cpaa ilipp+never taxeddollars+ part1_the conceptx

Copyright 2015 - All Rights Reserved

Retire Tax Freewith Never Taxed Dollars

Presented by CPAAdvantage.net to educate CPAs and other financial professionalsPublished by Capital Strategies Press - Author: Paul Bullock CLU ChFC GBA RPA FLMI CEBS

Not intended for use by the general public


IRC Section 7702(g) IRC Section 72(e)(5) IRC Section 101(a)(1)

Combine these provisions with a competitive portfolio return and you create the possibility for

Tax Free Retirement


Never Taxed Dollars

Certain universal life and whole life policies are structured to be over-funded within certain limits. Over-funding allows you to maximize the tax free growth aspects of life insurance and build-up a reservoir of never taxed dollars.

Never taxed dollars are interest earnings that are never taxed. If you cash out a life insurance product with a profit, you pay income taxes on the earnings. However, if you use those interest earnings in one of three alternative ways, they are NEVER TAXED!

When your pool of Never Taxed Dollars gets large enough, its creates enough financial leverage to sustain extensive retirement cash flow.


Policy Earnings Used: To pay internal mortality costs (term insurance)

are Never Taxed

To fund policy loans are Never Taxed

To provide a death benefit are Never Taxed

To make policy surrenders in excess of costare FULLY TAXED


ILIPP / FLIPPIndexed & Fixed Life Insurance Private Pensions use the financial leverage of NEVER TAXED DOLLARS in an over-funded universal life insurance policy as a financial pump to fund extended retirement benefits.

FLIPP uses tax leverage

ILIPP uses both tax and interest rate leverage


ILIPP –

$335 a Month After-Tax Cost Age 40 to 65: $100,500

$1,807 a Month Retirement Income Age 65 to 100: $758,940

Taxes Due: - 0 -

Indexed Life InsurancePrivate Pension

Sample ILIPP (Using Indexed Life Insurance for a male age 40 in average health and assume an annual compounded return of 7.3%, with a 5.9% variable loan rate.)

The structure of an ILIPP combines favorable tax treatment with interest rate leverage to generate impressive levels of retirement income.

**This is a sample illustration only, not a guarantee. The performance of an ILIPP is highly dependent on future economic conditions over a long period of time, as well as the age and health of the insured. Please see a NAIC compliant illustrations tailored to your specific situation.


Disappearing LoansRetirement distributions from an ILIPP or FLIPP are tax free because they are loans, not policy surrenders (which are taxable in excess of premiums). However, these loans are special and are not expected to be repaid during your lifetime.

Interest is not paid on these loans, because it is compounded inside the policy as an offset against policy cash growth. - Yes, this compounding just makes the loan grow faster, but there are other policy features that help control this loan growth. These policy features include: direct recognition, wash loans and variable loans.

If a policy is surrendered (either partially or in full), any loans in excess of cost (total premiums) are immediately taxed. In a well designed ILPP or FLIPP, the retirement loans are carefully calculated to fund a retirement benefit well past life expectancy, so the risk of forced surrender is zero. At death, the outstanding loan balance is repaid from tax free death benefits and any excess is paid to the policy beneficiary tax free. (Applicable tax authorities for these types of transactions are: Code Sections 72, 101 and 7702.)

Remember – loans against your insurance policy are loans you owe yourself!


Wash Loan / Direct RecognitionWash Loan - is a policy loan in which the interest rate on borrowed funds is identical to the policy return. Example: The policy has $100,000 of cash value compounding at 6% per year.

The math would be as follows:

Loan interest charged by policy ($50,000 x 6%): $3,000 Policy interest earned on loaned funds ($50,000 x 6%): $3,000

Net loan interest compounded - 0 -

Direct Recognition - uses a similar method to equalize loan to cash growth in a participating policy (those that pay dividends). In the direct recognition approach the dividends are reduced on the portion of the cash values that are borrowed. In a properly selected policy, these dividends are sufficient to nullify the effects of compounding loan interest.


Variable LoanVariable Loan - is a policy loan that floats with the bond market. The interest earned on the bonds is used to hedge a specified stock market index. In a variable loan scenario, the policyholder, not the commercial bonds, provides the policy interest. This interest is used to acquire options on the selected stock market index.

The math could be as follows:

Loan interest charged by policy ($50,000 x 5.9%): $2,950Policy interest earned on loaned funds ($50,000 x 7.3%): $3,650

Net loan interest compounded -$700

The variable loan approach lets the policyholder keep earning market based returns, even during the distribution phase. Since the stock market can be expected to fluctuate, there will be periods when the variable loan interest is higher than the market based return, which will detract from policy cash values. Some carriers allow policyholders to switch between wash loans and variable loans. A policy feature that adds flexibility and increased protection from compounding loan interest.


ILIPP is a Complex Financial Interplay Between

Increasing Mortality Costs Tax Free Compounding Stock Market Fluctuations Short & Long Term Interest Rates

The older you get the higher your chance of death, which drives insurance costs upward at a rate that increases rapidly. Life insurance carriers offset this tendency by either charging successively higher premiums or lowering death benefits. In a universal life policy, as the cash value grows, it takes on a larger and larger percentage of the policy death benefit. Uncle Sam cooperates by decreasing the ratio of cash to death benefit required to maintain a policy's tax advantages.

In a properly selected policy the cash balance can climb fast enough to both outpace the increasing mortality costs and sustain a lifetime of retirement loans.


ILIPP Working PartsRed - CashBlue - Total Input/Output


Most life insurance is bought with minimum premiums – this raises costs and stretches them out

$ $

$

ILIPPs & FLIPPs are Over-Funded, which – lowers costs and accelerates cash growth


The Total Return on an ILIPP Depends on Your Longevity

Total Death Total Tax Free Distributions + Benefit + Cash CollectedDeath at Age 75 $203,840 $154,485 $358,325

Death at Age 85 $407,680 $126,235 $533,915

Death at Age 95 $611,520 $165,869 $777,389

** The above amounts were taken from a NAIC compliant life insurance illustration on an age 40 male in average health and assuming a constant annual return of 7.3% and a variable loan rate of 5.9%. (The carrier's 30 year average annual crediting rate from 1982 to 2012 was 8.1%)


A FLIPP Works in an Almost Identical Manner

FLIPP returns are tied to investment grade long-term commercial bond yields

FLIPPs created from dividend paying whole life policies have a performance record of 100+ years

FLIPP dividends can include mortality savings which will add to the return

FLIPPs designed using universal life policies have track records of a little over 40 years

FLIPPs often have an accumulation advantage, but a benefit disadvantage


Never Taxed Dollars - Summary Prime the Pump with After-Tax Premiums

Use Non-Taxed Earnings to Pay Term Costs for Family or Business Protection

Compound Non-Taxed Earnings into a Nest Egg

Borrow Non-Taxed Earnings throughout Retirement

Tax-Free Death Benefits Wipe-out All Catch-up Taxes

**Never taxed dollars involve a cash value life insurance policy. All life insurance policy must be purchased through a life insurance agent licensed in the state of residence of the policy purchaser. Not all life insurance agents are familiar with this concept. Not all life insurance policies are suitable for this concept.


- but their Real Financial Power is Never Taxed Dollars

It is Common to Refer to ILIPPs and FLIPPs as Tax Free

Please contact us at Members.CPAAdvantage.net for additional information on this financial concept

Links to Impartial Providers of Historical Asset Class Performance


Federal Reserve Board posts returns from a variety of fixed income asset classes, some of which extend as far back as the early 1900’s. Please visit: http://www.federalreserve.gov/releases/h15/data.htm

Ibbotson, owned by Morningstar, compiles an extensive list of asset returns and focuses on stock market based asset returns. http://corporate.morningstar.com/ib/asp/subject.aspx?xmlfile=1414.xml

Capital Strategies Press publishes an annual summary of indexed performance. Their numbers are independent of the projections made by the insurance carriers. http://CapitalStrategiesPress.com

Yahoo financial database: http://finance.yahoo.com/market-overview/

MarketLinking.com offers a public access database on a variety of market linked and indexed returns. Visit http://MarketLinking.com

Important Notes and Disclaimers (Please Read)


The performance comparisons used in this presentation make assumptions about future rates of return. These assumptions may or may not be valid. No one knows the future. Our only guide is the past and the future returns from various asset classes may not reflect their historical averages or ranges. The comparisons used herein are solely for the illustrative purposed.

Knowledge is power and when making financial decision knowledge is essential. Every consumer, whether making investment, savings or insurance decisions should carefully study the past performance of every asset class under consideration in order to make an informed decision about their expectations of the future performance of that asset class. There are a number of independent third party sources of asset returns. All consumers should consult one or more of these sources or other impartial third parties that maintain similar databases and/or analysis.

Meaningful financial planning requires unbiased information. Financial decisions about retirement funding, future retirement income, building a family nest egg, and purchasing insurance to provide financial protection for life’s unexpected events all require making assumptions about future performance. Unless these assumptions are based on expectations that have a reasonable probability of being close to future results, you are not planning, you are guessing.

Please discuss asset class returns with a competent financial professional before making a final decision about how to allocate your financial resources. This should be more than a cursory discussion. If the financial professional you have chosen to trust seems uniformed in any way on the subject of asset class performances, you should seriously consider replacing them and finding a more knowledgeable professional.

Please, please, please take the time to build your personal knowledge of the various financial products and the performance and liquidity characteristics of the asset classes available to you.

Important Notes and Disclaimers (continued)


The National Association of Insurance Commissioners (NAIC) has formulated guidelines for illustrations that must be presented to each potential purchaser of cash value life insurance. These multi-page illustrations are carrier, product and insured specific and contain substantial disclaimers, warnings and clarifications. The summary presented herein is taken from one set of annual yield assumptions and premium inputs. Alternate assumptions can produce radically different policy performance, including early lapse of the policy. The age and health status of the insured is likewise a key assumption that when changed, can lead to policy performance much less favorable to the policy owner. These types of life insurance policies can only be purchased through the services of a life insurance agent licensed in your state of residence. If you are interested in learning more about the retirement cash flow features of cash value life insurance, please confer with a licensed agent and have her/him prepare NAIC compliant illustrations using reasonable assumptions. We strongly advise that consumers never rely on the carrier’s highest historical return. A lower return assumption will make the outcome more likely. We also strongly advise that the interest rate spread assumed on any variable loan be reasonable in light of historical performance data. The spread is the difference between the assumed policy crediting rate and the rate charged on policy loans. Example: the policy yields an annual return of 8.3% and a loan charge of 5.5%, then the spread is 2.8%. A 2.8% spread is unreasonable and will create an internal compounding during the loan period that will inflate the available retirement funds substantially. Since a 2.8% spread has never been sustained during any past economic period, the results illustrated will be an illusion and will never occur. The variable loan rate of an indexed policy is tied to the commercial bond rate. Universal life insurance carriers invest policy cash values funds in the commercial bond market. If the insurance carrier charges the policy holder less than its bond earnings, the carrier will lose money. A history of commercial bond rates are published by the Federal Reserve and can be found on the Internet The spread is a critical element of all indexed universal life illustrations that employ the universal loan. If your agent glosses over the importance of the spread or seems fuzzy on its criticality, get a new agent, because you are not working with a true professional.

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