Segment 1: Tax Tales SEGMENT BEGINS AT 00:37 Economist Jerry Robinson welcomes author, financial writer, and stand-up comedian Dominic Frisby for an enjoyable, stimulating discussion of his book, Daylight Robbery, as well as the role of taxes in history and the...
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An excerpt from Follow the Money Weekly Radio with Jerry Robinson – 3/12/11 To hear the entire program, click here. by John Bearss Transcript Over the last few episodes of financial strategies I have been talking about why cash value life insurance should be considered when developing a person’s overall retirement planning strategy. So today, I want to continue by talking about different ways of taking the money out of your cash value life insurance policy and the rules to each. Let’s review what cash value life insurance is. When you pay premiums on a cash value life insurance policy, some of your money is applied toward the policy cash value, which is similar to a savings account within the policy. Over time, the cash values accumulate. Then at some point during your lifetime, you can access the cash value by taking a withdrawal, or a policy loan, or surrendering or canceling your policy. Terminology is very important to understand when discussing ways of taking your money out of these life insurance policies. The first term is Withdrawals. Withdrawals are treated differently in regards to taxes than by taking a policy loan or surrendering your contract. When the time comes to pay your child's private school or college tuition, one option is to withdraw some or all of the cash value of your policy, much like a withdrawal from a bank account. The amount you can withdraw is generally limited to a percentage of the cash value, and varies by policy and company. Most insurance companies charge a processing fee for such withdrawals. The main advantage of cash value withdrawals is that such withdrawals up to your policy cost basis, are not considered taxable income as long as your policy is not a modified endowment contract, called a MEC policy. Taxation is based on the FIFO accounting method. FIFO means first in, first out. In other words, the first dollars you take out are considered a return of the premiums and that is the amount of premium you paid in or your cost basis. Let me give you an example: Suppose you own a life insurance policy with a cash value of $15,000, but your cost basis or the premium you paid into the policy equals $12,500. Then you decide to take a withdrawal of $7,000 to pay for part of your son's tuition. The result is you won't have to pay tax on this withdrawal amount because it will be considered a return of your policy cost basis. Just a couple of notes of caution: 1. Withdrawals are treated as taxable income if you take more out then what you put in to the policy. 2. Also, cash value withdrawals that occur in the first 15 years of the policy are accompanied by a reduction in the death benefit of the policy and may be subject to taxation. 3. There are special taxation rules for policies that are classified as a modified endowment contract. So the main disadvantage of taking a cash value withdrawal from your cash value life insurance policy is that such withdrawals will lower your death benefit. It is important that you consult with a life insurance specialist before purchasing your cash value life insurance policy and they can let you know how to construct your policy to meet your goals and objectives when it comes to taxes and death benefit payouts. Today, we talked about our first term that you need to understand and that is withdrawals. Next week I will discuss the second term that could be of even more benefit to you than taking withdrawals and that is the terminology of policy loans. I trust this financial insight has been helpful and I look forward to the next time when I can help you provide the foundation for a lifetime of financial independence. About John Bearss: John R. Bearss is a Retirement Specialist with the Christian Financial Advisor Network. He has been helping clients and financial professionals understand financial strategies for 24 years. Disclaimer: John Bearss is a registered representative of and does offer securities through Sicor Securities, Inc. Lifetime Decisions Management, nor it’s representatives provide legal or tax advice. Please consult your CPA or qualified tax advisor before making any decisions. Lifetime Decisions Management, Inc. is not a subsidiary of nor controlled by SICOR Securities, Inc.
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