oprah.chopra@[EMAIL PROTECTED]
writes:
> I am 31, net work around 450k and projected to grow at 100k/ year.
> A life insurance agent is trying hard to rope me into a plan where I
> can contribute large amounts to a relatively small policy ( ~1-1.5
> million ). He mentioned something about MEC, where you can not
> contribute too much to abuse the system.
A MEC is what happens if you put "too much" into a life insurance
policy up front rather than making payments year by year. The
death benefit is still income-tax free, but if you take distributions
during your lifetime, they may be hit with an extra penalty if
you are below 59-1/2.
> Is it a good idea to use life insurance as a way to avoid estate
> taxes? I have already maxed out 401k, roth IRA, and traditional IRA.
> I plan to open a SEP IRA next.
It's often a good idea to avoid estate taxes, but it's
nowhere near as simple a question to answer as "is it a
good idea to use life insurance to do so".
The death benefit from life insurance is usually income-tax free.
The proceeds may or may not be part of your estate and, thus,
may or may not be subject to estate taxes - generally the
issue of avoiding estate taxes on life insurance death
benefits depends on who is the *owner* and who is the
*beneficiary* of the policy.
The trick is to make sure that the owner and beneficiaries
of that life insurance policy are neither you nor your
estate - *that* is how you keep estate taxes off that
death benefit. And it can be achieved in a variety of
ways, but little of that is particularly life-insurance
dependent - generally it requires you to make *gifts*
each year while you are alive. Those gifts could be
anything from cash given to your kids (who may or may
not choose to pay for a life insurance policy on you),
or it may be given to a trust (where a trustee must
still have the discretion as to whether or not to pay
for life insurance premiums). Or the kids could just
take the cash and piss or away or invest it on their
own. All of that gets cash out of your estate. What
that cash is used for (and the value of what's done
with that cash by the time you die) can be anything.
That all said, a common means of managing this is to
set up an irrevocable trust which then owns and is the
beneficiary of a life insurance policy on you. You
must not be the trustee. The insurance policy held
by that trust may be anything from term to a VUL.
Permanent life insurance (like Whole or a VUL) may
grow in value inside that trust, Term would not, but
may be the most cost-efficient if all you want to do
is make sure that there's a chunk of cash to take
care of your dependents.
It sounds, though, like you're trying to avoid taxes
just for the sake of avoiding taxes, rather than
figuring out what you want the money *for*.
Note that if you use an ILIT, you *cannot* extract
and spend any of the accumulated value of whatever
life insurance is in the trust. Your trustee may
do so for the sake of the beneficiaries - but it's
out of your hands.
And if you don't use an ILIT but rather retain owner****p
of the policy, while you may extract money from the
policy later (loans or distributions), the benefit
*is* part of your estate.
Note that while there are reasonable and sensible
uses for life insurance, particularly for folks of
somewhat higher net worth who do have reason to set
up the trusts and crank cash into the policies, at
the moment, your estate is not big enough to warrant
that, you haven't said anything about dependents or
children or other planned beneficiaries (or a spouse),
and you need to bear in mind that the life insurance
salesman has a *huge* incentive to sell you a policy
regardless of how much sense it really makes for you.
It might make sense. But for the vast majority of
folks out there (certainly not all!) - a cheap term
policy is probably adequate. So you should be wary.
Note that there's nothing whatsoever wrong with
building up some substantial savings which is NOT
in tax-favored accounts - sure, max out the 401k,
Roth, SEP, etc. But you can and almost certainly
should crank some cash into a regular taxable account,
perhaps in fairly tax-efficient investments (low
turnover funds, etc).
BTW, congratulations. That net worth and level of
savings at you age is astoundingly good. Keep it up,
but don't forget to spend a little and enjoy yourself,
too.
--
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