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.

Although insurance companies offer peace of mind to the policy holders, it is important for all customers to remember that they are for profit companies, and accordingly your own personal interest is not their number one priority. Consequently, any insurance company will capitalize on every opportunity to extract money from its customers. The primary source of income for an insurance company is the premiums which it levies from its customers.

The premium is the fee which keeps the insurance policy alive. Each company collects the premium on a regular basis. The policy holder is expected to pay the premium on time. Delayed payments may lead to consequences such a fine or even termination of the policy. If a lapse in your payments does take place, this will render the earlier premiums paid by the policy holder useless. So, in order to reinstate oneself, the policy holder might even have to renew the entire policy.

There has also been a recent trend of policies being sold at inflated prices by a few agencies. Some of these companies that claim to be consulting organizations fail to ask important questions such as salary and mortgage details that are essential to assess the appropriate cover. So, an ideal solution to this problem would to make selling of insurance more transparent. But like all practical solutions, it is not in everyone’s interest to do so. As a result, insurance companies have lobbied congress men and women very heavily to ensure that despite the benefits of transparency, obscurity remains the law.

Another problem with insurance that is often never disclosed by sellers, is that the insurance premium is also very unstable. The rates may even change between consecutive billing cycles. For example, a driver with a recent accident history will have a pay a much higher premium than a regular driver. Such a driver will be left with no other option but to pay a high premium, since insurance has been made mandatory for driver in many states.

Insurance premiums are also very relative. They are based on extensive research and statistics. For instance, a policy holder who smokes might have to pay as much as twice the amount paid by a non-smoker. Some companies also have a provision wherein the premiums are reduced if the policy holder changes his habits. However, evidence based on medical tests will have to supplement this argument. Premiums may also fluctuate according to market trends.

As stated previously, it is not always in the best interest of the insurer to be up front with you regarding the many pitfalls which surround the purchase of insurance. However, by understanding not only some of the omissions as well as grasping the underlying motivations of insurers customers can be must better situated to make good decisions regarding their insurance needs