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Life Insurance as a tax free cash flow vehicle?

zaiteku

New Contributor
Read Millionaire Fastlane
Dec 10, 2007
112
7
27
Honolulu, Hawaii
Hi guys, has anyone heard of an Equity Index Universal life insurance policy? I heard it works sort of like this:

You open the policy and you can contribute some money over 5 years or something and you cant take it out for 5 years I think.

It tracks the S&P but your money is not directly invested in the S&P500 so the risk of loss isn't there.

If the S&P does poorly the most you gain is 1% but you cant lose your original capital.

You are guaranteed to gain at least 1% a year from the policy even in a down trending market. If the S&P does well for the year you can make at maximum, only 15% returns (so if the S&P goes up 20% in the year you'll only make 15% (this sucks)

After a certain amount of time (I think 5 years there is no age limitation I think like an IRA or 401K would have), you can begin withdrawing your money from the policy tax free.

So if I have 70K a year in gains from my policy I can supposedly withdraw it tax free (counting the withdrawal as my principle).

You dont have to pay the premiums if you don't want, but if you don't the policy doesn't grow obviously.

Also, if I die, the policy can be passed on to my kids tax free as an insurance policy.

I think I have it right as I heard it explained to me. Does anyone on the board have experience with this type of instrument that can speak on it? Id like to know the downsides to it as it sounds too good to be true to me. I know people doing it now and supposedly its awesome, but I want to know more about the downsides if there are any.

Seems to me the downsides are:

the policy may not grow very quickly, and 1% sucks. Of course the agents are touting the fact that the S&P500 averages 10% a year blah blah. But what if it doesnt keep up?

I know someone that is trying to take out a HELOC on their home to buy one of these, at around 8%. So what if the policy only returns 1% for a few years, hes out a lot of money on interest.

THe money you take out is tax free, but only up to the amount you put in, the gain is taxable at capital gains. So if you are making interest, can you take out the amount you got in interest tax free? and for how long? only until you take out all that you put in right? and then you would be paying tax on withdrawals after that right?

others? It seems the only way for this to work is Arbitrage including the tax benefits. But is it really easy to structure this policy to take advantage of an arbitrage system?
 

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EasyMoney_in_NC

Contributor
Sep 9, 2007
399
31
31
Wilmington NC
I'll be curious to read responses to this. I haven't looked into yet, but as I understand, its an excellent way of protecting monetary assets. The policy can't be attached via a judgment or charging order. It makes interest tax free (IIRC) and although I believe you'll find its much later before you can withdraw (similar to social security) one can take out a loan against the funds invested and pay it back or not without penalty. Plus it pays at death and/or can be passed without estate taxes.
 
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zaiteku

zaiteku

New Contributor
Read Millionaire Fastlane
Dec 10, 2007
112
7
27
Honolulu, Hawaii
thats what I forgot to mention, you can take your cash out via a loan, and its tax free. What is the downside to this? If I'm making 20K a year in interest from the policy for example, and I "borrow" out 20k and just not pay it back, does that keep my principle the same but give me cash flow?

Hypothetical:

300K in policy gaining 20K a year in interest

I take out 20K a year (supposedly tax free) as a "loan" to myself

Policy stays at 300K right?

Can I keep doing that indefinitely every year without getting taxed?

what am I missing? anyone? its a rather complex instrument, but Im interested to figure out the pros and cons.
 

Diane Kennedy

Bronze Contributor
Aug 31, 2007
795
209
49
Permanent life insurance is a good vehicle for asset protection and liquidity.

As far as income production, there are a lot of other tax-deferred and tax-free investment strategies that will make you more.
 
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zaiteku

zaiteku

New Contributor
Read Millionaire Fastlane
Dec 10, 2007
112
7
27
Honolulu, Hawaii
Here is an example of this type of system by one company pitching it (the videos, most importantly the ones near the end, like the "Have your Cake" video:

http://americanmoneygroup.03studios.com/financial_introduction.html

what do you guys think of this system? (I am not affiliated in any way btw! they seem legit but Im not positive). Aside from the typical sales pitch, how do the numbers work out to you all?
 
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zaiteku

zaiteku

New Contributor
Read Millionaire Fastlane
Dec 10, 2007
112
7
27
Honolulu, Hawaii
yeah for straight up growth it seems to suck, but compared to a standard 401K, it seems a lot better. Basically the same return with no taxation at the end and no risk of loss of principle in a market downturn, and no caps on how much you can deposit.

Def. not fast lane, but interesting as yet another vehicle...
 

tiredofworkin

New Contributor
Apr 28, 2008
32
2
9
Hi guys, has anyone heard of an Equity Index Universal life insurance policy? I heard it works sort of like this:

You open the policy and you can contribute some money over 5 years or something and you cant take it out for 5 years I think.

It tracks the S&P but your money is not directly invested in the S&P500 so the risk of loss isn't there.

If the S&P does poorly the most you gain is 1% but you cant lose your original capital.

You are guaranteed to gain at least 1% a year from the policy even in a down trending market. If the S&P does well for the year you can make at maximum, only 15% returns (so if the S&P goes up 20% in the year you'll only make 15% (this sucks)

After a certain amount of time (I think 5 years there is no age limitation I think like an IRA or 401K would have), you can begin withdrawing your money from the policy tax free.

So if I have 70K a year in gains from my policy I can supposedly withdraw it tax free (counting the withdrawal as my principle).

You dont have to pay the premiums if you don't want, but if you don't the policy doesn't grow obviously.

Also, if I die, the policy can be passed on to my kids tax free as an insurance policy.

I think I have it right as I heard it explained to me. Does anyone on the board have experience with this type of instrument that can speak on it? Id like to know the downsides to it as it sounds too good to be true to me. I know people doing it now and supposedly its awesome, but I want to know more about the downsides if there are any.
Anybody using this?

Sounds like a lot of upside. Down side?

Thanks

Chas
 

randallg99

Bronze Contributor
Aug 9, 2007
1,390
179
92
NJ
borrowing against life insurance policies is a good strategy for a variety of reasons but today's market has a lot of insurance companies on the fritz... I probably would only advise to stay with A rated companies ... also, these annuity/equity products are typically front loaded with fees (that you'll never see unless you ask for a statement) and could take several years before actual accumulation of cash value builds worthy enough of borrowing from

also coming to mind after seeing many of the age brackets on the board here it's probably just as easy (maybe cheaper) to buy a term insurance policy for 30 years for probably under 1k per year for a 2mil policy.... shop around. I have Met Life policies. JMHO.
 

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randallg99

Bronze Contributor
Aug 9, 2007
1,390
179
92
NJ
Can I keep doing that indefinitely every year without getting taxed?

what am I missing? anyone? its a rather complex instrument, but Im interested to figure out the pros and cons.
sure - if you keep repaying yourself back

Are you looking for an investment?
or are you looking for insurance?
 

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