people I know, I'd be happy to introduce you to them. But I'll screen a lot of calls for them. So anyway, I appreciate you guys joining me for episode 128, tax free legacy planning. It's a big deal. It's what the heavyweights do. You want to talk about it? Give me a call. You can schedule a call top right corner of any page on Schedule a call, write your name, pick your time zone, select the time. Give me a few notes, what you want to talk about. I'll be there. Please like subscribe or comment on any of your favorite podcast platforms on YouTube. Share it with your friends. We've got a lot of followers out here. Don't be shy. I'll take the heat if you send it to one of your friends and they say, I don't like life. I don't like annuities. Okay, go listen to Dave Ramsey. He is entertaining. But I'm here next week with another episode. I'm probably going to go back to annuity stuff. I'm going to wait to see what kind of comments and feedback I get from this and I will definitely dive into deeper topics within this if is necessary. I want to do what works for you guys and I want to make sure that you guys get the education you need so you can make solid decisions in retirement. Thank you so much for joining me. Sun's going down. Hope I'm still in the camera. I'll see you next week. Okay, bye. [00:27:52] Speaker B: You have been listening to annuity straight talk. The precision information is for informational and educational purposes only and does not represent tax, legal or investment advice. The views expressed by guests on this program are their own and do not necessarily reflect the views of annuity straight talk or its partners. No information presented today should be acted upon without meeting with a qualified and licensed professional. It is important that you read all insurance contract disclosures carefully before making a purchase decision. Guarantees are based on the financial strength and claims paying ability of the insurance company.

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