How Many Errors Can YOU Spot?

[scagnt83]

But does it make sense to put in more than what the company matches? Probably not, because that amount will be hit with the higher taxes on distributions... so I'd recommend a tax-free account.

I could argue that it does... but it all depends on a persons effective tax rate.
It is a higher tax rate, but it is a larger amount of money. Which is why I said that often (unless they are a true high earner), the two are pretty close after subtracting taxes (not accounting for the income method but looking at the lump sum).

 

[DHK]

Some good questions! I'll give you my perspective, and then, I'm sure that scagnt83 wil chime in too.

Okay so you guys got to take this down and put on the lower shelf for an FE person like myself.

I get the leave in the money in the 401(k) until retirement. I understand why it's more important to save for retirement first than fund for college.

I need somebody to explain to me the ins and outs of using a UL or WL policies cash value for this purpose.

A cash value policy with companies that specialize in accumulating cash values (not FE policies), by creating a policy with a minimum death benefit and maximum cash value accumulations can be a very effective way to save for college and retirement.

The main key that I look for, is being able to borrow from the policy when I want to, without having the original balance compromise its earning ability.

Suppose I have $100k in a cash value policy earning 5%. And suppose I take out a $50,000 loan at 5% as well. My $100k will still earn 5% or $5,000. My loan will charge $2,500. If I don't pay the interest out of my pocket, my policy will have a net growth of $2,500 ($5,000 - $2,500). But if I pay it out of pocket, then my policy still grows by the original $5,000.

Because it is a loan, it is not counted as "income", nor does it count as part of the income calculation for FAFSA purposes.

Also, would healthy issues affect the strategy at all? I'm in decent health but I am overweight, which would write me up and make my premium is higher. And my wife had cancer for years back, so that's going to make finding her insurance difficult anyway.

Yes and no. The big part of health is getting approved for the face amount of coverage you want. If you have impaired health, you can still do this... but with a much smaller face amount and corresponding premium to match your underwriting class.

For your wife, agreed, it would be a challenge to just get an offer.

What about insurance for the kid? I was planning on purchasing a 10 or 20 pay $50-$100,000 whole life plan for the kid anyway.do they have a cash rich permanent policy that would be good in the situation?

Absolutely. In fact, for children, I'd also look for guaranteed increase options as well - to increase the face amount at various intervals without requiring new underwriting.

And then so is the idea is that you take loans out against the policy and pay it back with whatever funds, plus the interest? How is that actually saving for college? If I have to pay the money back in it's got to come from somewhere.

You don't HAVE to pay the money back on a life insurance loan.

That's why I think that setting up informal intra-family loans are a good idea. Let your child borrow from YOU... while your money continues to grow as though you never touched it... as long as you (or your child) can pay the annual interest due on the loan back to the policy.

Or am I putting money into this permanent policy instead of putting it into a 401(k) or 529 or whatever 500 policies these other financial advisors you're talking about?

You could put it into the policy instead of a 401(k) or 529... or you can contribute to all three. I just think that there are specific advantages within permanent life insurance that make it a superior choice... and specific regulations on 401(k)s and 529 plans that make them "less than stellar".

Well then that's another question I have. My wife's employer matches up to five percepts and her 401(k). And I have been wondering where we should put additional money into other than the 401(k). What are some good text free accounts?

A Roth IRA or a Roth 401(k) can make sense.

As scagnt83 mentioned earlier - municipal bonds (federal tax free interest). (However, municipal bond interest will affect the taxation of social security benefits in retirement.)

Permanent life insurance properly structured with a minimum death benefit and maximum cash value can also make sense.

The hard part, as we know, is can you get approved for the strategy? You may pay for it with your checkbook... but your health is how you buy it.

10 Minute Lesson on Life Insurance:
https://youtu.be/Mpx2Jh87puA

 

[scagnt83]

I need somebody to explain to me the ins and outs of using a UL or WL policies cash value for this purpose.

Also, would healthy issues affect the strategy at all? I'm in decent health but I am overweight, which would write me up and make my premium is higher. And my wife had cancer for years back, so that's going to make finding her insurance difficult anyway.

And then so is the idea is that you take loans out against the policy and pay it back with whatever funds, plus the interest? How is that actually saving for college? If I have to pay the money back in it's got to come from somewhere.

Basically you "overfund" the policy. Meaning you reduce the DB down right over the MEC limit. This maximizes the CV and keeps the CV tax-free.

Loans do not have to be paid back. You can if you want. But they can remain just "on the books" within the policy.

Loans work a few different ways depending on the type of policy and the choices it has.

First, there are what is called "direct recognition" and "non-direct recognition" loans.
This simply means is the loan deducted from the CV when the overall credited interest rate is calculated. Direct recognition means it is deducted. Non-direct means it is not.

Example for direct:
$100k CV - $50k loan= $50k CV is used to calculate interest gains on the policy. So assuming 5% credited rate, that is $2,500 credited to the policy.

With non-direct the full $100k would be used to calculate interest gains on the policy. So it would receive $5k credited to the policy.

Of course the amount on loan receives a negative rate as well... but with the Non-Direct method you have the chance for arbitrage. Using the same example if you get a positive 5%, and the loan is a negative 4%, then you are up 1% on that $50k that you loaned out.


Most IUL policies use "wash loans" for the Direct Recognition option. Meaning that it is credited with the exact same amount that is assessed against it. Often it is assessed 3% and credited 3%... creating a net of 0% or a "wash".

 

[DHK]

I could argue that it does... but it all depends on a persons effective tax rate.
It is a higher tax rate, but it is a larger amount of money. Which is why I said that often (unless they are a true high earner), the two are pretty close after subtracting taxes (not accounting for the income method but looking at the lump sum).

Exactly! So, if they are close... I think "why bother with an account where I don't know what the future tax calculations will be?"

For me, the only reason to 'bother' with it... is for a company match. That's it.


BTW, if taxes are still an issue, and there's equity in the home... then refinancing can make sense to 'restart' the clock of tax-deductible interest payments and freeing up more money to work for you in other areas.

That deduction is a TRUE deduction... instead of a tax postponement.

 

[scagnt83]

It can be a great idea for the kids. Look at Mass, Guardian, Ohio National, or Penn Mutual for good 10 pay options.

 

[rousemark]

Exactly! So, if they are close... I think "why bother with an account where I don't know what the future tax calculations will be?"

For me, the only reason to 'bother' with it... is for a company match. That's it.


BTW, if taxes are still an issue, and there's equity in the home... then refinancing can make sense to 'restart' the clock of tax-deductible interest payments and freeing up more money to work for you in other areas.

That deduction is a TRUE deduction... instead of a tax postponement.

How can you "know what the future tax calculations will be?". The tax laws are in constant flux. You can only base your calculations on current law, menaing those calculations may or may not be correct in the future.

 

[scagnt83]

Exactly! So, if they are close... I think "why bother with an account where I don't know what the future tax calculations will be?"

For me, the only reason to 'bother' with it... is for a company match. That's it.


BTW, if taxes are still an issue, and there's equity in the home... then refinancing can make sense to 'restart' the clock of tax-deductible interest payments and freeing up more money to work for you in other areas.

That deduction is a TRUE deduction... instead of a tax postponement.

If they are close to not paying taxes then yes, the match is all you should worry about.

If they make real money and pay taxes then it can make a whole lot of sense to go the pre-tax route. Creating an extra $5k/$10k/whatver, that could be used as savings in addition to the 401k creates more in the long run.

Cant say I am a fan of extending debt into retirement unless you just have to or want to. The pre-tax deduction which creates extra savings just makes more sense to me personally. You can even look at it as the extra savings the pretax allows just pays off the taxes owed (and then some if they are a high earner).

 

[DHK]

How can you "know what the future tax calculations will be?". The tax laws are in constant flux. You can only base your calculations on current law, menaing those calculations may or may not be correct in the future.

Precisely correct! I cannot know what the future tax calculations will be... unless we're dealing with a tax-free account (and it remains that way).

The last time life insurance taxation was affected was in 1986... and every policy previously issued before that date was "grandfathered" under the old tax rules.

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Cant say I am a fan of extending debt into retirement unless you just have to or want to. The pre-tax deduction which creates extra savings just makes more sense to me personally. You can even look at it as the extra savings the pretax allows just pays off the taxes owed (and then some if they are a high earner).

Depends on what the debt is used for. If it's just to spend more money on more stuff... I 100% agree with you. That would be foolish.

But if it's to leverage it... it can make sense to do it. I think everyone should have their home paid for... but not necessarily pay off their mortgage to do it.

https://youtu.be/iJs_kAqgijM

 

[HoosierLife]

It can be a great idea for the kids. Look at Mass, Guardian, Ohio National, or Penn Mutual for good 10 pay options.

Also in the kid has no health problems, I would think we could borrow on his health, as it were, to get the best deal on a life insurance policy. Then we overfunded for the cash valuejust like what we've been talking.

As long as I'm the owner of the child outlives us, wouldn't that make those sound investment strategy?

 

[DHK]

Sure. That's the strategy known as "borrowing a life" for this purpose.

The only other consideration, is that insurance on children is inexpensive, so there isn't much room to put in THOUSANDS of dollars every year. Plus, many carriers want to be sure that the parents have sufficient coverage on themselves before issuing coverage on the child. (A cover letter explaining your current coverage and wife's health should help.) There's usually a maximum face amount on children without any further explanation, so you'll want to check on that with whatever carrier you choose.

That's the "bad news".

The good news is this... if the child eventually takes out PRIVATE student loans (loans that are not discharged in bankruptcy or forgiven at death)... you already have coverage on him and can increase that coverage using the GIO (Guaranteed Increase Option) rider.

Just make yourself the owner, beneficiary, and payor on the policy.