Your 412(i) Source

We at Phillips and Associates are experts at providing asset protection, including 412(i) plans.

Whether you need life insurance for its death benefit or you want it for its investment potential, you had better understand the real costs involved before you write your first premium check. The first thing to understand is income tax costs.

Taxes? I thought we were talking about insurance? We are, and it's something most people overlook completely in analyzing life insurance. You're crazy not to try and find a way to pay for the insurance with tax deductible dollars.

People compare policies to shave a few dollars off policy costs. Talk about not seeing the forest for the trees! How about finding a way to reduce the cost 40% to 60% right off the top? Now there's something that can make a difference in your wealth accumulation and preservation!

Assume you are in a 40% income tax bracket and you pay $10,000 in annual life insurance premiums. You have to earn $16,667 to pay those premiums. If you are buying the insurance for estate planning, then the policy needs to be owned by your irrevocable trust. When you write the $10,000 premium check, that's a gift to the trust. Gift tax can be over 50%. There's another $5,000 cost. And, the $5,000 is an after tax cost. You have to earn $8,333 to pay the $5,000. Your $10,000 insurance premium just cost you $25,000.

The most expensive part of life insurance is income tax. So, make your life insurance dollars go twice as far by making the expense tax deductible.

The Variable 412(i) PlanÔ

One way to buy life insurance with tax deductible money is a 412(i) retirement plan. These plans can provide tax deductible life insurance.

The 412(i) is a defined benefit pension plan called a "fully insured plan." All of the plan investments are in annuity and life insurance policies. But get this, the potential tax deductible contributions can exceed $300,000 per year. (No that is not a typo!). Plus, unlike other defined benefit plans, the 412(i) plan doesn't set you back $4,000 or more each year for an actuarial review.

Until recently, 412(i) plans offered only investments in old-style life insurance policies and annuities with low interest and dividend returns. That meant you got great tax deductions and lousy rates of return. But a newly patented business process has produced a 412(i) plan that offers insurance products with investments related to mutual funds. Presently, only a limited number of professionals have been trained and can offer these plans to business owners.

If you would love to be able to put away up to $300,000 per year and get a deduction for every penny, the 412(i) offers that potential as well as a substantial life insurance policy paid for with tax deductible dollars.

Welfare Benefit Plans

Life insurance can be bought with tax deductible dollars through a welfare benefit plan. In this arena you should only look for plans that have filed for and received a Letter of Determination from the Internal Revenue Service. Plans with these letters operate as Voluntary Employees' Beneficiary Associations ("VEBAs"). Under Internal Revenue Code Section 419, these plans offer nearly unlimited tax deductible contributions for a business establishing them. Your company's VEBA can provide you with a large death benefit and can deduct the cost.

VEBAs are not retirement plans. For these plans to work properly, a business owner already should be funding a retirement plan. The life insurance policy in the VEBA can develop large cash accumulations, if it is designed correctly. The cash accumulation can be used to maintain the life insurance after retirement. A VEBA might also be used to provide benefits like disability, long-term care or health insurance. And, if it is ever necessary, the VEBA can be terminated and the money comes back out. But, while the money is in the plan, ERISA law protects it from creditors, lawsuits, bankruptcy, and even divorce.

Life Insurance for Nothing "Out-of-Pocket"

For some people, life insurance can be obtained with no out-of-pocket expense. If you are at least 50 years old, in good health and have a net worth between $5 million and $30 million, premium financed life insurance can be very effective.

Under this arrangement, a bank loans the money each year for about 5 years to fully fund a life insurance policy. You provide collateral to cover the difference between the loan balance and the cash value of the insurance policy. At death, the policy pays off the bank loan, and your heirs get the remainder.

A good plan loans both the money for the premium and lets the interest accrue each year. (You don't write checks for interest payments.) A good plan also has a base amount of life insurance for your family to receive and another policy that increases along side to cover the increasing loan and interest balance. If you have to pay the interest each year, the interest bill can overwhelm you before long. If the insurance doesn't increase each year to cover the increasing loan balance, after a few years the death benefit will only cover the loan payoff, leaving little for your heirs.

When it is properly executed, premium financed life insurance can be even better than tax deductible life insurance.

Doing it Right

When you need really large amounts of life insurance, why pay anything out of your pocket? On the other hand, life insurance can be purchased with tax deductible dollars. When you pay for life insurance with tax deductible dollars, you're cutting the cost in half. Most of all, when you're buying life insurance, understand the tax costs, and let Uncle Sam pay for half of it.