Do you know that life insurance is the sole reason Disneyland, home of Mickey, Minnie, Donald, and Goofy, exists? Walt Disney, the animator, required a bank loan to finance his dream of opening a theme park. When a conventional business loan application was denied, Disney borrowed against the accumulated value of his life insurance policies.
In 1930, Max Foster used the cash values of his life insurance policies to purchase an 80-acre farm in Modesto, California, which became Foster Farms, one of the largest chicken producers in the United States. There are countless examples similar to Walt Disney and Max Foster.
Even though a lot has changed since the days of Walt Disney and Max Foster, one thing hasn’t: the favorable tax treatment of life insurance cash accumulation and how it can help anyone make tax-free income by using ultra-wealthy strategies.
A new twist on life insurance also allows for market-sensitive investing. It enables you to invest in “the market” without risk: zero is your hero. When the market falls, as it inevitably does, you never lose.
This must be a joke, right?
No, according to University of Michigan head coach Jim Harbaugh. According to USA Today, Harbaugh established a deferred compensation plan with indexed universal life (IUL) insurance, which allowed him to become the highest-paid college football coach in the nation.
Wells Fargo believes the same. Would you believe that Wells Fargo, the nation’s third-largest financial institution, has over $30 billion in cash values of life insurance on its books?
How did this asset get started, and why do so many wealthy people use it?
The tax-free treatment of life insurance is a good place to start. The IRS has preserved two distinct features: tax-free payment of death benefits and tax-free accumulation of cash values. Of course, there are no “absolutes,” so you should always seek advice from your tax and insurance professionals. When these policies are properly designed, they allow for tax-free distributions.
The newest twist on life insurance is an IUL, a cash-value policy with a death benefit and an accumulation component. Investments in an IUL are not placed directly in the market, where they could be lost. Rather, they are placed in a strategy that mirrors an index, such as the S&P 500, allowing the participant to realize all or most of the market gains. These profits are then locked in to protect against future losses.
IULs, like Harbaugh, appeal to professionals and business owners because of their benefits. IULs allow cash value to grow tax-free within the policy. IULs are paid for with after-tax dollars, so clients can make tax-free withdrawals at any age and receive tax-free income (off tax return) in the future.
Furthermore, when compared to an IRA or 401(k), IULs offer greater flexibility. There is no annual limit on contributions, unlike IRAs and 401(k)s, as long as the extra money doesn’t create a taxable modified endowment contract. IULs allow for a large cash value at the start of the policy. Unlike an individual retirement account (IRA), there are no time limits on withdrawing money.
In addition to tax-free wealth accumulation, IULs provide financial security for your family in the event of death or disability. The beneficiary receives the death benefit in a tax-free lump sum if the policyholder passes away.
In Coach Harbaugh’s case, millions of dollars in tax-free retirement income were generated using an IUL. This was made possible by the growth of the cash value within the policy, which increased his tax-free retirement funds. When Harbaugh was hired at Michigan, he agreed to split the two parties’ premium, cash value, and death benefit. This “split-dollar” agreement was made possible by a cash-value life insurance policy known as an IUL.
Wells Fargo uses IULs to fund various compensation arrangements for key executives and retirees. The same can be said for Bank of America.
IULs are popular among those who want protection for their loved ones after they pass away and market gains without market losses. As a result, IULs are a comprehensive and flexible wealth-building option that can be tailored to each individual’s financial situation.
People like Harbaugh use cutting-edge planning techniques and have access to the best financial advisors in the country. Request that your insurance advisor assists you in creating an IUL for tax-free accumulation. There has never been an excess of tax-free income!
Mack Hales has spent the past 4 decades helping clients prepare for retirement and manage their finances successfully. He also works with strategies that help clients put away much more money for their retirement than they could in an IRA or even a 401k. We involve the client’s CPA and/or their tax attorney to be sure the programs meet the proper tax codes.
Mack works with Federal Employees to help them establish the right path before and after retirement. The goal is to help the client retire worry-free with as much tax-free income as possible and no worries about money at risk of market loss during retirement.
Mack has resided in Gainesville, GA since 1983, so this is considered home. Mack is married to his wife of 51 years, has two boys and five grandchildren.