Rich Person's Roth

[austin3515]

[edited to fix link]

https://www.forbes.com/sites/davidrae/2018/09/20/rich-person-roth/#4b7ddee471fe

Whenever I read "backed by life insurance" I just think used car sales man.  Is this legit?  I have a client who is doing this.

[Mr Bagwell]

Austin,

I worked as a RIA for a bit and we had a couple of guys in the office peddling this to a few clients.  The boss man was none too happy when he found out.  I don't think life insurance companies are real keen on it too.

Without going into a lot of details, this can be legit.

If I remember right, the concept was to take a loan against the cash value and pay back the loan, over and over.  There are pitfalls too.... like borrowing too much and not having the ability to pay it back.....

The biggest pitfall is dumping too much into the life insurance policy and causing it to MEC out and that is bad.

Just my two cents.

[austin3515]

What does MEC out mean?

[Mike Preston]

Modified Endowment Contract

[Mr Bagwell]

The technical term is Modified Endowment Contract.

I have forgotten most of the life insurance testing knowledge, so bear with me.  It has something to do with the tax free status of the policy becoming non-tax free.  If I remember correctly.

[XTitan]

There is nothing new about this type of arrangement, and as long as the agent helps monitor, insurance companies don't really have an issue with it.  BTW, that's quite the marketing name; back in the 90's (before the term was banned) it would have called a "private pension plan".  Yes, you can buy a life insurance policy that is designed for the owner to take tax-advantaged policy loans and withdrawals.  As long as the policy is held until death (no lapse or surrender), the loans are tax-free because they are paid off by the tax-free death benefit.  Usually structured as paying the maximum premium for the minimum face amount.

There are a significant number of pitfalls.  For example, if the policy becomes a MEC, then the taxation of the distributions is impacted and may also be subject to an additional 10% penalty if the insured is under 59.5.  If the policy lapses, the loans become taxable to the extent there is gain in the contract.  The loan interest is not deductible so it's usually added to the loan balance. 

 

[Larry Starr]

2 hours ago, austin3515 said:

https://www.forbes.com/sites/davidrae/2018/09/20/rich-person-roth/#1d1196f971fe

Whenever I read "backed by life insurance" I just think used car sales man.  Is this legit?  I have a client who is doing this.

Can't get to the article without hitting this:  Mimecast requires you to enroll this device to access message links.

I won't do that.  Can you post the article itself?

[austin3515]

Sorry about that.  Mimecast is some  email protection thing we use.  I reposted the link it should work now!

[Larry Starr]

2 hours ago, austin3515 said:

[edited to fix link]

https://www.forbes.com/sites/davidrae/2018/09/20/rich-person-roth/#4b7ddee471fe

Whenever I read "backed by life insurance" I just think used car sales man.  Is this legit?  I have a client who is doing this.

I think the article is very well written and a very good discussion of the possibilities. Like others have said, this is not a new idea.  As an aside, insurance comes back into vogue (in some cases) because of the elimination of the stretch IRA (but that it for another thread).  I am part of a Family Office (we represent high net worth clients only) that is based in Nashville.  We have a group of experts (guess what my expertise is!) but we include property/casualty expert (especially for foreign property), marketing expert, concierge medicine practice, accounting expertise, our own trust company, high level estate planning lawyers, and some other areas.  We also have life insurance expertise, which I backstop as well.

So, other than the ridiculous  marketing name, this does have applicability to some people but it requires being well managed, almost always by someone who understands and is not getting paid on commissions (the product choice is critical, and often non-commissioned products would be best).

Is this legit?  Yup. But not for everyone (which I think is what the author said very well).

 

 

[ESOP Guy]

Maybe it is just me but I find people who feel the need to come up with stupid names to market a put off.

I remember years ago seeing something about opening an 802(k) plan.

I got curious.  It turned out the reason it was an 802k plan was it was twice as good as a 401(k) plan.   Get the stupid math?

It turned out to be nothing but a dividend reinvestment plan.  

They lost me on the whole twice at good as a 401(k) thing.  Even if I liked their idea the cutesy marketing terms had me closing the webpage pretty much after  they explained it.