Archive for the ‘Make money’ Category
Cheap life insurance and 1035 exchange
This is something of a rarity: a tax provision that actually works in your favor. So it is worth knowing what it is and how it can help you. As the title to the article suggests, this is all about Section 1035(a) to (d) of the IRS Code and it allows you to avoid paying tax when you sell an asset. Take the example of shares on which you have made a good profit. You decide you would like to take that profit and reinvest the original capital. So you sell the shares and then discover you have to pay tax on the realized gain. Indeed, almost all rollovers with this purpose will result in a bill from the tax office unless you are exchanging insurance assets. What is wrong with paying tax in this situation? In a capitalist society, the government is supposed to encourage people to invest their money in assets likely to grow in value. If tax interferes with the decisions of when and how many assets to sell, this is an artificial deterrent to commercial decision-making. Indeed, some people may deliberately sell some shares at a loss to set off against gains in other shares. You cannot get more irrational than that when everyone is supposed to be working to maximize their profits.
In this instance, the IRS is encouraging competition between different insurance products by removing the tax incentives from changing one for another. This allows fair competition. So, for example, you may start off with a moderate guaranteed minimum life policy but find competing products are offering a better minimum payout for the same premium payments. More importantly, it allows policyholders to change policies to reflect changes in circumstances. This could be financial problems in the insurer. If the policyholder loses confidence in the insurer and fears it may go into bankruptcy, there should be no penalty to changing. Similarly, if the policyholder is struggling to pay the premium, it should be possible to switch to another insurer who will carry a similar benefit for a lower premium.
Section 1035 allows a transfer between “like-kind” insurance assets. This means you could exchange a health for a life policy, or convert to an annuity or endowment. However, nothing this simple in principle can ever be allowed to remain simple in practice. So you have to get an agreement from the new insurance company to act as your trustee in holding the capital value of your existing assets. The new insurer then writes to the existing insurer to request a transfer of the funds to its possession so that this is a business-to-business transfer and not a cent passes through your hands. You should be warned, some less than responsible insurers can take up to six months to make the transfer.
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Long-term care and annuities
If a family unexpectedly loses one of the incomes, the effect can be devastating. If we look around, there are tens of thousands of two-income families struggling to make ends meet. If unemployment cuts off one income you always hope this is just a temporary blip. But if the worst has happened, there’s no recovery. This means every family should aim to carry some level of financial protection. Sadly, the statistics show less than 45% of families have an insurance policy. That’s millions of household with children who will have no money to replace the lost income. So we should all make insurance a priority, particularly when economic times are uncertain.
One of the factors that should focus our attention is the decision by the Obama administration not to go forward with the Community Living Assistance Supports and Services Act (CLASS). This was intended to help people in need of long-term health care, but the costs of a public-supported approach are too high. This will leave it for the private insurers to continue to offer products to the market. So, if you suffer an injury or disease that leaves you in need of long-term nursing care, it’s possible you can use the insurance policy on your life to help pay for that care. Assuming there’s a cash value to the policy with a reasonable amount already accumulated, you can borrow this money or use the policy as security for a loan. Alternatively, you can either surrender the policy or sell it on the secondary market. With a conventional policy, this gives you a lump sum with which to pay for long-term nursing care. Except this is an inefficient approach.
If you borrow money, you have to pay it back or you end up with serious debt problems. The surrender or sale of the policy gives you a cash sum without strings attached. You can use the money until it has gone. The best option is to have a policy with an annuity built in. This way, you can trigger the annuity should the need arise or leave the investment to accumulate for the benefit of your descendants. Why provide for the possibility of long-term care? Medical science has been increasing life expectancy. As we live longer, the risk of needing long-term care also increases. So far, medical costs have been rising faster than inflation. The federal government has seen the problem and has helped with the Pension Protection Act of 2010 which allows accumulating cash value to be used to pay long-term care expenses without being caught by income tax.