Insurance World

It’s never too early to think about tax season, even though many of us consider it to be the least wonderful time of the year. Increasingly savvy investors are taking advantage of investments that allow them to defer a portion of their tax burdens.

If you’ve exhausted your other tax deferral options – contributed the maximum allowed by law to your 401(k) or IRA – it may be time to consider life insurance or an annuity. Products such as variable annuities and variable universal life policies all offer distinct tax deferral benefits, according to Patty Reiners, assistant vice president of marketing for Ameritas Direct, a division of Ameritas Life Insurance Corp.

“For investors who have taken full advantage of other tax-deferred investment options, variable annuities and life insurance is a good place to put additional investment dollars,” Reiners says. “A lot of information, products and options can be found online. Investors should be sure to seek out ‘no-load’ products that don’t charge sales commissions, fees or overhead.”

Some tax-deferred investment options include:

Variable Annuities

Provided by insurance companies, this product allows the investor to participate in a range of investment options advised by well-known mutual fund companies. Taxes are deferred on the income generated by these investments. Trades within the investment are not taxed either, Reiners says.

“A variable annuity can help you grow your money on a tax deferred basis,” Reiners says. “Plus, if you invest in a no load annuity it is immediately liquid. You can put money in today and withdraw it tomorrow. You pay no taxes on the growth until you withdraw it as income, and then it is taxed as ordinary income.” IRS penalties could apply for withdrawals before age 59 1/2.

By deferring taxes on current growth, the investment has the potential to grow faster because there is potentially a greater, constantly increasing amount of money working for you generating more money.

Further benefits of variable annuities include the ability to make unlimited contributions, and a guaranteed death benefit for your beneficiaries in most annuities. If the annuity purchaser dies, beneficiaries receive at least the amount of the original investment, even if the actual value of the annuity has declined. And of course, if the annuity has gained in value, the beneficiaries receive the higher amount.

Variable Universal Life Insurance

Like all life insurance products, variable universal life insurance provides lifelong insurance protection and funds long-term financial goals. Additionally, it can be funded in a way that allows you to invest a portion of your premium in tax-deferred investments, just like a variable annuity, Reiners says.

Properly structured, the death benefit is income tax free to the beneficiary without the delays and expense of probate.

“You can also structure the product to allow you to withdraw from the policy,” she says.

“The withdrawal taps your contribution first and the investment income last. And since you’ve already paid taxes on your contribution, you are not taxed again when you withdraw it. You pay no taxes on the investment until you withdraw the income.” Withdrawals will reduce death benefit and could cause the policy to lapse.

For some reason I always seem to receive a lot of mail this time of year on the subject of “Life Insurance”. Most want to know the benefits or pitfalls of Term Life Insurance over Permanent Life Insurance.

Term Life Insurance is by far the most cost effective way of securing a life insurance policy available to the general public. Term Life Insurance covers a specific period of time - normally the policy will run for periods of 5, 10, and 20 years. As the age of the insured increases, the cost of the premium will increase. Premiums are calculated on the mortality rate, which is usually dependent on the persons age, sex and whether that person uses tobacco.

This type of policy allows the insured or the owner to pay a set premium for an agreed period. The Insurance company provides monetary benefits to the beneficiary in case of death of the insured during that period. Usually, the benefits received on the death of the insured is income tax free.

There are four parties in term life insurance: (1) the owner is the one who pays the premium; (2) the insured is the one on whose death, a death benefit (face value) will go to the beneficiary; (3) the beneficiary is one who will receive the proceeds of insurance on death of the insured; and (4) the insurer is the company providing the insurance. Depending on the Insurance company you choose, the premiums can be paid monthly, quarterly or annually. For example, Fred pays $50 dollars monthly to XYZ Company for insuring the life of Margaret (his wife) for a period of 10 years. Should Margaret die during the 10 years of the agreement, XYZ company will pay $25,000 to Joe (son of Fred and Margaret). Here the insured is Margaret, the owner of the policy is Fred, the beneficiary is Joe and the insurer is XYZ Company. If Margaret does not die during the 10 years, XYZ Company will not be liable to pay any money to any of the parties involved. Often the owner and the insured are same. That is, a person buys a policy to cover his own death and nominates a beneficiary. Husbands and wives often insure each other in case of death.

What is Term Life Insurance? It is a legal contract with terms and conditions and assumed risks. Sometimes there can be special provisions in the agreement like suicide terms, wherein on suicide of the insured, there is no benefit accrued to the beneficiary. Term Life Insurance is based on two concepts: (1) theory of diminishing responsibility and (2) Buy Term and Invest the Difference (BTID). With Term Life Insurance, the responsibility or liability of the insuring company reduces as the policy reaches its maturity. What makes Term Life Insurance the most cost effective type of insurance available to the public is that there is no cash value at the end of the period. Studies have shown that the mortality rate in Term Life Insurance can be as low as 1%. Hence the concept of BTID.

Rather than going for permanent life insurance (where on the expiry of the agreed period, the owner will accrue some cash benefit and there is a savings component in it) it is considered cheaper to buy term life insurance and take care of the savings components by investing in other areas.

With the present market giving good returns on investments, buying a term life insurance is a more attractive option than permanent life insurance.

Have an opinion or a question you would like me to answer, then write me! http://www.CarlHampton.com