Taxes and Protection Plus Life Insurance Contracts
What you really need to know.
True to form, the internal revenue code relating to insurance contracts might as well have been written in Greek. It can be found at IRC 7702. Here is a sampling:
(D) Recapture ceiling where change occurs after 5th year and before 16th year
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If the change referred to in subparagraph (B) occurs after the 5-year period referred to under subparagraph (C), the recapture ceiling is the excess of the cash surrender value of the contract, immediately before the reduction, over the cash value corridor of subsection (d) (determined immediately after the reduction and whether or not subsection (d) applies to the contract).
(E) Treatment of certain distributions made in anticipation of benefit reductions
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Under regulations prescribed by the Secretary, subparagraph (B) shall apply also to any distribution made in anticipation of a reduction in benefits under the contract. For purposes of the preceding sentence, appropriate adjustments shall be made in the provisions of subparagraphs (C) and (D); and any distribution which reduces the cash surrender value of a contract and which is made within 2 years before a reduction in benefits under the contract shall be treated as made in anticipation of such reduction.
Yikes!
Here’s the good news—you don’t have to understand this code. The entire section is basically a mathematical algorithm written out in words, rather than symbols. That algorithm is designed to differentiate a true life insurance contract from a modified endowment contract.
The rule is basically designed to measure the ratio between cash value and death benefit in whole life insurance policies to prevent people from stuffing so much money into a policy that it looks more like a high-yield savings account than an insurance contract.
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As long as your policy is written in a way that it is a true insurance contract rather than a modified endowment contract, your policy will be able to take advantage of the favorable tax treatment that insurance contracts enjoy.
Some of the benefits of having a life insurance contract (they must be written a certain way to get all these benefits) include the following:
Practically no annual contribution limits
Protected from creditors
Guaranteed returns
Never lose your principal
No penalties for accessing your money
Liquid
You can carve out your employees
Tax free transfer to heirs
No RMDs
Disability benefits
If you have any questions about how a Protection Plus Insurance Contract can be a vehicle for you to save in taxes and invest in anything tax-free, contact us for more information.
