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Author: TMFDataGeek One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 21  
Subject: Re: Greetings, Fool! Date: 5/22/2007 12:30 PM
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A few more thoughts:

- An entire board set up to talk about using life insurance as a savings vehicle is overkill. If that's the case, whoever set it up should check out the posts that have been made over the years, cause it's been covered a million times from every perspective.

- If the policy is not a MEC (Modified Endowment Contract - the issuer can tell you) under the regs, withdrawals are return of principal first. If it's a MEC, the scheme does not hold water and there's a "boot" on the withdrawals - taxable earnings come out first.

- Borrowing gives you tax DEFERRED, NOT TAX FREE use of the money.

- The only way to get money out of the policy truly TAX FREE is to leverage the tax free death benefit. When it comes time to get at the savings you borrow all but what is necessary for the policy dividends to carry premiums & loan interest. When you die, the tax free death benefit pays off the tax deferred loan, thereby avoiding EVER paying income taxes on the tax deferred gain.

As a planner I helped a number of people set these up. Really slick, really cool, you get the IRS to pay your income taxes, but IT IS NOT FOR THE FAINT HEARTED and should only be done as part of a comprehensive estate plan. This is a fantastic way to leverage the tax free death benefit, but you'd better have the cash to pay premiums till you die if the dividends fall off! If the policy lapses cause it can't carry itself, the entire gain becomes taxable as ordinary income in the year of lapse. But you already spent the money you borrowed! So you have phantom income: no money comes to you, but you get a tax bill for the entire gain. No money to pay the tax man? Who wants to be 90 and find out they have to resume premium payments or face a tax lien?

As jrr7 said - if you need insurance, buy insurance. If you are saving, then save.
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