Brian became self-employed because there would be no cap on his income. But he made a few mistakes.
Honest mistakes, but costly mistakes.
Instead of hiring someone to manage his books, Brian (not his real name) was doing the best he knew with online tools and the advice of colleagues in his industry. He didn’t set out to cheat, but ignorance kept him from following the rules as set out by the Internal Revenue Service.
The IRS auditor felt she was being quite lenient when she kept the penalty as low as $310,000, almost two years worth of Brian’s take-home pay. OUCH!
Two and a half years later when we spoke and I began to explain how cash-value life insurance can be like a shield protecting him from the IRS, he was skeptical. He didn’t want any loop-holes that could once again squeeze tightly around his neck.
Everything had to be 100% on the up and up. No problem, of course. That’s the only way I do things anyway.
I explained that the tax advantages of Cash-Value Life Insurance are not loopholes that the IRS has yet to discover. It is not a by-prodct of crafty financiers.
It is a feature of the US Tax Code. Section 7702 spells out that Life Insurance customers can defer paying taxes on the gains to cash value. And further, when properly structured, the disbursement of the growth does not have to be a taxable event either. By design of the US Tax Code, Cash Value Life Insurance is the best way for Brian to protect future profits from the IRS.
Cash Value Life Insurance products like Whole Life, Indexed Universal Life, Variable Life, and some others have the following tax benefits:
The Death Benefit is tax-free. It is income tax-free to the beneficiary. If the beneficiary is appropriately set up, it will not go through probate and be subject to those fees. And it can be estate tax-free if policy is placed inside an Irrevocable Life Insurance Trust.
The Cash Value grows Tax deferred. So, even if your values double or triple over time, there is no reporting required by the IRS.
First Money In, First Money Out: When you look at a Cash Value balance, part of that is the amount you put in (“cost basis”), the rest is the gain. With most Life Insurance policies, the first dollars you withdraw are from the Cost Basis and are not taxable.
Life Insuance Loans: You can borrow money from your Cash Value. Loans are not taxable income. Loans not repaid will simply be subtracted from the Death Benefit. Appropriately structured, this can be a huge benefit to people who need access funds that won’t create a tax burden.
Everything needs to be set up and handled correctly, of course. Find a professional with some experience.
Whether I am your guy or not, do not hesitate to ask me questions as it is something that I love doing.
