Section 79 is compared to the a high value cash value EIUL (equity indexed universal life). Wash loans are used in both comparisons. We see the tax free rates of return in retirement.
Section 79 Rates of Return
It is important to understand how Section 79 Plan illustrations are run. Typically, the administrator that demonstrates these plans will show a rate of return in the policy between 5.75% and 6% for the first five years. After that time period, the insurance administrator will return rates of return somewhere between 8-9.4%.
It is difficult to do get those rates of return for retirement with your traditional life insurance program, so we came up with an equitable model using a customary program for the Revolutionary Life comparison.
In the Section 79 scheme, we presumed for the years 1 to 5 of investment a rate of return of 6% and past the 5th year we presumed an 8% rate of return. For the Revolutionary Life, a 7.5% rate of return throughout the entire span of policy years is presumed. From years 1 to 5, the return is 1.5% higher for the Revolutionary Life, but for years 6-40+ the Section 79 has a rate of return .5% greater.
This is not an equitable comparison to the Revolutionary Life because having .5% higher for the Section 79 for 35+ years is showing partiality to the Section 79 even though the Revolutionary Life, in this demonstration, has a rate of return 1.5% higher from years 1 to 5. We used these rates of return as so-called conservative numbers that would show partiality for the Section 79. We’ll see what the actual tax free rates of return will be in retirement even with these partial rates for the Section 79 policy.
As we’ll see in this demonstration, even with the numbers slanted in the Section 79 Plan policy, the Revolutionary Life would still be a better tool for accumulating wealth. Wash loans were used with the Revolutionary Life and Section 79 policies.
Section 79 vs a good Cash Value Equity Indexed Universal Life
The small business owner funds $100,000 each year into a Section 79 policy from years 1 to 5. The business owner owns the plan and the accredited income of the employee is around $60,000 a year (with a 40% tax bracket).
Since the employee does not receive the $100,000 and, additionally, will have to pay $24,000 of taxes to pay for the $60,000 of income, the employee will, essentially, have to pay $24,000 in after-tax dollars in order to pay the income tax bill. This is because $60,000 of accredited income is multiplied by 40% tax bracket which equals $24,000.
How much would the business owner have to contribute to a cash value life insurance policy if he didn’t choose the route of the Section 79 Plan? In this case, the business owner would have contributed $60,000. He would have a gross income of $100,000 and when this number is multiplied with his tax bracket of 40% the result is $60,000. In addition, to the contributions of $60,000, he would have an extra $24,000 to contribute. Remember, he had to pay $24,000 in after-tax dollars if he chose the Section 79 plan; thus, with this choice of the Equity Indexed Universal Life he has an extra $24,000 to contribute. We need to compare the two investment opportunities equitably, so we add $60,000 plus $24,000 which equals $84,000.
In other words, the $60,000 that was left over from the $100,000 of income would be increased by $24,000 in taxes that would have been paid if the Section 79 Plan was implemented. In short, $60,000 + $24,000 = $84,000 that is available to fund every year for five years into a Revolutionary Life policy (i.e. a high cash value Equity Indexed Universal Life).
The numbers following compare $100,000 going into a Section 79 Plan EIUL policy versus $84,000 going into a good EIUL policy. The question is how much could be withdrawn from the Section 79 Plan policy tax free in retirement between the ages of 66 and 85? The answer is $83,646 annually. How much could be removed from the good EIUL policy? That amount would be $125,084 annually.
Pros and Cons of Section 79. Benefits of good Cash Value Equity Indexed Universal Life
Section 79 Plans are insignificant from a retirement planning and asset protection standpoint and they are usually pushed by an advisor who did not compare the Section 79 with other investment opportunities or is careless because these plans will help the advisor sell life insurance.
The rates of return are very clear. Using cash value life insurance policies offers excellent retirement returns. Manipulating a business owner to use a Section 79 Plan that is comparatively insignificant from the standpoint of simple tax free rates of return because the plan will allow advisors to sell a 40% deductible plan is a misconduct of ethics and is definitely not in the best interest of the business owner.
In addition, if you do have a money-making small business and wish to tax deduct $100,000 to $1.2 million each year into a benefit plan (in addition to getting asset protection), you may want to consider using a Captive Insurance Company, also known as a Captive Insurace Company.
Captive Insurance Company with Cash Value Equity Indexed Universal Life
Though Captive Insurance Companies are not benefit plans, they can prove to be an excellent retirement planning strategy that also offers asset protection. The asset protection comes in the form of business insurance. The business is really insuring itself against any losses. As well, providing insurance claims are minimal the business owner can withdraw the cash from the Captive Insurance Company with the long terms tax rate for any capital gains. With proper retirement planning, the business owner can withdraw the cash without paying any taxes.
Moreover, in a Captive Insurance Company set up, it is wise to use a high cash value Equity Indexed Universal Life policy as a strategy to grow the reserves in the CIC while having protection from the volatility of the stock market.
Please contact Estate Street Partners at (888) 938-5872 or, if you are calling in the Boston, MA region, please call us at (508) 429-0011 and see how we can protect your assets and maximize your returns in retirement. We offer advanced retirment planning and estate planning strategies such as the Cash Value Life Insurance, reduction of your taxes while enabling to transfer your assets to your beneficiaries and superior asset protection plans using our formidable Ultra Trust® irrevocable trust.