4 October 2013 0 Comments

Is It Too Late To Plan?

an hour glass to planIs it too late to plan for your retirement?  It’s always best to start planning  well before that date arrives.  But, the fact of the matter is, many people just don’t get around to it.  Still, for those procrastinators there are some steps to take at the last minute.

In my last entry I discussed how Social Security benefits can be subject to income taxation.  85% of Social Security payments are taxed if a couple’s annual Combined Income (CI) exceeds $44,000.  Combined Income includes half of Social Security payments and just about any other form of income, even tax free municipal bond interest.  However, one source of income payment that is possible to exclude from the CI calculation is cash value from life insurance policies.

If a person is near retirement, owns a life insurance policy with cash value and has a diminished need for the life insurance, there may be a way to produce income from that policy’s cash value that escapes the CI calculation.  Here are the steps to take to see if this works for you:

  • Ask the existing insurance company to calculate the amount of reduced paid-up life insurance that can be provided by your policy’s cash value if the policy is whole life.  If the policy is universal life, ask that the policy’s death benefit be reduced to the minimum possible while still qualifying for life insurance tax benefits.
  • Request a calculation showing a combination of annual cash withdrawals and policy loans from this reduced policy beginning at your anticipated retirement age for a 10-20 year duration of time.  Withdrawals should be made until the basis (total premium paid) has been recovered, followed by policy loans.  Whole Life will likely not offer withdrawals, but dividend surrenders are a possibility.  Any cash received in this manner is not taxable and not included in CI and therefore does not have a negative impact on Social Security benefit taxation.

Once you have reviewed the income that can be generated by the above process, look at transferring the existing policy’s cash value via an IRS 1035 tax free exchange to a new Indexed Universal Life Policy (IULP).  Normally IULP requires a minimum of 10-15 years of premium payments for it to produce a meaningful tax-free income stream.  However, by implementing a 1035 exchange process we can pump maximum premium into the policy without creating a Modified Endowment Contract (MEC).  An attractive tax-free income can be produced that might perform better than using the existing policy.  And, in either case there is still a modicum of life insurance for the benefit of the surviving spouse or kids.

Coming up, I’ll show you just how transferring life insurance cash values can work.

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