Cash Value Life Insurance is a Hedge against Higher Taxes

               I’m not an alarmist when it comes to what may happen with income taxes in the future, but as the US Government debt mounts, it’s definitely giving me cause for concern.

                The primary tools used by many consumers to save for retirement are IRAs (Individual Retirement Accounts) and 401(k)/403(b) pension plans.

                IRA, 401(k) and 403(b) plans are “tax-deferred*.”

                Advantages of tax-deferring income?

                -Reduce current income taxes

               -Tax-deferred growth (more money growing in a tax-deferred environment)

                Disadvantages of tax-deferring income?

                -ALL of the money when it comes out is income-taxed

               -Have to wait until age 59.5 to remove the money (at least to avoid a 10% penalty)

               -We have no idea what the income tax rates are going to be when the money is removed

                It’s the last item that is the focus of this newsletter. Income tax rates are historically low. Let me remind you of our past top marginal income tax rates.

                2020      37%

               1988      28%

               1986      50%

               1980     70%

                The most recent low income tax brackets were when we had Republican presidents and the higher tax brackets are with Democratic presidents.

                National Debt

                Our current national debt is over $26 trillion. That debt has doubled in the last 10 years. With COVID-19 debt piling on, there doesn’t appear to be any way to stop the growth.

                Paying the piper

                At some point in time the government is going to have to tackle the debt crisis. The way the government typically deals with such a crisis (at least when Democrats are in charge) is to raise taxes. It’s scary to think where income taxes may go in the future. [For an alternative view, see The Deficit Myth, by Stephanie Kolten.]

                Cash value life Insurance as a hedge against higher taxes

                Many people are unaware of the benefits of growing cash in a life insurance policy. While not all policies are created equally, the following are the characteristics of a “good” cash value life policy:

                1) Money grows tax-free.

               2) Money can be removed tax-free.

               3) Gains can be pegged to a measuring stock market index.

               4) Gains are locked in annually and can’t be lost due to downturns in the stock market. 

               All four aspects of a good cash value life policy are attractive, but the two to focus on for this newsletter are 1) and 2). Money can grow tax-free and be removed tax-free.

                Tax-defer to a IRA/401(k)403(b) plan or fund cash value life in a non-deductible manner?

                This is the question. Is it better to tax-defer money into an IRA or 401(k) plan where the money can grow tax-deferred, but ALL will be taxed at your future tax bracket when distributed?

                The fear is that our future tax brackets may be higher or much higher than where they are today.

                When growing wealth in a cash value life policy, it doesn’t matter what your future tax bracket is going to be because the money can come out of the policy tax-free.

                The point of this newsletter isn’t to suggest that all your money should go into a cash value life insurance policy. It’s to make readers think about using cash value life insurance as one part of a retirement planning strategy and one that will be a great hedge against income taxes going up in the future.

                If you would like more information about using cash value life insurance as a retirement planning tool, please send an email ([email protected]) or feel free to give me a call (303-440-7800).

 *If you earn more than $75,000 (single) or $124,000 (married) you can’t take a deduction when funding an IRA.

            Visit Law Office of Thomas J Swenson to learn more about estate and legacy planning, wealth building and asset protection.

 Copyright ? 2020 Thomas Swenson

 Disclaimer: This information is intended for educational use only.

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 Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained herein (including attachments and links) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.