Missed Fortune - "How does a life insurance policy work"

I want to take you through the process of setting up one of these policies that we discuss and teach about in Missed Fortune in hopes that that will help shed some further light on the topic. But first I need to lay a little foundation. When structuring a maximum funded contract, we have to stay in compliance with TEFRA and DEFRA. These laws were passed by congress between 1982 and 1984. They define what a life insurance policy is. Or better put, they defined a minimum cost one must incur per dollar of premium paid. They did this because prior to 1982, you could choose your death benefit. On any excess premium paid into the policy (any premium that does not have to go directly to cost) the life insurance company is allowed to pay interest or dividends. This is attractive because under section 72(e) and 7702 of the internal revenue code, the interest on the excess premiums is given a tax-deferred treatment. Plus if or when you want to access any of your excess premiums or any interest, you can access it via FIFO tax treatment or tax-free utilizing loans.
For example if you wanted to pay $100k of premium you could elect to have let’s say $10k of death benefit. The cost on for that policy would be minimal. You might have $150 that year go to expenses, but if your excess premium ($100,000 - $150) earned 8 percent ($7,988). Who wouldn’t pay a measly $150 to have the rest be tax-free? And that is just the first year; it just continues to compound every year after that. Under TEFRA/DEFRA a formula was created so that you could no longer “choose” your death benefit based on the total premium paid, but rather it is calculated based on cost. So now the question is…can you still structure the policy to minimize the cost enough to still enjoy the liquidity, safety, and tax-favored returns? The answer is yes. When structured correctly the overall cost on the policy retroactive back to day one will be about 1 percent of your overall return.
Okay, here is the sample plan:
1. Paying a total of $100,000 into a policy. ( I am going to show this being paid as fast as possible, 5 years, although the longest you would want to take would be 11 years in order to minimize cost)
2. I am going to use a 45 year old male and a fixed indexed universal life policy. This means that the excess premium goes into the general portfolio of the insurance company, but rather than using that portfolio to determine the interest rate, we can use an index (like the S&P 500). Your money is not invested in the index, we are simply using it to determine your return.
3. I will link several of these examples to actual illustrations for your benefit.

· This first illustration is to show you the policy maximum funded/minimum death benefit. $100,000 paid the first five years and a death benefit of $493,794.
· You can lower the death benefit even further after a period of time shown here.
· This illustration is showing the internal rate of return (column 4) or your return after all costs have been taken out. This is represented as an average return up to the year illustrated. The policy is the most expensive in the first year, but as we maximum fund it, it performs excellent. Over 30 years it averages back to day one 6.84 percent. With a gross return of 8 percent, that would mean the cost was equivalent to 1.16 percent.
· This illustration shows a level income withdrawal beginning at age 67 and ending at age 100.
· This illustration is comparing the insurance policy to four other alternatives. (since we cannot make those type of deposits in a typical IRA/401(k), we are assuming instead that the deposit is as if it already existed as a balance)
I hope this helps. We are always happy to answer questions. If your question is case specific, your are always welcome to call Missed Fortune at 888-987-5665.