Life expectancy has increased dramatically during the last 100 years, and the two main fears that people have are outliving their retirement savings and not having something to bequeath to their heirs.
Many investors need options in addition to traditional and Roth individual retirement accounts, 401(k)s and pension plans. A key to investing is finding ways to avoid -- not evade -- taxes, so money can grow without Uncle Sam taking a large portion at the beginning or end.
Investment vehicles can have pre-tax or after-tax contributions, an account's growth can be tax-sheltered or taxable and the distribution can be tax-free or taxable -- all of which should be carefully considered before making an investment or purchasing insurance.
Many people are "shocked" when their pension plans are taxed up to 45 percent, and, when not protected by an estate plan, can be taxed an additional 30 percent to 40 percent, said David Briggs, president of Colorado Financial Group Inc.
But one way to grow tax-free money is through cash value, or variable universal life insurance. Modern insurance products that are professionally managed, Briggs said, can receive tax-free growth inside the contract.
"Totally tax-free money is hard to come by," said Chuck Bracht, a principal with Compass Consulting and Benefits. "It can only be found in a couple of places," such as employer-paid long-term care benefits, employer-paid health insurance premiums and benefits, flex- spending accounts, health savings accounts and Roth IRAs.
Although Roths are nontaxable at distribution, they have limitations. If a married couple, filing jointly, has income higher than $169,000 per year, then the couple is not eligible to contribute to a Roth IRA. And contributions are limited to $10,000 annually for a married couple during 2008.Cash-value life insurance policies, Briggs said, give individuals a return on their investment."You don't have to die to win -- like you do with term insurance," he said.Premiums are paid with after-tax dollars and are tax-sheltered during accumulation. The cost-basis (sum of premiums), after 15 years, is tax-free -- first in, first out, Bracht said. The rest of the money can be accessed tax-free by taking out a loan with the insurance carrier, using the policy as collateral. "If you're healthy enough to get this type of insurance, frequently you can have more after-tax cash flow than by investing in stocks and bonds," he said.A hypothetical 40-year-old male, "standard nonsmoker," who pays an annual premium of $21,600 for 27 years, could begin withdrawing $125,000 per year, tax free, (by taking out a loan and using the policy as collateral) from age 67 to 100, Briggs said. If he died at age 100, his net death benefit could be more than $1.6 million.
Insurance policies can be self-directed, in stocks, bonds, real estate, etc., similar to a 401(k) and can be converted, if necessary, into long-term care benefits in cases of critical or terminal illnesses.To be a good candidate for cash-value life insurance, people should neither have trouble saving money regularly nor trouble saving money for a long period of time, Briggs said.Cash-value, permanent life insurance works best for people who are healthy, have a high income and a high net worth, need to tax- shelter their earnings, want to protect assets from creditors and judgments and want either tax-free income streams for themselves or a tax-free death benefit for their families, or a combination of the two."It's pretty rare not to pay tax at some stage of an investment - - either at the front or back end, or during growth," Bracht said.Bracht said one caveat to having a variable, universal life, minimum non-MEC (modified endowment contract) insurance contract is that the policy cannot lapse, or the contract is null and the money becomes taxable. Policy holders should consider adding at least two riders to their policy -- one to insure that the policy will not lapse and another for a guarantee of a minimum return on investment."It's never too late to start," Briggs said. "Psychologists say that people change when the pain of the status quo becomes greater than the pain of change. Today is the only day we have -- start today."
