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Investing/Strategies / Retirement Investing
|Subject: It's Whole Life - not annuities||Date: 5/17/2012 12:48 AM|
|Author: smolkod||Number: 70687 of 77407|
If anyone has any opinions on this type of whole life insurance policy for the purpose of setting up retirement plans, or college funding plans, or whatever, please let me know.
Some of the key concepts from the book "Bank On Yourself":
Policy should be from a life insurance company that meets all of these requirements
a) Dividend paying whole life
b) Offers flexible paid up additions rider (PUAR)
c) Non direct recognition, so your policy grows at the same rate when you borrow against your cash value
d) Insurance company must have great long term track record of paying dividends
e) Insurance company must be very strong financially, as determined by independent rating services.
They set you up with a plan that is guaranteed to grow by a contractually minimum amount every year. At the end of the year the company does an accounting based on their activity (income/loss) during the year. If they make money, they pay a dividend to your plan.
The plan is set up to withdraw the money after you retire and is tax free.
You have to fund the plan a certain agreed upon amount every month.
Only a few insurance companies offer the plan. It’s a whole life insurance dividend paying policy. They add a paid-up additions rider (PUAR). This accelerates the growth of the cash value in the plan. Your monthly premium is divided into two parts. A portion goes into traditional life insurance, while the other portion goes into the paid up additions rider, which buys a death benefit. Whatever premium you pay in any year is all the premium you’ll ever pay for the death benefit it purchased, which is why its called “paid up”.
The paid up additional rider buys a small amount of insurance and even if the insured died soon after the premium was paid, the company has already collected enough premium to cover much of the cost of the death benefit that it purchased. The IRS determines how much of the paid up additional rider premium can go into any given policy, which can’t be exceeded, or you lose the tax benefit that a life insurance policy has.
Under current tax law, dividends left in the plan are not taxable. Dividends you withdraw are not taxed until they exceed your cast basis, at which point you can switch to borrowing your cash value with no taxes due on policy loans.
When you borrow (use) money against the cash value, the money doesn’t actually come out of your policy. It comes out of the company’s general fund. Loans they make to any source will ultimately increase the cash value of all policies, including yours.
The missing piece (to me) is what the insurance company is investing in over time, to create all of these compounded gains.
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