Life Insurance Retirement Planning

Report
Life Insurance Retirement Planning
A life insurance strategy that helps
diversify your taxes during retirement
The conversation: “Pay them now, or pay them later!”
Presenter
Title
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For Producer Use Only
Today’s Focus
 Today we’ll learn about income-tax diversification for
your retirement savings
 By discussing retirement plan taxation during
contribution, accumulation and distribution
 So that you can offer your high-income-earning clients
and prospects a powerful supplemental retirement
solution
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History of Top Marginal Tax Rates
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Sources of Retirement Cash Flow
Pension
Social Security
Savings
Pension
30 Years Ago
Social Security
Savings
Today
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What has been the secret to success?
Pre-tax/Tax-Deductible Tax-Deferral
401(k), 403(b), 457, Traditional IRA
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What makes pre-tax/tax-deductible
tax-deferral work?
Contribution
Distribution
High Tax Rate
Low Tax Rate
Big Tax Deduction/ Reduction
Lowest Possible Taxes
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It worked before. . .
 Tax rates were high in the 1940’s – 1970’s
 Tax rates dropped dramatically in the 1980’s
Contribution
 Lower retirement income
meant lower
retirement tax rate
 With pensions and Social Security, retirees
didn’t own the assets and, therefore, didn’t
pass them on to their children
Distribution
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Will it work now?
 401(k) contributors had much lower tax rates from 1980’s
through today
 Pressure for tax rates to increase
 Increasing levels of wealth for financially successful retirees
 Because of personal savings in 40(k)s, IRAs, etc., retirees now
own significant assets that will be passed to their children
 Children’s tax rates are rising, creating significant income tax
implications
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Contribution, Accumulation, Distribution
 Every dollar put towards retirement goes through three phases:
Contribution
Accumulation
Distribution
The bad news is:
– You must pay taxes on at least one of these three phases
 The good news is:
– You get to decide which one
– It depends on the investments you choose
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Successful Investing
In a successful retirement investment strategy,
consistent long-term investment growth means:
– Your assets continue to grow throughout each phase
Assumptions: $10,000 annual contribution for 25 years. $42,800 distributions for the next 25 years. 6.00% growth rate
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Successful Investing
If the choice was yours,
which would you pay taxes on?
Assumptions: $10,000 annual contribution for 25 years. $42,800 distributions for the next 25 years. 6.00% growth rate
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Ask yourself: “Which phase would I
rather pay taxes on?”
It’s likely your answer will be:
“The lowest dollar figure!”
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Successful Investing
Where are the bulk of your retirement assets currently invested?
– 401(k), IRA
Which phase will you pay taxes on with those plans?
Assumptions: $10,000 annual contribution for 25 years. $42,800 distributions for the next 25 years. 6.00% growth rate
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What makes pre-tax/tax-deductible
tax-deferral work?
Contribution
Accumulation
Distribution
Traditional
Qualified Plan/
IRA Tax
Treatment
Non-Taxable /
Deductible
Tax-Deferred
Taxable
Your Desired
Tax Treatment
Taxable /
Non-Deductible
Tax-Deferred
Tax-Free
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Wouldn’t it make sense to position
a portion of your retirement assets
to add tax diversification to your
portfolio?
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Option 1: Roth-IRA
Pros
• Accumulates tax deferred
• No tax on qualified distributions
• No RMDs for Roth-IRA owners
• Income-tax-free inheritance to
beneficiaries
Cons
• Limited amount you can contribute per
year
• Cannot make-up missed contributions
• If your income is too high you cannot
contribute
• Tax penalty may apply to withdrawals
prior to age 59½
• RMDs for Roth-IRA beneficiaries
• No death benefit for “self-completing”
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Is there another way?
Maximum Funded Life Insurance
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Life Insurance
The list of benefits is long and powerful!
 Income-tax-free death benefit for beneficiaries*
 No defined IRS limitation on premiums*
 No limit on gross income affecting your ability to
contribute premiums
 Missed premiums may be “made up” at a later time*
 Tax-deferred accumulation*
 Distributions using withdrawals and loans are
income-tax-free when structured properly*
 Access to your values prior to age 59½
 Take distributions as needed*
 No required minimum distributions (RMDs) for owners
 Self-completing upon death
– Death benefit exceeds account value
* Policy must comply with IRS requirements to qualify as a life insurance contract. Total premiums in the policy cannot exceed funding limitations under IRC 7702. Withdrawals during the first 15 years of the contract
may be treated as income first and includible in policyholder’s income. If the policy is classified as a modified endowment contract (see IRC 7702A), withdrawals or loans are subject to regular income tax and an
additional 10% tax penalty may apply if taken prior to age 59 ½. Distributions will reduce policy values and may reduce benefits. Availability of policy loans and withdrawals depend on multiple factors including but not
limited to policy terms and conditions, performance, and fees or expenses.
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Case Study: Darren Johnson
 Age: 40, good health
 Occupation: Chiropractor
 Annual W-2 Income: $400,000
 Targeted Retirement Age: 67 (full Social Security benefits)
 Targeted Annual Retirement Savings:
– 10% of W-2 income = $40,000
 Current annual contributions to 401(k): $17,000
 Additional annual amount targeted to contribute: $23,000
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Case Study: Darren Johnson
Life Insurance Policy Assumptions (VUL):
Minimum death benefit (Initially $600,000)
Underwriting Class: Preferred
Option B increasing death benefit during contribution phase
Option A level death benefit during distribution phase
Assumed average annual growth rate (gross): 7.00%
Weighted annual average fund expense: .76% (76 bps)
Pay premiums to age 67
Withdrawals and loans for 20 years beginning at age 68
Policy endows at age 100 on a “current assumption” basis
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Case Study: Darren Johnson
Life Insurance Policy Non-Guaranteed Values:
Premiums: $23,000 per year for 27 years =
$621,000
Illustrated Accumulated Value: At age 67 =
$1,334,772
Distributions: $130,000 per year for 20 years =
$2,600,000
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Case Study: Darren Johnson
Maximum
Will Darren
Funded
beLife
gladInsurance
he paid tax may be
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achieve
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results!
Assumptions: $23,000 annual contribution for 27 years. $130,000 distributions for next 20 years. 7.00% growth rate
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Now, let’s tell the story…..
Contribution – Accumulation – Distribution
“The Napkin Sale”
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Additional Benefits:
$5
$10
$20
1.Self-Completing at owner’s death
2.No set limit on contributions1
3.Pre age 59 ½ access
– No income tax or penalty tax2
4.Catch-up on missed contributions
5.No RMDs for owners
6.No RMDs for beneficiaries
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1. Policy must comply with IRS requirements to qualify as a life insurance contract. Total premiums in the policy cannot exceed
funding limitations under IRC 7702.
2. Assumes the policy is not a Modified Endowment Contract Withdrawals during the first 15 years of the contract may be treated as
income first and includible in policyholder’s income.
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What is this incredible tool?
It’s a life insurance policy!
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For Producer use Only
Today’s Focus
 Today we’ll learn about income-tax diversification for
your retirement savings
 By discussing retirement plan taxation during
contribution, accumulation and distribution
 So that you can offer your high-income earning clients
and prospects a powerful supplemental retirement
solution
30
For Producer use Only
Target Audiences
 Doctors
 Dentists
 Attorneys
 CPAs
 Chiropractors
 Funeral Home
Directors
 Successful
business owners
 High-income
business executives
 Veterinarians
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Questions or Comments
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A life insurance strategy that helps
diversify your taxes during retirement
The conversation: “Pay them now, or pay them later!”
33
For Producer use Only
Important Information
Policies issued by American General Life Insurance Company (AGL), a member of American International Group, Inc. (AIG)
The underwriting risks, financial and contractual obligations and support functions associated with the products issued by
AGL its responsibility. Guarantees are subject to the claims-paying ability of the issuing insurance company. AGL does not
solicit business in New York.
Policies and riders not available in all states. Keep in mind that American General Life Insurance Company and their
distributors and representatives may not give tax, accounting or legal advice. Any tax statements in this material are not
intended to suggest the avoidance of U.S. federal, state or local tax penalties. Such discussions generally are based upon
the company’s understanding of current tax rules and interpretations. Tax laws are subject to legislative modification, and
while many such modifications will have only a prospective application, it is important to recognize that a change could have
retroactive effect as well. Individuals should seek the advice of an independent tax advisor or attorney for more complete
information concerning their particular circumstances and any tax statements made in this material.
©2014. All rights reserved.
AGLC1074701
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Appendix
Life Insurance Illustration
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