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Your 5 best arguments for life insurance (besides the death benefit)

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By Ed Slott

Ed Slott and Company, LLC

I do not sell life insurance. I am a tax advisor. And as a tax advisor, I can tell you that the single biggest benefit in the federal tax code is the income tax exemption for life insurance.

Life insurance should be a bedrock of any serious financial, retirement or estate plan, but it is not used nearly enough, even by those advisors who do sell life insurance. For planning purposes here, I refer only to permanent insurance, not term insurance.

Obviously, life insurance provides an income tax-free death benefit and people understand that. But besides the death benefit, here are your five best points for encouraging more people to have life insurance to enhance their long-term financial security.

1. IRAs are bad assets; life insurance is a good asset

Most people have their retirement savings in IRAs and 401(k)s. These are bad assets because they are tax-deferred. The tax will one day have to be paid, creating a growing debt on these retirement savings. The future tax will be paid when the money is needed most, in retirement, and at an unknown, but probably higher tax rate.

This makes these traditional retirement accounts an uncertain and diminishing asset over time. Replacing these accounts over time with permanent life insurance turns these tax-deferred funds into tax-free savings. Clients should begin a program of systematic IRA withdrawals to decrease their IRA balances and plow those funds into permanent life insurance.

This tax will have to be paid anyway beginning at age 70 ½ and probably at a higher rate on a higher balance. So it’s best to deal with this now to have more retirement funds available long-term. The increasing and uncertain tax debt is paid off by paying the tax now at known tax rates, which are at historic lows right now, while income tax-free savings are growing in the permanent insurance policy.

2. Life insurance is an investment, not an expense

People will say life insurance costs too much. Moving funds either from IRAs or from other accounts to permanent life insurance is not an expense; it’s an investment in a better long-term asset. Yes, if the funds are withdrawn from an IRA, there will be a tax to pay, but that tax will have had to be paid at some point anyway, probably at higher tax rates in the future.

Once the funds are in a permanent life insurance policy, they are simply located in a different and far better long-term asset than an IRA or 401(k). The funds in that new location, the life insurance policy, remove not only the tax risk, but can also eliminate the stock market risk, depending on how the policy is set up.

That’s a big deal in retirement, and something you generally cannot do in a traditional IRA. If you were changing investments, you would not think of that as an expense, so the same applies here.

3. Life insurance has lifetime benefits

People think of life insurance for the death benefit, but most people don’t know about the powerful lifetime retirement and tax benefits. Funds in a permanent life insurance policy can double as a retirement savings account, but without the worry about what future tax rates will be.

If these funds are needed in retirement they are accessible, tax- and penalty-free. That is a big deal, because if the funds were in an IRA, distributions would not only be taxable (in a traditional IRA), but that increased income could trigger other so called “stealth taxes.”

These are hidden tax increases in the form of phased-out deductions, tax credits, exemptions and other benefits as income increases. For example, an income increase from an IRA distribution could cause more Social Security benefits to be taxable or the trigger the 3.8 percent additional tax on net investment income from capital gains, interest and dividends.

Accessing funds from a life insurance policy are tax-free (up to cost-basis; and thereafter if taken as policy loans against the tax-free death benefit) so they don’t increase income. And in fact, the withdrawals keep taxable income and taxes lower in retirement. These are valuable lifetime benefits, in addition to the death benefit.

4. More control with life insurance

IRAs are subject to annual required minimum distributions (RMDs) after age 70 ½, whether the money is needed or not (Roth IRAs are exempt from lifetime RMDs). This causes forced distributions and additional taxes, though the client may not need or want to withdraw those funds.

These forced withdrawals take control away, while withdrawing from the value in a life insurance policy can be done at any time, or not. Clients are in control of their retirement savings in a life insurance policy.

5. Powerful wealth creation through leverage

Life insurance creates more long-term wealth than any other investment. And because this wealth is income tax-free, it is much more valuable than tax-deferred retirement savings that are at the mercy of future higher tax rates.

It’s the leverage that creates the wealth. Life insurance is the only investment where one dollar can do the work of many and the result is guaranteed and tax-free. With an IRA for example, it would take many years to multiply that balance; and when it is withdrawn, it will be diminished by taxes.

Taking the same funds that were in an IRA and investing them (after-the tax was paid on the IRA distribution) in a permanent life insurance policy, would produce many multiples of that original IRA balance, and it would be tax-free, not only for use during life but especially if there were an early death.

These are only five conversations, but they need to be had so that people can better understand the power and security of an investment in permanent life insurance, for life and beyond.

How to get the most out of the annuities you buy

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Annuity sales topped $229 Billion in 2014 and 2015 could be higher. Demand for annuities continues to grow as American are looking to annuities to quell their fears and provide solutions:

  • Protection from market losses and keeping what you have
  • as Bond alternatives (due to the threat of rising interest rates and low bond yields)
  • Risk of outliving your money

Here are two critical things to know about annuities that could save you thousands in the long run as well as annuity landmines to avoid:

Annuities have an “Account Value” and “Income Value”. Knowing the difference is crucial!

The “Account Value” is the walk away value. Just like a CD matures in a certain period of time, the annuity will have a time frame, say 8-12 years. At the end of the time frame you can take all your money and go or leave it where it is and draw out money as needed. Principal is guaranteed against market losses but growth is not guaranteed. The interest earned is based on the performance of various market indexes (More on Market Indexes later). These are used for accumulation, market protection and bond alternatives while still maintaining flexibility down the road.

The “Income Value” grows at a guaranteed rate by adding an “Income Rider”. Rates are currently as high as 7%. You cannot walk away with this money. The growth and guarantee is only available by taking a lifetime income payout. The only purpose of the income value is to create a pension like income stream.

Annuity Landmines

So each annuity will have an Account Value and Income Value. Since this income value has the most curb appeal: It’s easy to talk about 7% guaranteed. The features of the actual account value often get overlooked or ignored. On indexed annuities, many of the account values have low caps and very little growth potential. On variable annuities the account values can suffer big market losses and have fees north of 3% per year.

But why does it matter if you are buying it for income and you have a 7% guarantee?

If you hear this from an advisor this is a “Red Flag”.  First, if your account value is getting eaten up by fees and losses it will drop to zero over time once you start taking income. The higher the fees and losses and the lower the growth potential of the account value the faster this will happen. You may have a guarantee but if your die early or change your mind and want your money back from the insurance company you could lose big. It is not just principal you could lose, but think about parking your money with an insurance company for 20 years and never earning one dime of interest. When you get into the math as I do, this is a real possibility for many of the annuities on the market today.

I use annuities in planning every day and they can solve problems and provide peace of mind when set up properly.

A good combo annuity will have:

  • Real growth potential – no caps on growth
  • Low cost – fees 1.5% or less
  • No market risk – principal guaranteed
  • Flexibility – the ability to walk away with your money or take lifetime income

In the next email I’ll discuss how the money grows in annuities. What you can look for and what to avoid.

It is always good to get a second look at what you are doing.

Contact me to set up a free consultation at 480-970-5663 or contact me through LinkedIn – Denver Nowicz.


How to protect and preserve assets when faced with Long Term Care expenses

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Here is our interview with attorney Charles “Mike” Dyer on protecting and preserving your assets when faced with long term care expenses. If you are concerned for yourself, your parents or your kids, you’ll find some valuable tips in the interview and the tips listed below.

The keys to protecting and preserving your assets when faced with long term care expenses is to know the rules, use them to your advantage and do those things that are allowed.

Here’s one area to know: Prepositioning

Couples planning often uses prepositioning to achieve benefits for the person in need while preserving assets for the healthy spouse. This can include things such as:

  • Paying off the mortgage.
  • Paying down or off a vehicle or replacing one.
  • Home repairs and home modifications for care
  • Medicaid friendly annuities

Also, having the right tools is essential:

  • Legal documents allow spouses and children to be able to act.
  • Power of attorney – financial
  • Power of attorney – medical
  • Metal health power of attorney

Children also need to be actively involved in the process:

  • Know where documents are
  • Know what documents will be needed should an application for assistance be necessary
  • Know what the health issues are
  • Know when not to assist in covering expenses

Without knowing the rules, poor planning can result in complete liquidation of the marital estate. Experts can not only guide you in the rules but often assist in the process as well.
For more information contact Charles “Mike” Dyer at (602) 254-6008 or visit

How to save $10,000 on a new or used truck for sale

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ford-f-series-review-2011-ford-f-150-ecoboost-drive-car-and-driver-photo-366545-s-429x262When it comes to large expenses, buying a new or used truck can certainly fall into that category. Recently my wife and I bought a new truck and Rob Murray of Peoria Ford was able to help us save over $10,000 on a new truck for sale. While Rob may not be able to save you $10,000 on a new or used truck for sale every time, he knows the ins and outs of the business and can save you money if you are looking for the best deal on a new or used truck for sale in Phoenix, Glendale, Peoria or even valley-wide.

I interviewed Rob for the Wealth For Life radio show on 1100am KFNX Newstalk Radio to get his best advice on buying a truck to save you money. Here is the interview and his top tips: Read More

Your taxes are going up. You just don’t know it yet.

Posted by | economy, indexed life insurance, tax strategies | No Comments

It’s only a question of when your taxes will go up, not if.  Here’s what the Washington Post recently reported:

Yet look out over the next 10 years, and it is also hard to find a scenario where the United States doesn’t raise taxes, potentially even on the middle class. The only alternatives may be for the country to significantly pull back on the country’s commitments to seniors and the poor, or to forfeit its global competitiveness.

Read More

How the stock market can make you work an extra 13 years

Posted by | annuities, economy, indexed life insurance | No Comments

Over the last 14 years the markets have hit all time highs three times: March 2000, July 2007, and roughly where we are at now – June 2014.

What if you had turned 65 and decided to retire in the year 2000? As you’ll see in this video – the market ups and downs forced “Joe” – who had planned to work until age 65 – to work all the way to age 78.

To make matters worse, he still faces the same question today, with the markets at all time highs again, just like in March of 2000: What to do now? Read More

$5.8 Billion in 401k early withdrawal penalties. Should companies provide a more liquid savings option?

Posted by | pension, retirement income, small business, tax strategies | No Comments

The IRS collected more than $5 billion in 2011 from penalties incurred by taxpayers who withdrew money from tax-deferred retirement accounts before the age of 59 1/2. The people who pay the penalty include younger workers who switch jobs and don’t bother to roll over their accounts and older workers who believe they have no place else to turn. The cash out factor occurs among all age groups: Read More