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Tax Free Retirement Cash Flow


Overfunding is a strategy that focuses on accumulating cash in the policy rather than paying for the death benefit which is the payout to your loved one’s when you pass away. This approach leverages the highest policy premium that is allowed with the lowest life insurance death benefit so that your cash accumulation exceeds your policy net insurance costs over at least 10 years. There are fundamentally 4 steps to determining the combination of maximum premiums and minimum death benefits necessary to selecting the most leveraged indexed universal life policy:

  1. First, determine the person’s maximum premium commitment over a minimum of ten years or more. The premium amount selected should be an amount that they can make regularly whether it is a monthly or annual payment and does not strap their cash flow. Universal life insurance policies offer flexible premium payments, but to get the maximum leverage you have to stay on course with a premium payment.
  2. Secondly, determine the minimum insurance face amount and payment commitment along with your age and gender to make sure the numbers work based on your particulars. Most insurance illustration provide the actual premium amount limits that meet the internal revenue code minimum requirements.
  3. Next, go over the internal rate of return (IRR) of the policy to ensure you’ll be getting the full benefit of the tax-free accumulation versus what an ordinary investment would receive outside of this tax-free environment. Some agent’s illustrate way too high like 8% which is unrealistic. We usually do ours at 5.25% and still kick the pants off other investments.
  4. Finally, you must pay close attention to the maximum premiums allowable under the Internal Revenue Code which is referred to as the seven-pay premium limitation. As long as the total premiums for any seven-year period are equal to or less than the maximum allowable premiums for the seven-pay test, you’ll be able to access the cash values in the policy at any time, tax-free and relatively liquid.

In essence, a life insurance contract that fails to meet the seven-pay test will be classified as a modified endowment contract (MEC). The seven-pay test is not met if the accumulated amount paid at any time during the first seven years is more than the total of the net level premiums that would normally have been paid on or before such time if the contract provided for paid-up future benefits after payment of seven level annual premiums Want to see if this is a fit for you? If you’re healthy it may very well be a great tool in your arsenal to slay the bailout dragon for your retirement.

Orange County Attorney James Burn

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