MKA Executive Planners Blog

I was speaking with a CPA recently who is a partner in a large, successful accounting firm.  We were discussing the firm-sponsored group life insurance plan.

He was covered by a typical multiple of salary base plan and had also purchased additional supplemental insurance.  He was thinking of retiring, and we discussed whether the employer-sponsored insurance was sufficient for his needs.  This was especially important since he had some health issues and is in his late 60’s.

So often we hear the excuse, "I can't afford to buy life insurance."

The reality is that because life insurance is tied to thoughts of one's own death, there is an automatic mental barrier to its purchase.  This can be offset by focusing on the living benefits of life insurance, which today include accumulation of cash surrender value that grows in many ways: interest credited by the insurer, performance of stock indexes or performance of funds that directly invest in various markets and companies.  These funds can be utilized for emergencies or to provide retirement income.

Many foreign individuals choose to invest in the United States for a variety of good reasons such as to provide for family living here, to purchase a second home, or to take advantage of the relative security of the U.S. economic system.  Those non-citizens, whether they are classified as “non-resident aliens” or “resident aliens,” face a complex set of rules based on tax codes and international treaties for income and wealth transfers.

There are a whole host of reasons why life insurance is acquired.  I think it is sufficient to note that “Americans purchased $2.9 trillion of new life insurance coverage in 2011, a .5 percent increase over 2010.  By the end of 2011, total life insurance coverage in the United States was $19.2 trillion, an increase of 4 percent from 2010.”[1]

So, you are a top executive at a large healthcare, not for profit or other form of business organization.  Because of the headline grabbers, most people think you are a fat cat, overpaid and sitting on top of the world.  That may be true for the few on the front page, but at a closer look is, quite often it is the other way around. 

The primary factor that makes life insurance a potential retirement savings option is the tax favored status afforded life insurance.  With proper policy design, the buildup of cash value in the policy is not subject to taxation, and most policy distributions are not subject to tax provided the policy remains in force until death.  The taxation of life insurance, when properly designed and monitored, is much like that of a Roth IRA.  Banks have utilized cash value life insurance for years to enhance their after tax rate of return.

Not too many people realize what a powerful asset protection vehicle life insurance is.  Most people do not understand that the investment inside a life insurance policy grows income tax free and may be accessed at any time with the condition only that the policy does not lapse.  In addition, the investment options (usually a wide variety of mutual funds) are extremely broad, and may be self-directed by the policy owner.  When we think of estate tax benefits we are usually trying to maximize the death benefits.  When we use life insurance as an asset protection strategy, the primary focus should be to maximum cash value accumulation.  This means the smallest death benefit possible so that the maximum investment return on cash value is achieved.