Can You Believe An Insurance Agent When He Talks About “Tax Free Retirement?”


I should know better but I still will join the network of most people who ask me to on Linked-In.  Unfortunately, about half the strangers who ask me to connect with them on Link-In want to sell me something.  I have yet to have anyone ask me to connect with them because they want to learn from my experiences.

Last week an individual with a brokerage house asked me to connect with him through Linked-In.  Less than a half-hour later I got this email.  My response is below.

EMAIL

As I’m sure you are aware, not all life insurance agents/producers are created equal.  By the same token, not all CFPs are created equal.  I am familiar with the mess caused by underfunded UL policies of the 80s-90s because I had to clean up some of those messes as well.  In addition, I am familiar with the mess caused by VULs over the last decade.  I’m not here to argue, only here to help!  I will say though… life insurance cash values CAN be tax free if the contract is structured properly and the funds are accessed properly.  I know this to be fact because cash value in life insurance is how I paid for my last year of college in 1999.  I’ve never once paid taxes on those dollars.

MY RESPONSE

I am aware that the inside build-up of cash value within life insurance CAN be free of income tax. The caveat is that the life insurance policy must result in at least $1 of tax-free death benefit. If the policy lapses, income tax is due on any growth over basis. I am more than happy to concede that not all insurance agents are the same. I also know that not all CFPs are competent.

What I have learned, the hard way, is that any future congress and president can change the tax-code at any time to make plans to shelter money from them obsolete. I also have observed that many insurance agents are trained to talk-up the “tax-free” aspects of life insurance and ignore the caveats.

I am thrilled that life insurance helped you with your last year of college. Unfortunately, I have seen to many people lapse their life insurance policies after they have met their financial goal and then get a letter from the IRS the year after the lapse wanting their taxes but the money had already been spent.

A couple of years ago, I worked with a client who had taken a loan of $40,000 against his policy 15 years earlier. Although he paid his premiums for 15 years, the interest on his loan ate up the rest of his cash value and his policy eventually lapsed. At age 70 and in poor health, he had to pay taxes on $15,000. His agent had told him that he could access his money tax-free through a policy loan than never had to be paid back. What his agent did not tell him was that he would have to pay interest on the loan or run the risk of his policy lapsing.  If that happens, he would have to pay tax on any growth.

MORAL

The moral of the story is the same one that the ancient Romans taught.  “Caveat Emptor,” “Let the buyer beware.”  It is more up-to-date to say, “If it sounds too good to be true, it probably is.”

A lesson that I learned very early in my career was to understand who I was and who I was not.  We insurance agents are not lawyers or accountants.  You should rely on advice that you get from the appropriate professional

  • If you are going to buy something for tax reasons, talk to a tax professional rather than an insurance agent.
  • If your question is a matter of law, talk to an attorney.
  • However, if you are looking for a way to pay the bills if you get sick or die, talk to an insurance professional.

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