Steve Savant is a national insurance columnist, financial color commentator and host of the daily Internet talk show, The Business Insurance Zone. And with Steve is co-host, Eric Palmer, the National Director of Advanced Markets & Annuities.
A Non MEC Life Insurance contract can generate tax free income via withdrawals of basis and policy loans of gain as long as the contract is kept in force for the life on the insured. Eric and Steve will talk you through the little known tax item called the force out rule, the great E&O exposure issue of tax free distributions using life insurance.
And remember our caveat on tax free income using life insurance: The life insurance policy must be designed as a non modified endowment contract. The contract must be kept in force for the life of the insured. If the maturity date of the contract does not contain a maturity date extension provision, the client should be notified in writing in the application and initialize it. During distributions, any withdrawals of basis or policy loans of gain must comply with the force out rule, guideline annual or guideline single or Cash Value Accumulation tests.
Policy Maturity dates – The vast majority of life insurance policies have time certain maturity dates of termination. Several policies have extension provisions in the unlikely event that the insured outlives the policy maturity date. Some policies have no date certain, but use the provisional phrase “life of the insured.”
Policy Loans – There are a variety of policy loans: preferred & standard. There are also five categories of policy loans Zero Net Cost Loans, Wash Loans, Spread Loans, Direct Recognition Loans and Arbitrage Loans. There is the charging and crediting of policy loans: Differing Calendar Times, Simultaneous – either at the beginning of the year or at the end of the year. This may cause an accrual charge.
Zero Net Cost Loans – the charging and crediting of the same rate, virtually at the same time.
Wash Loans – the charging and crediting of the same rate at the beginning and end of the year.
Spread Loans - the charging and crediting of a differing rate at the beginning and end of the year.
Direct Recognition Loans – the same as spread loans with a reduction of dividends assigned to loans.
Arbitrage Loans - the charging and crediting of a differing rate dependant on the performance of the crediting method. The cannibalization of cash values to pay annual interest expense.
The Force Out Rule governs the first 15 years of the policy if distributions occur. Basis may be realized as a taxable event if there is an accumulated gain in the policy.
You view and download the white paper and the tax free series at MaxRetirementReport.com as well as the tax advantaged five video series were recorded last month at brokersalliance.com/taxadvantagedproducts