Utilizing Life insurance as a tax mitigation

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smitcat
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Utilizing Life insurance as a tax mitigation

Post by smitcat »

Another poster has repeatedly posted that there are possibilities of utilzing life insurance at later ages as a tool to deter taxation at retirement draw in higher RMD situations.
He/she has not provided any details other than to say it is a method to reduce the impacts of RMD's in later aged planning.
I have read nothing about this possibility and have no idea how this could possibly work so I wanted to post this in case I am missing something.
Is there anything here to talk about? Thank you
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Stinky
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Re: Utilizing Life insurance as a tax mitigation

Post by Stinky »

I don’t recall the message. Could you post a link to the thread?

If all else fails, you could private message the author and see if he/she will provide details, either publicly or privately.
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Rex66
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Re: Utilizing Life insurance as a tax mitigation

Post by Rex66 »

This isn’t a new idea at all

It’s a terrible idea

What you do is take loans against your csv

Works great for the insurance industry. They make tons off a poor performing product and then charge you 6-8% interest to access your own money. Highly likely to pay more in interest then you would in taxes.
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celia
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Re: Utilizing Life insurance as a tax mitigation

Post by celia »

All I can think of is that the insurance payout could be used to pay the taxes instead of being used for living expenses. This could be “useful” to pay the taxes for each beneficiary of a tax-deferred account or if your estate was over $11.7 M when you died.


Added: After reading Rex66’s reply, you could do the same thing by leaving the same heirs some “tax money” in another account.
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smitcat
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Re: Utilizing Life insurance as a tax mitigation

Post by smitcat »

Stinky wrote: Tue Jun 15, 2021 1:06 pm I don’t recall the message. Could you post a link to the thread?

If all else fails, you could private message the author and see if he/she will provide details, either publicly or privately.
This is a cut and past from the other post regarding contributing to 401K and RMD's .....

smitcat wrote: ↑Sun Jun 13, 2021 11:00 am

"Again - at RMD time what would be your ‘then’ tax rate(s) — would it be as high or higher than 37% !? You already saving 37% in current pre-tax-deferred>"
- Would your thoughts be that both spouses live to a similar old age
- They also have 'quite enough' in after tax accounts according to the OP post
- no mention of heirs but the ability to leave funds to them with tax considerations are also a challenge
What are guarantees that OP or spouse May live longer or shorter — at the time or before RMDs comes into picture !?

Do you (and spouse) have life insurance (most likely not - but wealthy folks give a thought to life insurance as Tax/Inheritance/estate planning rather than merely for its death benefit). Note that Life Insurance proceeds are almost-always tax-free so your “effective” tax rate actually goes down significantly!! (A million insurance tax free, but 2 million in tax-deferred at higher 42% rate .. still effective rate of 28% — know this is simplistic math .. but you get the lower effective-tax-rate..)
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smitcat
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Re: Utilizing Life insurance as a tax mitigation

Post by smitcat »

Rex66 wrote: Tue Jun 15, 2021 1:14 pm This isn’t a new idea at all

It’s a terrible idea

What you do is take loans against your csv

Works great for the insurance industry. They make tons off a poor performing product and then charge you 6-8% interest to access your own money. Highly likely to pay more in interest then you would in taxes.
Thank you - I really thought I might be mssing something from seeing repeated posts to the contrary.
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smitcat
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Re: Utilizing Life insurance as a tax mitigation

Post by smitcat »

celia wrote: Tue Jun 15, 2021 1:18 pm All I can think of is that the insurance payout could be used to pay the taxes instead of being used for living expenses. This could be “useful” to pay the taxes for each beneficiary of a tax-deferred account or if your estate was over $11.7 M when you died.


Added: After reading Rex66’s reply, you could do the same thing by leaving the same heirs some “tax money” in another account.
Thank you
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Stinky
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Re: Utilizing Life insurance as a tax mitigation

Post by Stinky »

smitcat wrote: Tue Jun 15, 2021 2:23 pm
Rex66 wrote: Tue Jun 15, 2021 1:14 pm This isn’t a new idea at all

It’s a terrible idea

What you do is take loans against your csv

Works great for the insurance industry. They make tons off a poor performing product and then charge you 6-8% interest to access your own money. Highly likely to pay more in interest then you would in taxes.
Thank you - I really thought I might be mssing something from seeing repeated posts to the contrary.
You may have seen repeated posts from one or two persons.

You’ll find very few advocates for permanent life insurance within the Boglehead community. 99+% of people should use term life insurance.
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Rex66
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Re: Utilizing Life insurance as a tax mitigation

Post by Rex66 »

Some people like to pretend that there is a secret life insurance sauce that Bogleheads either don’t know about or are prejudice against or some other BS

The only time that insurance is likely “to win” compared to a typical strategy employed here is when the insurance company incorrectly rates you and you die a lot sooner than they thought you would.

Everything else is smoke and mirrors which is why such folks are light on the details.
exodusNH
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Re: Utilizing Life insurance as a tax mitigation

Post by exodusNH »

smitcat wrote: Tue Jun 15, 2021 2:23 pm
Rex66 wrote: Tue Jun 15, 2021 1:14 pm This isn’t a new idea at all

It’s a terrible idea

What you do is take loans against your csv

Works great for the insurance industry. They make tons off a poor performing product and then charge you 6-8% interest to access your own money. Highly likely to pay more in interest then you would in taxes.
Thank you - I really thought I might be mssing something from seeing repeated posts to the contrary.
When it comes to insurance, you need to look no further than Stinky.

Whole / permanent life insurance is a great deal for the person selling you that.

Let me tell you my story.

I had just turned 30. Met an investment guy at a networking event. (Northwestern Mutual.) Sold me on whole life insurance.

Since 2005, I have been paying $261/month for the policy with a $200,000 death benefit.

The current value of the policy is about $64,000. Of that, about $12,000 is investment gain. The rest is my own money. It's gained a total of $12,000 over 17 years.

Now, go to portfoliovisualizer.com. Plunk in a $1 starting investment with a monthly contribution of $261. Choose any fund -- I chose Vanguard's S&P 500 investor shares, since that fund started in 1976. Run it from 2005 to present.

Guess what that value would be?

$160,000 -- or $105,000 over 17 years.

Now, to be fair, you have to subtract out what the cost of term life insurance with a $200K benefit would have been, but that is on the order of low $100s per year.

That's why whole / permanent insurance is a pile of poo.
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Re: Utilizing Life insurance as a tax mitigation

Post by Rex66 »

I should add to the above story that NWM is considered one of the “best”………
exodusNH
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Re: Utilizing Life insurance as a tax mitigation

Post by exodusNH »

Rex66 wrote: Tue Jun 15, 2021 4:37 pm I should add to the above story that NWM is considered one of the “best”………
Yeah. For a bond fund, it's done OK. Slightly worse than Vanguard's total bond over the same period. But that's not something a 30 year-old should have invested in.

So, now, it's just chunked into my AA as "fixed income". This year's dividend was on the order of 2%-2.5%, which is about what my 401K stable value fund returned. I will probably cash it in next year, when I have the headroom in my bracket to take the hit.
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Re: Utilizing Life insurance as a tax mitigation

Post by HootingSloth »

Stinky wrote: Tue Jun 15, 2021 2:31 pm
smitcat wrote: Tue Jun 15, 2021 2:23 pm
Rex66 wrote: Tue Jun 15, 2021 1:14 pm This isn’t a new idea at all

It’s a terrible idea

What you do is take loans against your csv

Works great for the insurance industry. They make tons off a poor performing product and then charge you 6-8% interest to access your own money. Highly likely to pay more in interest then you would in taxes.
Thank you - I really thought I might be mssing something from seeing repeated posts to the contrary.
You may have seen repeated posts from one or two persons.

You’ll find very few advocates for permanent life insurance within the Boglehead community. 99+% of people should use term life insurance.
Agree with this. In addition, if you do not expect to be paying significant estate taxes, you are almost surely not in the small minority that should consider permanent life. If you do expect to be paying significant estate taxes, you probably should be spending more time thinking about your overall estate plan, which would help you decide whether permanent life could make sense as one component of that plan.
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Stinky
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Re: Utilizing Life insurance as a tax mitigation

Post by Stinky »

exodusNH wrote: Tue Jun 15, 2021 5:16 pm
Rex66 wrote: Tue Jun 15, 2021 4:37 pm I should add to the above story that NWM is considered one of the “best”………
Yeah. For a bond fund, it's done OK. Slightly worse than Vanguard's total bond over the same period. But that's not something a 30 year-old should have invested in.

So, now, it's just chunked into my AA as "fixed income". This year's dividend was on the order of 2%-2.5%, which is about what my 401K stable value fund returned. I will probably cash it in next year, when I have the headroom in my bracket to take the hit.
I note that permanent life insurance often gives a “decent” fixed income return after the policy is about 20 years old.

The problem is that the “returns”’are perfectly awful for the first 20 years.
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mrsgoldilocks
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Re: Utilizing Life insurance as a tax mitigation

Post by mrsgoldilocks »

exodusNH wrote: Tue Jun 15, 2021 3:45 pm When it comes to insurance, you need to look no further than Stinky.

Whole / permanent life insurance is a great deal for the person selling you that.

Let me tell you my story.

I had just turned 30. Met an investment guy at a networking event. (Northwestern Mutual.) Sold me on whole life insurance.

Since 2005, I have been paying $261/month for the policy with a $200,000 death benefit.

The current value of the policy is about $64,000. Of that, about $12,000 is investment gain. The rest is my own money. It's gained a total of $12,000 over 17 years.

Now, go to portfoliovisualizer.com. Plunk in a $1 starting investment with a monthly contribution of $261. Choose any fund -- I chose Vanguard's S&P 500 investor shares, since that fund started in 1976. Run it from 2005 to present.

Guess what that value would be?

$160,000 -- or $105,000 over 17 years.

Now, to be fair, you have to subtract out what the cost of term life insurance with a $200K benefit would have been, but that is on the order of low $100s per year.

That's why whole / permanent insurance is a pile of poo.
Totally agreed!! Someone in my family bought a whole life policy because he is convinced by the agent that's a good way to grow his money and shelter from tax. Total BS! Yes, it's true that it's a tax shelter, and he may be saving ... I don't know ... some tax in a way. Or when his heir got his 250K + whatever investment return in 50 years, it's tax free. BUT it's with a very very high cost and that's totally unjustifiable!!

I get really mad if anyone trying to sell me these kind of Whole life, Universal life policy etc etc Or life insurance with raider for LTC/cancer/all sort of favor to make it more "attractive". If someone brings this up to you, run as far as you can. The only life insurance I will buy is Term life.

I agree ... no one will praise about whole life insurance except the agent. Period.
Rex66
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Re: Utilizing Life insurance as a tax mitigation

Post by Rex66 »

i should also add in the example above if purchased today it will take 17 years to break even. So NO GAIN at all and im talking illustrated and not guaranteed. Dividends are also still going down.
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Re: Utilizing Life insurance as a tax mitigation

Post by bsteiner »

If you live to life expectancy it will reduce your estate tax because you'll have less money (including the insurance proceeds) than you would otherwise have had.
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Re: Utilizing Life insurance as a tax mitigation

Post by lazynovice »

I don’t think that other poster is referring to whole life or permanent life insurance. I think he is trying to answer your concern about one spouse dying before the other and the impact of RMDs on the surviving spouse’s tax rate.
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Re: Utilizing Life insurance as a tax mitigation

Post by Stinky »

bsteiner wrote: Tue Jun 15, 2021 8:33 pm If you live to life expectancy it will reduce your estate tax because you'll have less money (including the insurance proceeds) than you would otherwise have had.
[sarcasm alert] :D
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Re: Utilizing Life insurance as a tax mitigation

Post by MiddleOfTheRoad »

lazynovice wrote: Tue Jun 15, 2021 9:56 pm I don’t think that other poster is referring to whole life or permanent life insurance. I think he is trying to answer your concern about one spouse dying before the other and the impact of RMDs on the surviving spouse’s tax rate.
This.
I saw that other thread and I think that person referred to term life. The term life in this case is used as insurance for extra income tax to be paid if one spouse dies prematurely during Roth conversion window (from retirement to RMD) and the survivor falls into the single brackets. The insurance proceed is used to pay the extra tax in the single brackets for the surviving spouse. If both spouses survive to RMD then the life insurance cost is considered money well spent to mitigate that risk.
This may or may not come out ahead, but that’s the idea
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Re: Utilizing Life insurance as a tax mitigation

Post by ivk5 »

smitcat wrote: Tue Jun 15, 2021 2:22 pm
Stinky wrote: Tue Jun 15, 2021 1:06 pm I don’t recall the message. Could you post a link to the thread?

If all else fails, you could private message the author and see if he/she will provide details, either publicly or privately.
This is a cut and past from the other post regarding contributing to 401K and RMD's .....

smitcat wrote: ↑Sun Jun 13, 2021 11:00 am

"Again - at RMD time what would be your ‘then’ tax rate(s) — would it be as high or higher than 37% !? You already saving 37% in current pre-tax-deferred>"
- Would your thoughts be that both spouses live to a similar old age
- They also have 'quite enough' in after tax accounts according to the OP post
- no mention of heirs but the ability to leave funds to them with tax considerations are also a challenge
What are guarantees that OP or spouse May live longer or shorter — at the time or before RMDs comes into picture !?

Do you (and spouse) have life insurance (most likely not - but wealthy folks give a thought to life insurance as Tax/Inheritance/estate planning rather than merely for its death benefit). Note that Life Insurance proceeds are almost-always tax-free so your “effective” tax rate actually goes down significantly!! (A million insurance tax free, but 2 million in tax-deferred at higher 42% rate .. still effective rate of 28% — know this is simplistic math .. but you get the lower effective-tax-rate..)
Saving everyone else the search… link to thread
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Stinky
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Re: Utilizing Life insurance as a tax mitigation

Post by Stinky »

ivk5 wrote: Wed Jun 16, 2021 2:36 am
smitcat wrote: Tue Jun 15, 2021 2:22 pm
Stinky wrote: Tue Jun 15, 2021 1:06 pm I don’t recall the message. Could you post a link to the thread?

If all else fails, you could private message the author and see if he/she will provide details, either publicly or privately.
This is a cut and past from the other post regarding contributing to 401K and RMD's .....

smitcat wrote: ↑Sun Jun 13, 2021 11:00 am

"Again - at RMD time what would be your ‘then’ tax rate(s) — would it be as high or higher than 37% !? You already saving 37% in current pre-tax-deferred>"
- Would your thoughts be that both spouses live to a similar old age
- They also have 'quite enough' in after tax accounts according to the OP post
- no mention of heirs but the ability to leave funds to them with tax considerations are also a challenge
What are guarantees that OP or spouse May live longer or shorter — at the time or before RMDs comes into picture !?

Do you (and spouse) have life insurance (most likely not - but wealthy folks give a thought to life insurance as Tax/Inheritance/estate planning rather than merely for its death benefit). Note that Life Insurance proceeds are almost-always tax-free so your “effective” tax rate actually goes down significantly!! (A million insurance tax free, but 2 million in tax-deferred at higher 42% rate .. still effective rate of 28% — know this is simplistic math .. but you get the lower effective-tax-rate..)
Saving everyone else the search… link to thread
Thank you. I missed that thread.

That other thread sounds like a whole life sales pitch. Long on the hyperbole, short on the facts.

I can assure the OP of this thread that he’s gotten good advice in this thread.
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smitcat
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Re: Utilizing Life insurance as a tax mitigation

Post by smitcat »

lazynovice wrote: Tue Jun 15, 2021 9:56 pm I don’t think that other poster is referring to whole life or permanent life insurance. I think he is trying to answer your concern about one spouse dying before the other and the impact of RMDs on the surviving spouse’s tax rate.
No, he was referring to life insurance as a method to pass on wealth not to pay bills. Once again here is his exact post....

"Do you (and spouse) have life insurance (most likely not - but wealthy folks give a thought to life insurance as Tax/Inheritance/estate planning rather than merely for its death benefit)."
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smitcat
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Re: Utilizing Life insurance as a tax mitigation

Post by smitcat »

Stinky wrote: Wed Jun 16, 2021 5:06 am
ivk5 wrote: Wed Jun 16, 2021 2:36 am
smitcat wrote: Tue Jun 15, 2021 2:22 pm
Stinky wrote: Tue Jun 15, 2021 1:06 pm I don’t recall the message. Could you post a link to the thread?

If all else fails, you could private message the author and see if he/she will provide details, either publicly or privately.
This is a cut and past from the other post regarding contributing to 401K and RMD's .....

smitcat wrote: ↑Sun Jun 13, 2021 11:00 am

"Again - at RMD time what would be your ‘then’ tax rate(s) — would it be as high or higher than 37% !? You already saving 37% in current pre-tax-deferred>"
- Would your thoughts be that both spouses live to a similar old age
- They also have 'quite enough' in after tax accounts according to the OP post
- no mention of heirs but the ability to leave funds to them with tax considerations are also a challenge
What are guarantees that OP or spouse May live longer or shorter — at the time or before RMDs comes into picture !?

Do you (and spouse) have life insurance (most likely not - but wealthy folks give a thought to life insurance as Tax/Inheritance/estate planning rather than merely for its death benefit). Note that Life Insurance proceeds are almost-always tax-free so your “effective” tax rate actually goes down significantly!! (A million insurance tax free, but 2 million in tax-deferred at higher 42% rate .. still effective rate of 28% — know this is simplistic math .. but you get the lower effective-tax-rate..)
Saving everyone else the search… link to thread
Thank you. I missed that thread.

That other thread sounds like a whole life sales pitch. Long on the hyperbole, short on the facts.

I can assure the OP of this thread that he’s gotten good advice in this thread.
Yes ,thank you.
I read a bunch of words in his posts but never was able to get a real math example or any reasonably detailed articles which described any stretagy.
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Re: Utilizing Life insurance as a tax mitigation

Post by Rex66 »

And you never will
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Re: Utilizing Life insurance as a tax mitigation

Post by nisiprius »

To date, I have never seen anything written by anyone independent of the insurance business that had anything good to say about whole life insurance as part of an investment strategy.

(This is in contrast to other insurance products. For example, Swedroe and Kizer, in The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly include income annuities in the "good" section.)
Last edited by nisiprius on Wed Jun 16, 2021 7:17 am, edited 2 times in total.
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Rex66
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Re: Utilizing Life insurance as a tax mitigation

Post by Rex66 »

Well there is the work by wade pfau but that was completely sponsored by the insurance industry and included poor assumptions that of course favored the insurance product.
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Re: Utilizing Life insurance as a tax mitigation

Post by HootingSloth »

nisiprius wrote: Wed Jun 16, 2021 7:10 am To date, I have never seen anything written by anyone independent of the insurance business that had anything good to say about whole life insurance as part of an investment strategy.

(This is in contrast to other insurance products. For example, Swedroe and Kizer, in The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly include income annuities in the "good" section.)
FWIW, Kitces talks about one remaining (narrow) use case for irrevocable life insurance trusts (ILITs) in this article to provide liquidity to an estate that is subject to the estate tax but holds significant illiquid assets:
But in most cases, ILITs are no longer necessary unless the family already has a net worth to expose them to estate taxes, for which any additional life insurance death benefits just compound the problem. And in those cases, ILITs aren’t just about sheltering the life insurance death benefit from estate taxation, per se, but are used because the life insurance may be needed to provide liquidity for the rest of the family estate tax liability in the first place. In this context, the life insurance inside of the ILIT may help after death by loaning cash to the estate, or buying out assets (e.g., a family business) from the estate, providing the estate the liquid cash it needs to pay the estate tax bill without triggering a fire sale of (potentially illiquid) family assets.
It generally would not make sense to purchase term insurance in such an ILIT because the plan would not work if you die after the term has expired. You could, however, purchase guaranteed universal life insurance, rather than whole life insurance, to avoid wasting a bunch of money on a whole life policy. So I think it is fair to say this is not a use of whole life insurance as part of an investment strategy, but it is a use of permanent life insurance as part of an estate planning strategy.

I think it can be worth knowing about legitimate uses of a product, so that we can point out to people why sophisticated, rich individuals may be using them but that most people still do not have any use for them. Sometimes a plain caution that a product is "snake oil," without more, could go unheeded because someone will still want to imitate the very wealthy, thinking that the wealthy know better, when in reality their circumstances may just differ.
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Re: Utilizing Life insurance as a tax mitigation

Post by Rex66 »

Yes gUL much better than WL in an ILIT but you could take the money and invest it in taxable such as total stock. Likely but not guaranteed that this will perform better. If you die prematurely then the gUL could win.
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Re: Utilizing Life insurance as a tax mitigation

Post by HootingSloth »

Rex66 wrote: Wed Jun 16, 2021 8:06 am Yes gUL much better than WL in an ILIT but you could take the money and invest it in taxable such as total stock. Likely but not guaranteed that this will perform better. If you die prematurely then the gUL could win.
Yes, it makes more sense in a situation where the benefit of potentially growing a large estate ever larger is seen as less important than the benefit of decreasing the risk that you will have to sell off chunks of the family business (or whatever other illiquid asset) to cover an estate tax liability. Leaving the largest possible fortune is not always as important to people as leaving a legacy through an intact family business. It is a tool to consider in the right circumstances, nothing magic.
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Re: Utilizing Life insurance as a tax mitigation

Post by Stubbie »

Ed Slot, the guru of IRAs, espouses this advice on his PBS specials. The first 90% of what he talks about regarding Roths and traditional IRAs is pretty good, then he gets into the whole life scheme. That's where his advisory firm really makes their money.
BTW, their Slot Report emails always have some pretty good detailed tidbits regarding retirement accounts.
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Re: Utilizing Life insurance as a tax mitigation

Post by afan »

Term in an ILIT could make sense if the illiquidity of the holdings is expected to be temporary. If the owner of a business anticipates a sale during their lifetime then at that point the estate would have liquid assets to pay estate taxes when the time came.
One could get the benefit of low cost insurance coverage while needed and never have to pay for the option of keeping the policy into old age, when term becomes prohibitively expensive.

But I think most of the sales pitch for life insurance as tax avoidance strategy is based not on estate planning at all. The pitch seems to be that you get "high safe returns, with no risk of loss" (typically no word about inflation risk over the decades), followed by "tax free" borrowing from the policy at retirement. As long as the loans are outstanding at death, they are paid off by the death benefit. The heirs get whatever is left.
The appeal is thus a more or less bond-like investment with a guarantee (backed in part by a state guaranty association) with a way to access the income eventually without paying tax on the growth. Then all the insurance salesperson need do is compare the life insurance
rate to municipal bonds, which lack the "no loss" guarantee.

The problem is as others have mentioned- the initial expenses are so high that it takes years before the insurance even comes close to a muni bond portfolio. If inflation picks up your muni funds will start paying at a higher rate. Your life insurance policy may or may not.

The recent performance of WL has been as good as it can get because of the steady decline in interest rates. Policies sold 20 years ago may have had guaranteed minimum returns that seemed laughably low back then but are pretty good now. This put the insurance companies in the position of having guaranteed returns on the policies that are higher than they can get on safe bonds. People who bought such policies years ago have lucked into a situation in which it may be worthwhile to keep them. This can only continue in the future if we go into a future of sustained negative rates. If that is unlikely, then ex ante a WL policy purchased now is a bad investment choice.

There was a poster either here or on WCI who strongly asserted that for them, with a high income, living in a high tax state, WL was a better investment than the alternatives. Although asked several times to show their work, and promising they would, the person never did.
Then they stopped answering questions.
It was unclear whether they really were a forum participant who had done the calculations and at least thought they had come up with an instance where WL was good, or they were a sock puppet who had not and could not produce evidence to back their claims.
There was a different poster on WCi who made similar claims but they were based on the erroneous assumption that capital gains on a taxable account would be taxed at their death. As the other participants pointed out that this was not true, the poster seemed to be seeing the light about what they had been sold.

I suspect most bogleheads would love to see an example of where WL is a good investment choice. I don't know that one has been supplied.
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Re: Utilizing Life insurance as a tax mitigation

Post by bsteiner »

afan wrote: Thu Jun 17, 2021 10:06 am Term in an ILIT could make sense if the illiquidity of the holdings is expected to be temporary. If the owner of a business anticipates a sale during their lifetime then at that point the estate would have liquid assets to pay estate taxes when the time came.
One could get the benefit of low cost insurance coverage while needed and never have to pay for the option of keeping the policy into old age, when term becomes prohibitively expensive.

But I think most of the sales pitch for life insurance as tax avoidance strategy is based not on estate planning at all. The pitch seems to be that you get "high safe returns, with no risk of loss" (typically no word about inflation risk over the decades), followed by "tax free" borrowing from the policy at retirement. As long as the loans are outstanding at death, they are paid off by the death benefit. The heirs get whatever is left.
The appeal is thus a more or less bond-like investment with a guarantee (backed in part by a state guaranty association) with a way to access the income eventually without paying tax on the growth. Then all the insurance salesperson need do is compare the life insurance
rate to municipal bonds, which lack the "no loss" guarantee.

The problem is as others have mentioned- the initial expenses are so high that it takes years before the insurance even comes close to a muni bond portfolio. If inflation picks up your muni funds will start paying at a higher rate. Your life insurance policy may or may not.

...

There was a poster either here or on WCI who strongly asserted that for them, with a high income, living in a high tax state, WL was a better investment than the alternatives. ...
You are correct that it works well for illiquid estates where the client expects that the business will be sold or will go public within a reasonable period of time. The insurance provides liquidity of the client dies before that happens. However, if the client keeps the business for a long period of time, the insurance won't increase the liquidity.

I've seen some illustrations that appear to show that the expected return on the insurance is comparable to the expected return on municipal bonds, so for someone who can keep the insurance until death. I think that to evaluate it you would have to consider the probability of dying in year 1, in year 2, etc., which I didn't do.
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Re: Utilizing Life insurance as a tax mitigation

Post by unclescrooge »

exodusNH wrote: Tue Jun 15, 2021 5:16 pm
Rex66 wrote: Tue Jun 15, 2021 4:37 pm I should add to the above story that NWM is considered one of the “best”………
Yeah. For a bond fund, it's done OK. Slightly worse than Vanguard's total bond over the same period. But that's not something a 30 year-old should have invested in.

So, now, it's just chunked into my AA as "fixed income". This year's dividend was on the order of 2%-2.5%, which is about what my 401K stable value fund returned. I will probably cash it in next year, when I have the headroom in my bracket to take the hit.
That's how it was sold to a buddy of mine. As part of his emergency fund and bond portfolio.

The only issue is it will take decades before there is any value to it, by which point he probably will never need it.
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Re: Utilizing Life insurance as a tax mitigation

Post by Lee_WSP »

There are only a few scenarios where life insurance is better than investing as you can use the same ILIT structure to invest instead of purchase life insurance. All those scenarios involve dying before your life expectancy or the stock market crashing just as you die. There may be other scenarios, but I cannot think of any. Okay, one more. If for some reason, you are unwilling to invest more aggressively than a savings account or perhaps even CD’s; life insurance can come out ahead.

edit: Thought of one more.
If interest rates are at or near peak rates and are about to drop (perhaps precipitously), a ten up policy will outperform a similar bond investing ladder simply due to the fact that the higher rate was locked in via contract under an installment plan. But obviously, not a great thing to bet on in today's market.
Last edited by Lee_WSP on Thu Jun 17, 2021 11:59 am, edited 1 time in total.
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Re: Utilizing Life insurance as a tax mitigation

Post by TomatoTomahto »

smitcat wrote: Wed Jun 16, 2021 6:03 am I read a bunch of words in his posts but never was able to get a real math example or any reasonably detailed articles which described any stretagy.
All the words and eccentric punctuation (I know, I know, punctuation is so 20th century :oops: ) reminded me of a Doonesbury cartoon of decades ago: at a press conference a reporter yells out “Senator, Senator, we need a verb.”
I get the FI part but not the RE part of FIRE.
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Re: Utilizing Life insurance as a tax mitigation

Post by bsteiner »

Lee_WSP wrote: Thu Jun 17, 2021 10:58 am There are only a few scenarios where life insurance is better than investing as you can use the same ILIT structure to invest instead of purchase life insurance. All those scenarios involve dying before your life expectancy or the stock market crashing just as you die. There may be other scenarios, but I cannot think of any. Okay, one more. If for some reason, you are unwilling to invest more aggressively than a savings account or perhaps even CD’s; life insurance can come out ahead.
One more is where someone won't otherwise make gifts, but is willing to pay the premiums on life insurance owned by an insurance trust or by the children directly, since he/she doesn't think of that as a gift.
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Re: Utilizing Life insurance as a tax mitigation

Post by exodusNH »

unclescrooge wrote: Thu Jun 17, 2021 10:52 am
exodusNH wrote: Tue Jun 15, 2021 5:16 pm
Rex66 wrote: Tue Jun 15, 2021 4:37 pm I should add to the above story that NWM is considered one of the “best”………
Yeah. For a bond fund, it's done OK. Slightly worse than Vanguard's total bond over the same period. But that's not something a 30 year-old should have invested in.

So, now, it's just chunked into my AA as "fixed income". This year's dividend was on the order of 2%-2.5%, which is about what my 401K stable value fund returned. I will probably cash it in next year, when I have the headroom in my bracket to take the hit.
That's how it was sold to a buddy of mine. As part of his emergency fund and bond portfolio.

The only issue is it will take decades before there is any value to it, by which point he probably will never need it.
Yep. I've had mine for 16 years. I didn't pay attention to it until recently. Lesson learned; I try to help others avoid that same mistake.
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Re: Utilizing Life insurance as a tax mitigation

Post by HootingSloth »

afan wrote: Thu Jun 17, 2021 10:06 am Term in an ILIT could make sense if the illiquidity of the holdings is expected to be temporary.
That's a good point. Term in an ILIT could make sense if the illiquidity will be resolved prior to the end of the term.
afan wrote: Thu Jun 17, 2021 10:06 am But I think most of the sales pitch for life insurance as tax avoidance strategy is based not on estate planning at all. The pitch seems to be that you get "high safe returns, with no risk of loss" (typically no word about inflation risk over the decades), followed by "tax free" borrowing from the policy at retirement.
I agree that that seems to be the typical sales pitch. In general, when evaluating whether or not to buy something, listening to the what a sales person has to say about the costs and benefits should be pretty low down on the list.
bsteiner wrote: Thu Jun 17, 2021 11:05 am
Lee_WSP wrote: Thu Jun 17, 2021 10:58 am There are only a few scenarios where life insurance is better than investing as you can use the same ILIT structure to invest instead of purchase life insurance. All those scenarios involve dying before your life expectancy or the stock market crashing just as you die. There may be other scenarios, but I cannot think of any. Okay, one more. If for some reason, you are unwilling to invest more aggressively than a savings account or perhaps even CD’s; life insurance can come out ahead.
One more is where someone won't otherwise make gifts, but is willing to pay the premiums on life insurance owned by an insurance trust or by the children directly, since he/she doesn't think of that as a gift.
People's priorities can seem a bit strange sometimes, but a belief that there are more important things than maximizing your expected net worth at death strikes me as healthy. I have seen someone with guaranteed universal in an ILIT that I thought was making a considered choice with eyes wide open about the costs and about what their priorities were. But it's not a very common situation to find oneself in.
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Re: Utilizing Life insurance as a tax mitigation

Post by afan »

The problem with buying a WL policy when headed for a long period of lower rates is that no one knows when such a thing will happen. I am with almost everyone else who assumes that interest rates are headed up, rather than down, over the coming decades. But I have no idea whether I am right and I don't make bets on this belief.

10 years ago I suspect it would have been hard to find people predicting that we would have negative interest rates at all.

If interest rates were to continue to fall, go seriously negative and stay there, then buying a WL policy now could well be profitable in 20-30 years even at the low guaranteed returns they currently offer.

But if I could predict changes in long term interest rates I would be so rich that saving mere millions in taxes would be of no concern.
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Re: Utilizing Life insurance as a tax mitigation

Post by afan »

bsteiner wrote: Thu Jun 17, 2021 11:05 am
One more is where someone won't otherwise make gifts, but is willing to pay the premiums on life insurance owned by an insurance trust or by the children directly, since he/she doesn't think of that as a gift.
I am trying to imagine the conversation with a client who will make gifts to an ILIT but otherwise would not make gifts. They want to pass more money on to their heirs, but the insurance premiums are the only form in which they are willing to do that? Are there situations where this makes sense? Or do they do this because they do not understand what is going on in their estate plan?

Brings up a bigger question. Estate planning can be complicated and I suspect few clients really understand all the details. Is it the job of the estate planner to understand what the client wants, create a plan that accomplishes this, and help the client follow it, even if the client does not understand it themselves? At some point, particularly with the more complicated plans, I assume you must give up on explanations? Unless the client wants to go to law school, get a masters in tax and practice estate planning themselves, there will be issues that "have to be done this way" and it would be too time consuming and expensive to explain why.
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Re: Utilizing Life insurance as a tax mitigation

Post by prudent »

HootingSloth wrote: Wed Jun 16, 2021 7:54 am FWIW, Kitces talks about one remaining (narrow) use case for irrevocable life insurance trusts (ILITs) in this article to provide liquidity to an estate that is subject to the estate tax but holds significant illiquid assets:
But in most cases, ILITs are no longer necessary unless the family already has a net worth to expose them to estate taxes, for which any additional life insurance death benefits just compound the problem. And in those cases, ILITs aren’t just about sheltering the life insurance death benefit from estate taxation, per se, but are used because the life insurance may be needed to provide liquidity for the rest of the family estate tax liability in the first place. In this context, the life insurance inside of the ILIT may help after death by loaning cash to the estate, or buying out assets (e.g., a family business) from the estate, providing the estate the liquid cash it needs to pay the estate tax bill without triggering a fire sale of (potentially illiquid) family assets.
It generally would not make sense to purchase term insurance in such an ILIT because the plan would not work if you die after the term has expired. You could, however, purchase guaranteed universal life insurance, rather than whole life insurance, to avoid wasting a bunch of money on a whole life policy. So I think it is fair to say this is not a use of whole life insurance as part of an investment strategy, but it is a use of permanent life insurance as part of an estate planning strategy.

I think it can be worth knowing about legitimate uses of a product, so that we can point out to people why sophisticated, rich individuals may be using them but that most people still do not have any use for them. Sometimes a plain caution that a product is "snake oil," without more, could go unheeded because someone will still want to imitate the very wealthy, thinking that the wealthy know better, when in reality their circumstances may just differ.
I was peripherally involved as an observer for an estate plan that involved an ILIT. It was exactly as Kitces said - the person was sole owner of a business worth multi-millions and owned next to nothing beyond that. This was when the estate tax exemption was $5-something million. A number of the owner's family members worked in the business. The ILIT's purpose was to protect the estate from a fire sale of the business in the event the owner died which could have resulted in the family members being tossed out of their jobs.
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Re: Utilizing Life insurance as a tax mitigation

Post by Lee_WSP »

afan wrote: Fri Jun 18, 2021 9:06 am
bsteiner wrote: Thu Jun 17, 2021 11:05 am
One more is where someone won't otherwise make gifts, but is willing to pay the premiums on life insurance owned by an insurance trust or by the children directly, since he/she doesn't think of that as a gift.
I am trying to imagine the conversation with a client who will make gifts to an ILIT but otherwise would not make gifts. They want to pass more money on to their heirs, but the insurance premiums are the only form in which they are willing to do that? Are there situations where this makes sense? Or do they do this because they do not understand what is going on in their estate plan?

Brings up a bigger question. Estate planning can be complicated and I suspect few clients really understand all the details. Is it the job of the estate planner to understand what the client wants, create a plan that accomplishes this, and help the client follow it, even if the client does not understand it themselves? At some point, particularly with the more complicated plans, I assume you must give up on explanations? Unless the client wants to go to law school, get a masters in tax and practice estate planning themselves, there will be issues that "have to be done this way" and it would be too time consuming and expensive to explain why.
It’s not that they are greedy, but they may be untrusting or do not want to give up control until they die.
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Re: Utilizing Life insurance as a tax mitigation

Post by bsteiner »

Lee_WSP wrote: Fri Jun 18, 2021 11:02 am
afan wrote: Fri Jun 18, 2021 9:06 am
bsteiner wrote: Thu Jun 17, 2021 11:05 am
One more is where someone won't otherwise make gifts, but is willing to pay the premiums on life insurance owned by an insurance trust or by the children directly, since he/she doesn't think of that as a gift.
I am trying to imagine the conversation with a client who will make gifts to an ILIT but otherwise would not make gifts. They want to pass more money on to their heirs, but the insurance premiums are the only form in which they are willing to do that? Are there situations where this makes sense? Or do they do this because they do not understand what is going on in their estate plan?

Brings up a bigger question. Estate planning can be complicated and I suspect few clients really understand all the details. Is it the job of the estate planner to understand what the client wants, create a plan that accomplishes this, and help the client follow it, even if the client does not understand it themselves? At some point, particularly with the more complicated plans, I assume you must give up on explanations? Unless the client wants to go to law school, get a masters in tax and practice estate planning themselves, there will be issues that "have to be done this way" and it would be too time consuming and expensive to explain why.
It’s not that they are greedy, but they may be untrusting or do not want to give up control until they die.
If they give cash, the recipients (or the beneficiaries of the trust if the gift is in trust) may want to spend the money now, whereas if the cash is used to pay insurance premiums, the beneficiaries of the trust are less likely to press for distributions since they'll think of it as money later when the donor dies.

Of course, the beneficiaries may have more need for the money now. When the donor dies, they'll inherit his/her other assets.

The extent to which clients understand their estate plans varies from one client to another. I think most clients have at least a general understanding of their estate plans even if they don't understand all of the details. On the other hand, when reviewing new clients' existing plans, they often don't make sense, and often the clients don't know why they did what they did.
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Re: Utilizing Life insurance as a tax mitigation

Post by Rex66 »

Almost always better to give it in small chunks then vs a lump sum at death. If you aren’t happy with how they spend it, you can make adjustments. Harder to do when dead.
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Re: Utilizing Life insurance as a tax mitigation

Post by Lee_WSP »

Rex66 wrote: Fri Jun 18, 2021 12:18 pm Almost always better to give it in small chunks then vs a lump sum at death. If you aren’t happy with how they spend it, you can make adjustments. Harder to do when dead.
I prefer a protection trust with Crummey powers if I wanted to direct what happens to the gifts.
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Re: Utilizing Life insurance as a tax mitigation

Post by Rex66 »

They can still spend it on junk with that
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Re: Utilizing Life insurance as a tax mitigation

Post by Lee_WSP »

Rex66 wrote: Fri Jun 18, 2021 4:06 pm They can still spend it on junk with that
No. Only if they exercise their Crummey power, at which point you discontinue the gifting. Also, an ILIT relied upon the same Crummey power to gift a present interest and use up the yearly exemption.
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Re: Utilizing Life insurance as a tax mitigation

Post by sc9182 »

Mostly cut-n-pasted from another thread:
smitcat wrote: Tue Jul 20, 2021 11:40 am
I have asked these questions before and received no answers which would support the stategy.
Here is a link to one such post...

viewtopic.php?f=2&t=351369&p=6068863#p6068863
Since this Poster excited about Roth., let me ask for counterfactual. If Roth conversion likley to provide barely slight advantage “over longer term” (Prof. McQ thread) — how is someone going to ensure Roth’s long term survival - to effectuate its break-even-point/success. Or if unable to achieve longer longevity (sorry), what action one going to take to reduce short-term Roth’s conversion-loss due to early demise of Roth holder !? Got an idear ?

Do note: many “large” and long-term Roth conversions are likely to involve some tax-realization towards paying conversion taxes — most often done from brokerage (likely with some embedded cap gains). Hence, upon the initial years of Roth conversion (s) — it’s likely Roth conversion would lose against free step-up basis of Brokerage monies used (with embedded cap gains) to pay for conversion-taxes. If such cap-gains not realized until death — likely, they would get free step-up upon early demise of the Brokerage/Roth holder. Alas, the Recently realized cap-gains negated put Roth “net” portfolio value to be lower than that of {TDA + Brokerage (with some embedded cap gains)}

I am OK with Roth, and especially like MBR (excess savings/investing go here prior to Brokerage). But Roth conversions at marginal rates higher than 22-24% (and/or considering some NIIT, IRMAA tier points), are less likely to assure conversions' success. Then again -- very specific (a Few BHers) individual cases -- larger/extended Roth conversions could make sense. But do crunch numbers ..
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Re: Utilizing Life insurance as a tax mitigation

Post by smitcat »

sc9182 wrote: Wed Jul 21, 2021 3:46 pm Mostly cut-n-pasted from another thread:
smitcat wrote: Tue Jul 20, 2021 11:40 am
I have asked these questions before and received no answers which would support the stategy.
Here is a link to one such post...

viewtopic.php?f=2&t=351369&p=6068863#p6068863
Since this Poster excited about Roth., let me ask for counterfactual. If Roth conversion likley to provide barely slight advantage “over longer term” (Prof. McQ thread) — how is someone going to ensure Roth’s long term survival - to effectuate its break-even-point/success. Or if unable to achieve longer longevity (sorry), what action one going to take to reduce short-term Roth’s conversion-loss due to early demise of Roth holder !? Got an idear ?

Do note: many “large” and long-term Roth conversions are likely to involve some tax-realization towards paying conversion taxes — most often done from brokerage (likely with some embedded cap gains). Hence, upon the initial years of Roth conversion (s) — it’s likely Roth conversion would lose against free step-up basis of Brokerage monies used (with embedded cap gains) to pay for conversion-taxes. If such cap-gains not realized until death — likely, they would get free step-up upon early demise of the Brokerage/Roth holder. Alas, the Recently realized cap-gains negated put Roth “net” portfolio value to be lower than that of {TDA + Brokerage (with some embedded cap gains)}

I am OK with Roth, and especially like MBR (excess savings/investing go here prior to Brokerage). But Roth conversions at marginal rates higher than 22-24% (and/or considering some NIIT, IRMAA tier points), are less likely to assure conversions' success. Then again -- very specific (a Few BHers) individual cases -- larger/extended Roth conversions could make sense. But do crunch numbers ..
This post is about Life insurance....please tell us how that would work?

Which life insurance do you have or do you suggest?
What is the cost per XXX for a 60 year old for that insurance?
Are there limitations based on current health for that insurance?
Does the insurance have a fixed payout or is it adjusted for inflation?
Please describe how this would work....
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