Now let’s explore the IUL (indexed universal life) and why it is a better choice. As a professional of these types, your income level is much higher than average, so you max out your contribution very early in the year. With the IUL, there is no limit on how much money you can contribute - the money still grows tax-deferred, but with a several advantages.
Now comes the great part! In the event of a business need, the money in your tax-deferred accumulation account can be used, through interest-free loans, for the purchase of new equipment, to expand the practice, or just to carry you through a tough time. At retirement the money is paid to you in the form of tax-free loans against your account value. The income would be a lifetime income with no risk of loss in a down market, and at the end of the income, your death, the face amount of the life insurance policy would still go to your heirs as a tax-free death benefit. The tax-free death benefit would, at any time, be the security to your family that their lifestyle would continue in the same manner to which they had become accustomed - a guarantee the retirement account cannot promise. If, through a consultation with your insurance professional, it is determined that your life insurance needs exceed the desired amount of contribution in the IUL, a term life insurance policy can be added to meet your life insurance needs at a lower cost.
A business owner has many of the same needs but also faces many different challenges. The IUL is even more exciting in these cases. All of the benefits listed above still apply to the business owner, but if you are an S Corporation, you could have the option of making the premium contributions as a draw against the profits of the corporation and avoid the self-employment tax/social security tax, which could add to the benefits of the IUL. That alone is a 13.3% tax savings!
To a business owner with a partner or partners, another issue is presented that makes an IUL a perfect choice. Should a partner/partners die, you would have the need for a Buy-Sell Agreement to determine the value of the buy-out of the deceased partner/partners. The best way to fund the buy-sell agreement is through life insurance policies. The buy-sell agreement would either be a cross purchase buy-sell or a stock purchase buy-sell. These differ based on your corporate structure. Your insurance professional should have a working knowledge of the two types of agreements and work with your CPA and attorney to make sure they are set up correctly. In the cross purchase buy-sell agreement, each partner would carry and own a policy on the other partner/partners. In the event of the death of a partner, the life insurance benefit would be used to purchase the deceased partner’s share of the business so the remaining partner/partners would not have to work with the heir/heirs of the deceased partner. Now the even better option, everyone lives and the tax-deferred cash accumulation account becomes a tax-free retirement account. The IUL has now solved several key needs of a business owner with NO market risk to your contributions.
In the cross purchase buy-sell agreement, each partner would carry and own a policy on the other partner/partners. In the event of the death of a partner, the life insurance benefit would be used to purchase the deceased partner’s share of the business so the remaining partner/partners would not have to work with the heir/heirs of the deceased partner. Now the even better option, everyone lives and the tax-deferred cash accumulation account becomes a tax-free retirement account. The IUL has now solved several key needs of a business owner with NO market risk to your contributions.
The stock purchase Buy-Sell Agreement would differ in the fact that this would be done for corporations taxed as a C Corporation. In this case the corporation would be the owner and the beneficiary of the policy, and in the event of the death of a partner/partners the corporation would receive the death benefit tax-free for the purchase of the stock of the deceased partner/partners, so as not to have to work with the heir/heirs of the deceased. This would all be spelled out in the Buy-Sell Agreement. The tax-deferred cash accumulation account would show up on the corporate books as an asset to the corporation. Here’s the exciting part about an IUL being used to fund the stock purchase Buy-Sell Agreement: in the event all the partners live and decide to sell the business or retire, the policy ownership can be voted over to the partners so that the cash-deferred accumulation account may be used as a tax-free retirement account. This would be considered under tax codes as deferred compensation, so the death benefit could fall under current tax codes at the time of death - but let’s face it, the death benefit was never meant to be solely used as family protection anyway. The remainder would still be tax-free to your heirs, minus the income tax, but could still be set aside for estate taxes, provided your estate is still under the estate tax limit.
It is very important that you choose an insurance advisor with a working knowledge of these agreements and realize the insurance professional is NOT a tax or legal advisor, and professional legal and tax advice should be obtained to work with the insurance professional. Keep in mind also that the legal and tax professionals are NOT insurance professionals either, and all should work in unison for your best interest!
Published: 2011.12.02, Fox Busines