Beating the IRS with using Life Insurance as an Investment
You can think of permanent life insurance as a bucket of money; each year you add more to the bucket, each year the cost of insurance, and administrative charges, are taken from the bucket. This cost goes up a bit each year as you get older. Whatever is left in the bucket is invested and grows over time. The IRS allows only so much investment dollars for each $1,000 of protection. It maximizes your gain to put the maximum amount allowed into the policy. If the insured dies there is no tax, if the insured takes distributions and loans from the policy there is no tax. The right way is no tax ever paid on the income stream and the loans are paid off when the insured dies. If done right, the IRS loses out and you win. They limit how much you can invest by tying it to the face value of the life insurance policy. Even if you cannot buy life insurance on yourself, you can insure someone you have “insurable interest” in. For instance, you can own a policy on a spouse or child or business associate. I recently insured a 53 year old, $1 million was invested in a life insurance contract. No more premium will ever be paid. After 16 years the “cash value” in the policy will have an annual rate of return of over 4%. It also insured my client for a few million AND starting the 16th year $94,000 per year could be withdrawn from the account tax free for the next 20 years. 1 million invested 1.8 million withdrawn! After 20 years a death benefit will still exist (at age 89).
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