Are cash values subject to Medicare spend down?

[Allen Trent]

I guess I am in the 1% then. I will not look again at a SPWL for myself, and would do so only very, very reluctantly for others. There are several reasons for this, but the MEC issues you raised in other threads are a significant part of those concerns and I appreciate you taking the time to raise them.

MEC is a non issue for almost everyone considering single deposit life with their excess safe money not expected to be needed & over age 59 1/2. MEC doesn't affect the tax free death benefit. MEC only impacts paying tax if the policy has a gain in the cash value & only if the person takes money out or loan against, etc. Even then, the tax is only on the small gain if any (just like NQ Annuity). If left in bank CD or account, you are paying tax every year interest is credited even if never taken out.

You are mixing concepts. Those other threads are for young people over funding premium paying policies that wish & plan to use the cash values to supplement retirement & needed to pay bills.

Single premium life is looked at by consumers as a better place to put excess lazy safe money they currently don't need & have no specific plans to need the cash as they have other assets & income to cover budget & planned future expenditures.

Not for everyone, but grossly under purchased by millions of consumers that have excess money in banks & excess money in non qualified fixed MYGA annuities. NQ annuities are a terrible tax play at death for the majority of tax payers. Tax deferred interest while in low or 0 tax brackets while alive & taxable in lump sum in most cases to heirs in higher tax brackets on the deferred gains at death

 

[scagnt83]

One issue we have in this discussion is no defined goal. Not all life policies... even Single Premium Policies... are designed to achieve the same goal.

Then after the goal, comes the situation and the clients specific circumstances.

Without a defined goal for the situation, there can be no conversation about pros/cons.

Its like driving down the road with no destination... while trying to discuss the best route to this non-existent destination.

 

[LostDollar]

(Caveat, for others that will read this thread at points in the future. I am NOT an agent. I am a senior. My comments are based on conversations with two agents over a period of approximately 4 years, 6-8 quotes for policies, and a significant number of posts by Allen Trent, Tahoe Ray, and Scagent in a variety of threads over the last 12 months.)


(bolding below is mine, not post author's)

You are mixing concepts. Those other threads are for young people over funding premium paying policies that wish & plan to use the cash values to supplement retirement & needed to pay bills.

I will have to disagree, unless the things you said in other posts are not facts.

I think it was Tahoe Ray, and I think it was in a prior post in this thread, who basically said one has to look at the parameters of their own personal situation to determine the appropriateness of particular life insurance coverage.

I am NOT trying to imply in any way that in the sales experience of your agency the issues of MEC and SPWL don't fall mostly with people under age 59 1/2. However, if the things you said are facts, they also affect me as a person well over 59 1/2.

For some income years, even a small bump in taxable income will be a concern for me. This year, for example, I want to get the maximum tax credit for some ACA health coverage. I will be close enough to the "edge" that even a small bump of a few hundred dollars could be costly to me. I cannot predict what income tax situations I will want to deal with in the future.

I am at an age where my expected life span could reasonably be placed in a range of 5 minutes to 20 years. That makes it very difficult to do life insurance planning. For my overall picture I have to look at 4 people of disparate ages, holding differing opinions about the value of life insurance, and having differing levels of financial responsibility and presenting total unknowns about how they would act as holders of a life policy 15-30 years from now. I have to make concrete assumptions about some life spans and future health conditions. I do not have the resources to take a shotgun approach and cover all bases. I have to define some situations I think are most likely to happen and try to address those in a way that leaves some flexibility for those still around dealing with the actual things that happen.

When I put all that together, SPWL is not the vehicle for me personally. I returned a SPWL policy under the free look period earlier this year. There were 3 reasons for it and all this MEC related stuff weighted 1/3 to 1/2 in the decision.

MEC is a non issue for almost everyone considering single deposit life with their excess safe money not expected to be needed & over age 59 1/2. MEC doesn't affect the tax free death benefit. MEC only impacts paying tax if the policy has a gain in the cash value & only if the person takes money out or loan against, etc. Even then, the tax is only on the small gain if any (just like NQ Annuity). If left in bank CD or account, you are paying tax every year interest is credited even if never taken out.

You made that very clear to me in your prior post. However, also keep in mind that we are talking here in the Senior Forum, not the Life Insurance forum, so I felt like it was legitimate to comment about my personal experience as a senior (well beyond 65) with this product.

 

[Allen Trent]

Its like driving down the road with no destination... while trying to discuss the best route to this non-existent destination.

without knowing if it is Electric vehicle or Combustible Engine

 

[Allen Trent]

For some income years, even a small bump in taxable income will be a concern for me. This year, for example, I want to get the maximum tax credit for some ACA health coverage. I will be close enough to the "edge" that even a small bump of a few hundred dollars could be costly to me. I cannot predict what income tax situations I will want to deal with in the future.

so, you were buying the SPWL you bought with dollars you expect to need to pull out of the policy? Also, look at the illustration of what you bought, how long did it take before there was more cash in the policy than you had deposited?

If you have that same money in a bank account, you are getting a 1099 each year for the interest, dont you risk a small bump in tax bracket from that?

If you put that same money into a NQ Annuity & end up needing to pull the money out for some emergency, wont you be taxed on the gains on the annuity & potentially be bumped in a tax bracket.

you may indeed not be well served by putting money in SPWL, my question is where can you put those same dollars & not face impact of tax bracket creep. even tax free municipal bonds impact your federal tax return as the tax free income is added to the Provisional tax calculation related to how much of your Social Security is added to taxable income. 57% of all US taxpayers paid no federal income taxes in 2021 (the vast majority were seniors & many could have had much more taxable income to utilize their entire standard deduction, ie: pull out more from IRAs, Annuities as taxable income, but have the standard deduction wipe it away. 2023 Standard deduction is going up by almost $2k to $27,700 for a married couple) 57% of U.S. households paid no federal income tax in 2021: Study (cnbc.com)

80% of seniors age 75+ pay no federal income tax. So, there can be some great tax planning with CPA for some of these consumers that have taxable assets like IRAs/Annuities to gradually move some of those monies out of tax deferred accounts & into after tax accounts with the aid of their tax preparer to stay under the taxable threshold or in a specific bracket. But some of these citizens over 75 have sizeable assets in IRAs or NQ Annuites just compounding to some day be taxed to their heirs at higher tax brackets. Gradually shifting some of this strategically into Roth, Life insurance, Life/LTC, or LTC can be a phenomenal tax planning strategy if only someone would actually help them plan it out.

I am not an agent & I dont personally sell or receive any direct compensation from the sale of products or SPWL. I just think our society is so poorly educated on how to understand how all these moving parts work & out of fear do nothing...................IRS wins in the end by becoming a 15-50% beneficiary of some of these assets if they are not being used to live on monthly or for planned expenditures

 

[scagnt83]

80% of seniors age 75+ pay no federal income tax. So, there can be some great tax planning with CPA for some of these consumers that have taxable assets like IRAs/Annuities to gradually move some of those monies out of tax deferred accounts & into after tax accounts with the aid of their tax preparer to stay under the taxable threshold or in a specific bracket. But some of these citizens over 75 have sizeable assets in IRAs or NQ Annuites just compounding to some day be taxed to their heirs at higher tax brackets. Gradually shifting some of this strategically into Roth, Life insurance, Life/LTC, or LTC can be a phenomenal tax planning strategy if only someone would actually help them plan it out.

I am not an agent & I dont personally sell or receive any direct compensation from the sale of products or SPWL. I just think our society is so poorly educated on how to understand how all these moving parts work & out of fear do nothing...................IRS wins in the end by becoming a 15-50% beneficiary of some of these assets if they are not being used to live on monthly or for planned expenditures

This is one of the best explanations of the value a financial planner can add for someone who is not "high net worth".

 

[scagnt83]

if only someone would actually help them plan it out.

If only they would let someone help them plan it out.

Most consumers, especially middle class, are very resistant to hiring a financial planner.

They are too concerned about the cents they are spending to realize the dollars they could be saving.

 

[LostDollar]

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so, you were buying the SPWL you bought with dollars you expect to need to pull out of the policy?

I don't know.

I am at an age where my expected life span could reasonably be placed in a range of 5 minutes to 20 years. That makes it very difficult to do life insurance planning.

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Also, look at the illustration of what you bought, how long did it take before there was more cash in the policy than you had deposited?

11 years.

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If you have that same money in a bank account, you are getting a 1099 each year for the interest, dont you risk a small bump in tax bracket from that?

If you put that same money into a NQ Annuity & end up needing to pull the money out for some emergency, wont you be taxed on the gains on the annuity & potentially be bumped in a tax bracket.

Yes.

For some income years, even a small bump in taxable income will be a concern for me. This year, for example, I want to get the maximum tax credit for some ACA health coverage. I will be close enough to the "edge" that even a small bump of a few hundred dollars could be costly to me. I cannot predict what income tax situations I will want to deal with in the future.

Notice I said SOME years, not all, and I said I cannot predict in what years the "need" situations will occur.

At my income levels, the ACA tax credit is a big deal. It worked well in 2021 and I hope it will work in 2022. There IS a future tax price-I am pushing some issues ahead that I will have to deal with in 2023-2024-2025.

40-50 years ago a CPA told me "it is all about taxes". For 2021 and 2022 I am working to maximize refunds in order to make IRA and HSA deposits so they can work for me for 10 years or so (Barring major health events). In the next 2-3 years I will have to study taxable income and tax brackets.

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you may indeed not be well served by putting money in SPWL, my question is where can you put those same dollars & not face impact of tax bracket creep.

I don't know enough taxes (I use H & R Block tax programs) to say anything other than,
"Probably nowhere, but it is a predictable flow. I can look at last year's interest in the tax program and put it into this year's tax software, using the old figure as a new year estimate."

(And again, in relation to the kinds of dollars you, Ray, and scagent deal with, my financial position is quite small or insignificant-but it is important to me.)

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But some of these citizens over 75 have sizeable assets in IRAs or NQ Annuites just compounding to some day be taxed to their heirs at higher tax brackets. Gradually shifting some of this strategically into Roth, Life insurance, Life/LTC, or LTC can be a phenomenal tax planning strategy if only someone would actually help them plan it out.

Conceptually, taxation of heirs, because of my specific situation and the smaller size of my assets, is likely less of an issue for me than for many of your clients.

I repeat, as before, Life Insurance requires health qualifications and exams. And it is my understanding when you guess wrong on the first app and get a decline on record on that "secret" reporting board, then subsequent apps become more of a problem.

And, again, a piece of my comments from above follows in the quote box. If I had 2-3 million dollars I could do things differently. I don't, so I can't. I have been on sort of an equivalent of covid lockdown since I was fired from my last job in 2013.

I am at an age where my expected life span could reasonably be placed in a range of 5 minutes to 20 years. ......... I have to make concrete assumptions about some life spans and future health conditions. I do not have the resources to take a shotgun approach and cover all bases. I have to define some situations I think are most likely to happen and try to address those in a way that leaves some flexibility for those still around dealing with the actual things that happen.

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[LostDollar]

@Spin
I hope some of the comments here are giving you useful perspectives for your selling processes. I had hoped posting his name would draw allen trent into the discussion.

I always find comments by @Allen Trent , @Tahoe Ray , and @scagnt83 in relation to life insurance and annuities of interest. They bounce off each other like billiard balls.

 

[Allen Trent]

This is one of the best explanations of the value a financial planner can add for someone who is not "high net worth".

agree---I just wish actual financial planners & tax preparers would counsel those 80% each year in October. Some of those 80% have hundreds of thousands or more sitting in tax deferred products like IRA or NQ annuities. Some are living on only SS & maybe some RMDs of $5-10K a year. Many couples could take another $5-$15k out each year to wash the tax bill at 0% & redeposit in something to utilize their 0% tax bracket. By the time the tax return is filed in Feb-April, it is too late. Needs to be a fall planning excercise for sure

Obviously, not true for all people, but the IRS stats dont lie about who is not paying taxes at specific ages. The IRS knows this & it is 100% the reason they have changed the RMDs rules & factors over the last 20+ years. 20 years ago, at age 70 you had to take 1/16th of your IRA as RMD, then the following year 1/15th & by age 86 it was 1/1 & your IRA was empty at age 86. Today, doesnt start until age 72, & the factor at age 86 is actually 1/16th like it was 20 years ago at age 70. This is because lowering RMDs for people in the 0% tax bracket guarantees that when they die, there is a ton more money still in the IRA. the beneficiaries are more likely to be in higher tax brackets & will have to pay tax in a lump sum or over 10 year period at max. It is very smart move by the IRS/govt for tax revenues.