Life Insurance Tax Advantages Repealed if Trump Wins

[scagnt83]

This idea gets drummed up every few years and for obvious reasons nothing happens. If they did decide to tax life insurance CV it would be a slippery slope for many different reasons.

First, Withdrawals over basis are already subject to taxes. They could possibly make it LIFO instead of FIFO. But that would not be a big deal since Withdrawals are rarely the best way to access CV.

Second. If they taxed the Loans then they would open up the possibility of making all types of Loans a taxable event. Especially HELOCS.

Third. If they taxed the CV build up as Capitol Gains like they do CDs. Then owning LI would become a taxable event and would discourage ownership in a massive way. The government does not want this because LI keeps beneficiaries from being on the gov dime. This would also likely cause the industry to have to massively redesign policies which wold cost hundreds of millions of dollars and would be fought with a massive lobbying effort.

Fourth. Even if they did tax the CV it would be a drop in the bucket to fix our national debt. Much bigger fish to fry.

 

[pfg1]

This idea gets drummed up every few years and for obvious reasons nothing happens. If they did decide to tax life insurance CV it would be a slippery slope for many different reasons.

First, Withdrawals over basis are already subject to taxes. They could possibly make it LIFO instead of FIFO. But that would not be a big deal since Withdrawals are rarely the best way to access CV.

Second. If they taxed the Loans then they would open up the possibility of making all types of Loans a taxable event. Especially HELOCS.

Third. If they taxed the CV build up as Capitol Gains like they do CDs. Then owning LI would become a taxable event and would discourage ownership in a massive way. The government does not want this because LI keeps beneficiaries from being on the gov dime. This would also likely cause the industry to have to massively redesign policies which wold cost hundreds of millions of dollars and would be fought with a massive lobbying effort.

Fourth. Even if they did tax the CV it would be a drop in the bucket to fix our national debt. Much bigger fish to fry.

I agree completely. Well said.

 

[Robert Barney]

This idea gets drummed up every few years and for obvious reasons nothing happens. If they did decide to tax life insurance CV it would be a slippery slope for many different reasons.

First, Withdrawals over basis are already subject to taxes. They could possibly make it LIFO instead of FIFO. But that would not be a big deal since Withdrawals are rarely the best way to access CV.

Using premiums as the adjusted cost basis of the policy, to determine the taxability of cash value withdrawals, is flawed. In truth part of any premium paid goes to mortality cost, meaning that the actual portion of the premium that is invested to create the reserve (from which yor get CSV) is smaller than the total premiums paid. In Canada the government introduced an adjusted cost basis which subtracted the YRT cost of the mortality each year, from the premium paid each year (internal taxability calculation) to reduce the adjusted cost base. What that meant, over a long period of time, was that the ENTIRE cash value became taxable.

Second. If they taxed the Loans then they would open up the possibility of making all types of Loans a taxable event. Especially HELOCS.

Yes, but can you borrow money from other tax deferred investments? What happens if you borrow money from your IRA? What happens if you borrow money from your deferred annuity?

Third. If they taxed the CV build up as Capitol Gains like they do CDs. Then owning LI would become a taxable event and would discourage ownership in a massive way. The government does not want this because LI keeps beneficiaries from being on the gov dime. This would also likely cause the industry to have to massively redesign policies which wold cost hundreds of millions of dollars and would be fought with a massive lobbying effort.

Taxing CSV as capital gain would be better than taxing it as income, am I wrong?

Fourth. Even if they did tax the CV it would be a drop in the bucket to fix our national debt. Much bigger fish to fry.

Yes, but a bucket is still made up of many drops, and if you discount all the drops, then there is no bucket.

Never underestimate the tax appetite of a government spending more than it takes in.

 

[DHK]

Yes, but can you borrow money from other tax deferred investments? What happens if you borrow money from your IRA? What happens if you borrow money from your deferred annuity?

Yes, you can borrow against a 401(k) for both personal and residential purchase reasons. Just because you can, doesn't make it a good decision due to the tax consequences if you are let go from your job and cannot repay the loan in full in 60 days. Life insurance policy loans are FAR more favorable compared to 401(k) loans.

You can borrow money against the equity of your home.

You can borrow money against the value of qualified securities. That's called a margin loan. However, you can be subject to 'margin calls' if the value of those securities dips below certain values. Far too risky for most people.

You cannot borrow money from an IRA. That's actually a prohibited transaction.

You can borrow or pledge your non-qualified annuity for a loan, but usually not directly from an insurance company.

 

[scagnt83]

You can borrow or pledge your non-qualified annuity for a loan, but usually not directly from an insurance company.

There are annuities out there that allow for loans. NWL is the first that comes to mind.

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Using premiums as the adjusted cost basis of the policy, to determine the taxability of cash value withdrawals, is flawed. In truth part of any premium paid goes to mortality cost, meaning that the actual portion of the premium that is invested to create the reserve (from which yor get CSV) is smaller than the total premiums paid. In Canada the government introduced an adjusted cost basis which subtracted the YRT cost of the mortality each year, from the premium paid each year (internal taxability calculation) to reduce the adjusted cost base. What that meant, over a long period of time, was that the ENTIRE cash value became taxable.

That is a flawed concept since any investment/savings vehicle has a cost associated with it. The 1% your mutual fund takes is not excluded from your basis. The 0.5% the bank makes on your CD is not excluded from your basis. The 1% your stock broker takes as a fee is not excluded from your basis. Although I would expect that from a country like Canada who has little understanding of basic economics.

 

[pcbinsurance]

I'm not wasting my time reading a thread that discusses something that will never happen. Trump doesn't have a chance to be our next president....not now, not ever.

 

[Robert Barney]

Yes, you can borrow against a 401(k) for both personal and residential purchase reasons.

OK, so lets assume I have $500K in my IRA.

Are you saying I can use the IRA as collateral for a loan?

Of course the bank would look at it and reason, OK, it's $500K, but if you had to collapse it to pay off the debt, it would shrink to $250K, so that's the amount the bank would lend.

So to be clear, the bank can accept an assignment of the IRA as collateral?

There are no rules preventing that?

NOTE: In Canada, they had a retirement product called an RRSP (same only different) and if you pledged the RRSP as collateral for a loan, the government deemed it a disposition, and you had to add the RRSP to your income for that year. In other words, nobody uses them as loan collateral.

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I'm not wasting my time reading a thread that discusses something that will never happen.

The power of positive thinking.

I'm of the view, never say never.

Trump doesn't have a chance to be our next president....not now, not ever.

What a country! Hillary could be our next president, but Donald Trump doesn't have a chance.

Never say never.

Put your money where you mouth is. Can I get 100 to 1 odds on a bet?

 

[DHK]

OK, so lets assume I have $500K in my IRA.

Are you saying I can use the IRA as collateral for a loan?

Of course the bank would look at it and reason, OK, it's $500K, but if you had to collapse it to pay off the debt, it would shrink to $250K, so that's the amount the bank would lend.

So to be clear, the bank can accept an assignment of the IRA as collateral?

There are no rules preventing that?

An IRA is NOT a 401(k).

Please see page 22 of the attached link:
http://www.irs.gov/pub/irs-pdf/p590b.pdf

The following are some examples of prohibited transactions
with a traditional IRA.
Borrowing money from it.
Selling property to it.
Using it as security for a loan.
Buying property for personal use (present or future)
with IRA funds.

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401(k) loan rules:
401k Loan Rules

 

[Cash]

What a country! Hillary could be our next president, but Donald Trump doesn't have a chance.

Never say never.

Put your money where you mouth is. Can I get 100 to 1 odds on a bet?

You can get 9/2 on Paddy Power US Presidential Election 2016 - US Politics Betting Odds - Paddy Power

 

[Robert Barney]

You can get 9/2 on Paddy Power US Presidential Election 2016 - US Politics Betting Odds - Paddy Power

Yes, but based upon Paddy's assurance, I'm guessing I can get better odds with him.

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An IRA is NOT a 401(k).

Please see page 22 of the attached link:
http://www.irs.gov/pub/irs-pdf/p590b.pdf

Thank you. That was helpful. It says:

The following are some examples of prohibited transactions with a traditional IRA.

Borrowing money from it.
Selling property to it.
Using it as security for a loan.​

That's as I would have guessed.

So there are investments, which have accumulated income, tax deferred, from which you cannot take loans or use as security for a loan from a third party.