All Forum Posts by: Zachary Paschke

This question is about Infinite Banking concept. For the tax experts here, when I take a policy loan on life insurance for private lending, how should I structure it to minimize taxes?

Generally unless the policy is a MEC loans are not taxable.

a MEC is a Modified Endowment Contract and would mean that the cash put into the policy was too much too soon for the IRS’s liking. If you’re policy is a MEC you would have been notified.

1 Vote

Quote from @Rick Sims:

I own a 55 yr corporation, I want to sell it to a couple of my employees and owner finance. Trying to protect about a 4M loan. My last pay check! I have talked to lawyers, financial advisers, insurance companies and searched online, I do not find what I am looking for.
I would like to know if there is any type of loan protection insurance anyone knows about in the US to protect such a loan. I know the rate will be expensive, there will be key man life insurance and all the personal guarantees. I just need to protect the loan if the buyers can't pay due to bad business economy or they become disabled somehow. There is no property attached to this sell, just the corporation and it's assets which are worth about $550,000.00.

Thanks

Rick

Hi @Rick Sims,

There’s no insurance for downturn in business, but when I write key man life insurance policies we include coverage for chronic, critical, and terminal illness.

You can write full disability plans, they’ll be a little more expensive than the Illness riders.

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Quote from @Mike Miller:

Thanks I will look up your posts.

we plan on doing an LLC and likely a Wyoming holding LLC (possibly with just my wife and I on that) then the first property in its own with an operating agreement with my uncle and us on it.

My questions are related to forming the LLC and what should go in the operating agreement and the various clauses.

term life is a good idea I didn’t even think about that.

I work on these for people all the time. The agreement for what happens when he dies is called a "business continuation agreement," or "buy sell agreement." The agreement is not foundational to the formation of the LLC but is done later because they periodically get updated.

The LLC is formed with you as the managing partner. You’d only be filing the basic structure. Once that is done you and your uncle can add the business continuation agreement. It describes how the business is valued at the time of death and who is paid.

You and your uncle should have term life insurance on each other. That funds the buy/sell. Depending on what he wants to do he could get extra coverage on you to hire a new manager. Your policy should include some kind of living benefit or disability coverage so if you’re disabled the management can be funded.

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Cincinnati, Ohio

Quote from @Todd Goedeke:

@Basit Siddiqi I agree, as insurance companies make high fees and insurance agents masquerading as financial advisors make high commissions off of life insurance policies. Cutting out the middleman ,involving insurance, when investing makes long term sense.

Contractors make large fees. Not only that the fees are lumped up in the front of the purchase. That’s a bad idea. 🤣

Legally there’s always an agent for every policy even if you go direct to a carrier. Some call center executive gets a bonus and the fees for getting a policy are the same (in theory - assuming they’re lower direct is wrong). The only thing that can lower fees is working with a broker that can help you find the carriers with the lowest fees (hint, hint … not usually the ones with the biggest advertising budget) and for an agent to structure the policy. The better structured it is, the lower the fees.

Dollar for dollar in premium I make way more money on term insurance than properly structured IULs or WL for cash accumulation (term is my bread and butter). I don’t make the money that ends up in the policy. So, for my clients that are getting 70-80% of their premium in direct cash first year, that’s all money being put to work.

1 Vote

Mobile, Alabama

I appreciate the thought but LTC insurance is actually the insurance people with $200k need more than those without. It was pretty much the only one you could have listed 🤣. LTC isn’t care coverage it’s asset coverage. I appreciate the thought though. 😆

Quote from @Jeff S.:

@Jared Trindade, @Aaron Porter and @Zachary Paschke. Planning and setting goals in whatever way we do is most important but at the end of the day it is how we respond to the cards that are dealt us. If insurance helps one sleep better at night whatever kind it may be whether it is whole life or any other of the many types of products, then it has value. If there is a premature death and not enough assets to take care of a family then term or whatever type works best is a good idea.

Then there is long-term care insurance. Again maybe good if one cannot afford the $200,000 or whatever it may be. Maybe good but not so much in my book.

0 Votes

Portland, Oregon

@Jeff S. I’d agree with you. That’s why we move assets into WL or IUL policies so the money can be used in retirement tax free.

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Portland, Oregon

Quote from @Thomas Rutkowski:

Quote from @Zachary Paschke:

Quote from @Thomas Rutkowski:

Quote from @Alicia Marks:

Quote from @Thomas Rutkowski:

Quote from @Jeffrey Evans:

@Thomas Rutkowski curious why you wouldn't want to pay the premium as a lump sum annually vs monthly? isn't is more expensive to pay monthly? I thought the cash value would grow faster if put it all in up front each year.

thanks for the info

Jeff

Sorry for the confusion. I'm not referring to annual vs monthly. There is no difference on that.

Some people think they can kickstart their "banks" by putting in $50,000 from savings the first year and then following that up with $12,000/yr premiums after that, for example. This is a huge and costly mistake.

Can you more clearly explain why that wouldn't be the better option? I've considered this option, as my term policy is up in two years and I know several people who use them successfully to invest.

The problem with a lump sum has nothing to do with creating a MEC. It's important to understand that the death benefit is a function of the first-year premium. When I design a maximum over-funded policy, I am solving for the lowest possible death benefit that still meets the definition of life insurance. When the first-year premium is 4X the subsequent premiums, you will end up with 4X the death benefit. It's also important to understand that the charges in a policy are also primarily driven by the death benefit. That means there will be 4X charges hitting the policy for the next 10 to 15 years and taking a big bite out of each of the subsequent premiums.

Determine the most you are willing to commit to for at least 5 years. That should be considered the shortest funding period for a policy. Longer is fine, just don't go shorter. 5 years is the sweet spot between minimizing the charges and getting your money working in the policy.

The problem is that most agents are unaware of this. They will happily design a policy with a large lump-sum premium up front. They either know what they are doing or they are ignorant of it. Either way, and using my example above, they end up with a 4X larger commission, and you end up with a policy bleeding cash value for the first 10 years.

What you just described is avoiding a MEC. I know you don’t like me, but why do you have to share misleading information just so you can argue with me? Thomas, I just want you to leave me alone. Do you find me attractive? Why is it you have to comment on all of my posts? I’ll need security next time I pass though FL.

My goal is simply to correct any misinformation posted about life insurance whether it comes from an agent or anyone else. If you keep posting erroneous information, I'm going to keep correcting you so that subsequent readers are armed with correct information.

The OP was asking about lump sums vs level premiums. The issue with Lump Sum premiums is the fees. A lump sum premium can double or triple the charges in a policy. This will cause the policy owner to lose much of their cash value over time. All maximum over-funded policies are funded right up to the MEC/Guideline Premium level. That is not the issue.

Are you suggesting a SP won’t MEC or that it won’t matter? Either way you’re wrong.

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Quote from @Thomas Rutkowski:

Quote from @Alicia Marks:

Quote from @Thomas Rutkowski:

Quote from @Jeffrey Evans:

thanks for the info

Jeff

Can you more clearly explain why that wouldn't be the better option? I've considered this option, as my term policy is up in two years and I know several people who use them successfully to invest.

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Quote from @Alicia Marks:

Quote from @Thomas Rutkowski:

Quote from @Jeffrey Evans:

thanks for the info

Jeff

Can you more clearly explain why that wouldn't be the better option? I've considered this option, as my term policy is up in two years and I know several people who use them successfully to invest.

The reason why more in the first year is not preferred is the MEC limit that Jeffery mentioned. This is a rule that the IRS put in place that limits the amount of money you can put into a policy the first few years if you intend to borrow against it. In theory it is better, that’s why the IRS wants to limit how much you shield from taxes. The whole point is that the money grows tax free.

2 Votes

Quote from @Mary Jay:

Quote from @Craig Sloan:

@Sam Abraham has a good strategy. Glad to hear him say that he has included permanent life insurance in his portfolio. A lot of people don't realize the benefits of permanent insurance. I work with a lot of real estate clients that are able to improve their situation through the use of permanent life insurance. Don't believe everything you hear about it, it can be a great tool if structured and used properly.

how does that permanent life insurance work?

thank you

You fund a policy really well so that the maximum amount of cash goes into it from the beginning. This lowers the fees and costs of the policy. Policies grow tax free. At retirement you can borrow against the policy (as the capital remains in the policy making more money). When you die the policy pays off the loan tax free and the balance of the death benefit goes to your beneficiary. Policy loans are really reasonable interest and depending on terms are not required to be repaid before death.

0 Votes

All Forum Posts by: Zachary Paschke

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