RPF0609-Asset_Protection_Planning_for_Mere_Mortals_-_Part_7_-_Life_Insurance_Exemption_Planning
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00:00:15.000 | Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now, while building a plan for financial freedom in 10 years or less.
00:00:26.000 | Welcome to the next episode in the Asset Protection for Mere Mortals series.
00:00:32.000 | And today we're going to discuss life insurance, specifically the exemptions for life insurance, because there is a good chance that some or all of the money that you may have in a life insurance policy can be protected from the claims of your creditors.
00:00:49.000 | I'll expand on this throughout the show.
00:00:51.000 | My focus in this series is to give you very actionable advice, to give you ideas that wouldn't necessarily require you to go and consult an attorney, to give you things that you can do even if you don't have a half a million dollars yet or a million dollars yet, but yet things that will be very helpful for you to have in place.
00:01:08.000 | That's why I titled this series Mere Mortals.
00:01:10.000 | I do not claim that some of the techniques that we're discussing are perhaps the most bulletproof technique.
00:01:16.000 | It's rather obvious that if you want the very best asset protection planning in the world, you're going to have an offshore asset protection trust.
00:01:24.000 | You're going to have that in a very strong jurisdiction.
00:01:27.000 | You're going to have a trust protector.
00:01:29.000 | You're going to have an investment manager.
00:01:30.000 | You're going to have all kinds of veto powers and rights of assignment.
00:01:32.000 | You're going to have all kinds of things squared away.
00:01:35.000 | And that'll also cost you $10,000 or $15,000 or $20,000 a year just to maintain the legal structure alone, let alone the other fees that are associated with it.
00:01:43.000 | And yet that's not advisable for somebody with a mere 50 or $100,000 in net worth.
00:01:48.000 | You need to have significant assets before those types of strategies really become worth the money.
00:01:54.000 | And so I'm focusing on mere mortals in this series.
00:01:57.000 | I'm focusing on the things that are low-hanging fruit that are available to everyone.
00:02:01.000 | That's why we've talked about homestead exemptions.
00:02:03.000 | That's why we've talked about retirement plan exemptions and today life insurance exemptions.
00:02:08.000 | Because these three things put together are probably the easiest and simplest things for you to do now.
00:02:15.000 | And they are some of the things that will be the most helpful for you to have in place as you expand your wealth to the point where an offshore trust may be more appropriate for you.
00:02:28.000 | So let's talk about life insurance.
00:02:30.000 | The first thing I need to point out to you is life insurance is a sticky subject to plan because it's very much dependent on your state law.
00:02:39.000 | Life insurance is governed by the laws of each individual state in the same way that homestead exemptions are governed mostly in the laws of each individual state.
00:02:49.000 | Now in my discussions on homestead exemption, we focused a lot on the things that are federally applicable.
00:02:56.000 | Then in the discussion on retirement plan exemptions, we focused a lot on the things that were federally applicable.
00:03:02.000 | But with life insurance, everything comes down to the state.
00:03:05.000 | And each state has tricky laws, tricky different amounts that are applicable.
00:03:10.000 | And so the things that I'll talk about may or may not be applicable in your state.
00:03:15.000 | You will have to research that very carefully.
00:03:18.000 | Now I'm either fortunate from the perspective of a financial planner or unfortunate from the perspective of a broadcaster to live in the state of Florida.
00:03:25.000 | Because the state of Florida has very, very strong and liberal laws that apply to asset protection as it applies to life insurance.
00:03:33.000 | In short, in the state of Florida, as long as a policy does not benefit the insured, as long as the insured is not also simultaneously listed as the beneficiary of a life insurance policy,
00:03:45.000 | there is an unlimited amount of money that can be protected from the claims of a creditor within a life insurance contract.
00:03:52.000 | And so it's a wonderful state to live in from the perspective of life insurance.
00:03:56.000 | And when I sold life insurance in the state of Florida, that was certainly something that I would love to educate clients on.
00:04:02.000 | But it may not be the same in your state because some states don't exempt any amount of money in a life insurance contract.
00:04:10.000 | Some states only exempt money that in the life insurance contract if certain requirements are met.
00:04:16.000 | So certain requirements about a beneficiary. Some states require certain language to be involved in the actual policy that you have to have certain language in the contract.
00:04:26.000 | And so if your contract doesn't include that language, then you have trouble.
00:04:30.000 | Some states talk about whether life insurance proceeds from a death benefit are protected or not protected.
00:04:37.000 | Some states talk about cash values. And so you will have to look at your state.
00:04:41.000 | This is one of those areas where working with a competent life insurance agent, an educated life insurance agent should help you.
00:04:48.000 | A life insurance agent who sells life insurance policies in your state should know those rules.
00:04:52.000 | And/or you need to also do some web searches and you also need to consult with appropriate legal counsel.
00:04:58.000 | A bankruptcy attorney would be a good place to start.
00:05:00.000 | The easiest way for you to get information on your state is to search for the bankruptcy exemptions.
00:05:05.000 | As I've stated previously in this series, the best thing to do if you are interested in what's protected in your state,
00:05:10.000 | pull up your computer, go to DuckDuckGo.com and just search something like Florida bankruptcy exemptions or Alabama bankruptcy exemptions.
00:05:20.000 | And you'll start to see in the bankruptcy exemptions those exemptions that will basically apply to most asset protection planning as well.
00:05:28.000 | And that'll give you some information.
00:05:30.000 | So I will proceed from here on the understanding that you know the laws in your state.
00:05:35.000 | Because this depending on your state, life insurance may be very useful or it may be just a waste of time and you need to move on.
00:05:43.000 | The first thing I need to point out is like other forms of exemptions, life insurance is not completely invulnerable.
00:05:55.000 | There are creditors who can invade a life insurance policy.
00:05:58.000 | The most important one would be the IRS.
00:06:01.000 | The IRS can and will take the cash value of a life insurance policy or the proceeds under various circumstances.
00:06:10.000 | So although you'll be protected from other forms of creditors, you will not be protected from the IRS.
00:06:15.000 | So just keep that in mind.
00:06:17.000 | But from most of the creditors that we're talking with, if you want to do the IRS, we're going to do quite a bit more sophisticated planning.
00:06:22.000 | I think it's worth thinking about.
00:06:24.000 | But for most people, most creditors will be protected with a life insurance policy.
00:06:29.000 | The unique thing about life insurance is when I use that term, there are a couple of different ways that money comes out of a life insurance contract.
00:06:36.000 | The first way that money can come out of a life insurance contract is in the form of a death benefit.
00:06:41.000 | Somebody dies and a death benefit is paid.
00:06:45.000 | Another way that life insurance can come out of a contract is in the form of some version of a living benefit,
00:06:50.000 | such as a distribution of cash value or a loan on cash surrender value or basically dealing with what happens with the cash surrender value of a contract that it has a cash surrender value.
00:07:02.000 | Both of these are important.
00:07:04.000 | It's important that you understand that even if you have a term life insurance contract,
00:07:08.000 | that term life insurance contract can be a helpful part of your asset protection plan.
00:07:14.000 | Consider this example.
00:07:16.000 | Let's assume for a moment that I have a million dollar term life insurance policy.
00:07:20.000 | I don't have any kind of permanent contract.
00:07:22.000 | I don't have anything that has cash surrender value.
00:07:24.000 | I have a pure -- my insurance portfolio just has a term insurance policy.
00:07:29.000 | And let's assume that I also am deeply indebted.
00:07:34.000 | I have a lot of debt that I owe.
00:07:36.000 | I owe mortgage debt.
00:07:37.000 | I owe credit cards.
00:07:39.000 | I owe all kinds of debt.
00:07:41.000 | And then I die.
00:07:42.000 | And I leave that insurance contract with my wife as the beneficiary of the contract.
00:07:48.000 | Great news is, depending again on state law, even though I die and I leave that million dollars directly to my wife, there's no trust that I've left it to, there's no other form of protection, because it's a life insurance death benefit, she may still be able to have that money protected from the rest of my or our creditors.
00:08:10.000 | It's very important if you're ever the beneficiary of a death benefit on a life insurance contract, and if there's debt on the estate, or if there's any kind of antagonistic situation, including things like divorce, it's very important that you obtain professional counsel, that you obtain legal counsel for your situation.
00:08:31.000 | The best thing to do, leave it with the insurance company.
00:08:34.000 | Do not immediately co-mingle the funds.
00:08:39.000 | Do not immediately file the death claim, get the check, toss that into your joint checking account.
00:08:44.000 | If you do that, it may lose its protected status.
00:08:48.000 | Do not make that mistake.
00:08:50.000 | The safest thing is leave the death benefit with the insurance company.
00:08:54.000 | Get counsel.
00:08:56.000 | Now, if you don't want to leave the death benefit with the insurance company, put it into a new, separate account that is not co-mingled with your other funds.
00:09:05.000 | Here's why.
00:09:06.000 | If you're the beneficiary and you immediately take the money from a life insurance payout, and you toss it into your checking account, it's now your asset.
00:09:14.000 | It's now available to the claims of your creditors.
00:09:17.000 | That's a bad thing to do.
00:09:19.000 | Don't do that.
00:09:21.000 | It's up to you if you want to use the money to pay your creditors, but don't do it right away without getting good legal counsel.
00:09:28.000 | The reason I say the safest thing to do is to leave it with the insurance company is that will retain your maximum payout options.
00:09:35.000 | Now, you might take an immediate full death benefit.
00:09:39.000 | You might choose that.
00:09:41.000 | You might choose to do something else, though.
00:09:43.000 | You might choose to take out an annuity payment.
00:09:45.000 | And if you're in a situation where you're in a contentious fight with somebody, a creditor, you don't want to all of a sudden lose those options.
00:09:53.000 | Example, one of the most valuable asset protection tools that you have is when you can transform an asset into something that would be very attractive to a creditor into something that would not be very attractive to a creditor.
00:10:05.000 | Now, some creditors would like to have an annuity payment.
00:10:08.000 | But even if you live in a state that doesn't have great laws, if you can leave the assets, leave the life insurance payout with the insurance company until you're ready for it, or just take the annuity payment from the insurance company,
00:10:21.000 | you can transform something that's all available to a creditor all of a sudden to something that's an ongoing payout.
00:10:27.000 | Now, they might take it or might not.
00:10:29.000 | You got to look at your state laws.
00:10:31.000 | But leave it with the insurance company until you've gotten good legal counsel and good financial counsel.
00:10:37.000 | Or if you do take it from the insurance company, do not commingle the asset.
00:10:43.000 | Don't commingle it to where it becomes all of a sudden part of community property that is now subject to a divorce court.
00:10:49.000 | Don't commingle it so that it's subject to the claims of your creditors.
00:10:52.000 | Keep it in a separate account, a new account, and get legal counsel on it.
00:10:57.000 | I hope that was clear.
00:10:59.000 | Don't take the money.
00:11:01.000 | Get legal counsel.
00:11:04.000 | I'm so tired.
00:11:05.000 | I've seen this again and again and again, especially with small insurance payouts.
00:11:08.000 | Somebody is in a bad place.
00:11:11.000 | Let's say you're a 25-year-old kid and your dad has cancer.
00:11:16.000 | And you're caring for your dad and you're helping him.
00:11:21.000 | And as such, you've totally messed up your finances.
00:11:23.000 | You put yourself into debt.
00:11:25.000 | And dad dies and has a $25,000 life insurance policy.
00:11:28.000 | Well, kid is desperate, just grabs the money, tosses it in the checking account, and two months later, it's all gone and it goes to pay the creditors.
00:11:34.000 | It doesn't need to be that way.
00:11:36.000 | The money could be a starting point for you to reset your life.
00:11:40.000 | But you've got to maintain its protected status.
00:11:42.000 | So life insurance has the unique context of having the beneficiary having protections for a beneficiary.
00:11:51.000 | You should maximize those protections.
00:11:54.000 | If you own a life insurance policy and you are going to have beneficiaries of that, you should make sure that you maximize the protection of those proceeds for your beneficiaries.
00:12:06.000 | And probably to do that, depending on your state, probably you will want to establish a trust.
00:12:11.000 | You will want to have a trust that has spendthrift protections so that the beneficiaries of that trust are protected.
00:12:17.000 | You'll want to make sure that you have a trust as the beneficiary of that asset.
00:12:22.000 | This is so important.
00:12:23.000 | And so many people who don't have a lot of money yet aren't used to thinking like rich people.
00:12:28.000 | But there's no reason for anybody to have less than half a million or a million dollars of life insurance.
00:12:35.000 | And when you have a million dollars of life insurance, that automatically puts you in the situation of being rich.
00:12:41.000 | Now, all it takes is for you to simply sit down and draw up an appropriate trust, be the beneficiary of that policy, and you could protect millions of dollars for your family.
00:12:52.000 | Back to my discussion.
00:12:53.000 | You know, most people listening to this podcast, you should have at least a couple million bucks of insurance.
00:12:59.000 | Most people.
00:13:00.000 | Now, think for a moment what would happen if you wind up in a long extended illness and you've got a bunch of medical bills, you've got you've run up your credit cards, you've got debts all around.
00:13:13.000 | You've spent all your money and you're just barely hanging on and then you die.
00:13:17.000 | Now, think about the difference between leaving that asset directly to your spouse.
00:13:22.000 | If you live in a state that doesn't protect life insurance proceeds, leaving that directly to your spouse, and now all of a sudden you thought you were well protected with a three million dollar estate because you left it as a three million dollars of life insurance.
00:13:35.000 | But now a million and a half bucks is gone.
00:13:37.000 | And now your spouse is left trying to figure out how to put their life together with a million and a half dollars.
00:13:42.000 | It's not enough money.
00:13:43.000 | You can fix that.
00:13:45.000 | So spend the money and set up a trust that's the beneficiary of the contract and set up that trust with spendthrift provisions.
00:13:52.000 | So it'll pay out an income to your spouse while they're dealing with settling the estate and getting rid of all your creditors.
00:13:58.000 | Don't be stupid and own millions of dollars of life insurance and not understand how those beneficiaries are properly titled.
00:14:07.000 | And here the life insurance agent business is does this a very poor job of this.
00:14:12.000 | Most life insurance agents simply want to sell policies because that's what gets a commission paid.
00:14:17.000 | And most life insurance agents are not knowledgeable enough to properly advise somebody on the appropriate beneficiary designations.
00:14:25.000 | And most people who buy life insurance don't have a clue what they're doing with the beneficiary designations.
00:14:30.000 | They don't know what to do.
00:14:31.000 | The standard thing is, well, leave it to your spouse.
00:14:34.000 | And so what happens is somebody, you know, they're feeling the pressure of buying a life insurance policy.
00:14:39.000 | They don't know if they're getting ripped off.
00:14:41.000 | And so they sit down and they're going to buy a policy and they don't know what to do when they're going through the application.
00:14:46.000 | So they just put their spouse as the primary beneficiary, their kids as contingent beneficiaries, and they don't ever think to come back to it.
00:14:53.000 | And what incentive does life insurance agent have to sit down and go over it to do that?
00:14:59.000 | They're going to sell the policy and they're going to get their commission.
00:15:04.000 | And here's the problem, especially because people often have a weird relationship with life insurance agents.
00:15:10.000 | They think they're being sold.
00:15:12.000 | They don't like the sales process.
00:15:13.000 | They think that the only reason the life insurance agent is calling them is to sell them more contracts, which is certainly a big component of it.
00:15:20.000 | They don't sit down and do the maintenance work.
00:15:22.000 | When I was a life insurance agent and a financial advisor, I would try to call all my clients at least once a year and try to do an annual review.
00:15:29.000 | Now, obviously, what was in it for me was to touch base with them, build a greater relationship, find out other needs, see what other policies I could sell to the situation.
00:15:38.000 | Obviously, but there was a huge benefit for the client to take the meeting and go over and do a review.
00:15:44.000 | And one of those most important things is updating beneficiary designations.
00:15:47.000 | It's got to be done.
00:15:49.000 | And here's the thing.
00:15:50.000 | You can update a beneficiary designation and you can do it when you're in the middle of a contentious situation and you're not going to have problems with the fraudulent transfer laws and such just by changing beneficiary designations.
00:16:04.000 | So take the time and review the beneficiary designations.
00:16:08.000 | I am so sad.
00:16:10.000 | Maybe I am.
00:16:11.000 | Who knows?
00:16:12.000 | But most people don't do it.
00:16:14.000 | You got me yelling or I got myself yelling.
00:16:16.000 | So forgive me.
00:16:17.000 | It's just this is it's so stupid when you can control an incredible asset, you know, two million bucks of life insurance for seventy five bucks a month.
00:16:25.000 | That asset, if it's properly protected with the beneficiary designation, can change the course of your family's future.
00:16:34.000 | And when you're dying of cancer with a million dollars of creditors calling and you've got no money, that is such a valuable thing to do.
00:16:43.000 | Don't skip it.
00:16:45.000 | Don't mess it up.
00:16:48.000 | Now, at this point in time, I'm going to pivot from beneficiaries, which will satisfy all the by term and invest the difference people.
00:16:55.000 | And we're going to talk about cash value because cash value life insurance contracts are some of if your state protects them, are some of the most valuable wealth building tools that are protected from the claims of creditors.
00:17:08.000 | They're wonderful.
00:17:09.000 | They're absolutely wonderful from the perspective of asset protection.
00:17:12.000 | I'm spoiled from Florida.
00:17:14.000 | Picture this Florida law exempts 100 percent of the value of your homestead from the claim claims of your creditors.
00:17:26.000 | Florida law exempts 100 percent of the value of your retirement accounts from the claims of your creditors.
00:17:35.000 | And Florida law exempts 100 percent of the value of your life insurance policies and annuity contracts from the claims of your creditors.
00:17:48.000 | Did you hear what I just said?
00:17:51.000 | With those three tools alone and not a single dime in legal bills, although you should pay some to set up an appropriate trust to be beneficiaries of your retirement accounts and to be the beneficiary of your life insurance policies and to make sure that your house goes into an appropriate trust when it's part of your estate.
00:18:09.000 | But without even legal without that, we can cover most of the stuff that people face and do good asset protection.
00:18:17.000 | And so cash value life insurance policies are wonderful because of their flexibility.
00:18:23.000 | They're really, really incredible in terms of the power that they bring to a situation.
00:18:29.000 | Now, if you're in a state that doesn't protect large amounts of life insurance cash surrender values, then it's a very different story.
00:18:49.000 | Let me give you a few things to keep in mind when it comes to establishing life insurance contracts.
00:18:55.000 | Check the laws in your state, but always remember this.
00:18:59.000 | In a life insurance contract, there are three or four people who are involved in each contract, and these people can be different or they can be all the same.
00:19:09.000 | These four people are the insured, the person on whose life the policy is written, the owner of the contract, which is the person who has the legal rights to change the contract, the payer of the contract, the person who actually pays the premium, which is usually the owner but doesn't have to be, and the beneficiary of the contract.
00:19:29.000 | So, can be all the same person. You can own a policy that you bought and pay for on your own life, and you can be the beneficiary of that policy.
00:19:41.000 | Of course, in the state of Florida, you would lose your credit or protected status because you're the beneficiary of the contract.
00:19:47.000 | Or you can own a contract on somebody else's life.
00:19:51.000 | So, I own life insurance contracts on the lives of my children.
00:19:55.000 | I'm the insured, I'm the owner, I'm the payer, and then I and/or a trust can be the beneficiary of that contract.
00:20:03.000 | And so, you can use these contracts in very, very flexible ways.
00:20:08.000 | There are very few assets that give you that flexibility.
00:20:12.000 | So, if one spouse is healthy or unhealthy, it doesn't mean you can't use life insurance.
00:20:17.000 | If one spouse is older or younger, you can apply the life insurance contract appropriately.
00:20:22.000 | You can adjust the beneficiary designations, and you can change those beneficiary designations at any time.
00:20:27.000 | So, you get a tremendous level of flexibility.
00:20:30.000 | Now, in a life insurance contract, you additionally have options with regard to how you fund it.
00:20:37.000 | And over the last few decades, as there has been an explosion of different types of life insurance contracts, you have tremendous ways that they can be set up.
00:20:47.000 | The traditional life insurance contract that has cash surrender values in it is a whole life insurance contract.
00:20:54.000 | And a whole life insurance contract usually has the feature of requiring ongoing premium payments.
00:21:00.000 | You start it, and let's say your premium payment is $3,000 a year.
00:21:03.000 | Each year, you fund it with $3,000.
00:21:06.000 | But many years ago, the universal life insurance contract was developed.
00:21:11.000 | And one of the benefits of a universal life insurance contract was the flexibility that came with the premiums and how the premiums are due.
00:21:19.000 | So, you can have a contract into which you pay regular premiums.
00:21:23.000 | You can have a contract into which you pay irregular premiums.
00:21:27.000 | And there are life insurance contracts that you can purchase, which you even make a single premium.
00:21:33.000 | Now, usually, for the purpose of tax planning, single premium life insurance contracts are not advisable because you lose the ability to take a loan against the policy without paying income taxes.
00:21:45.000 | When you buy a single premium life insurance policy, you give up your ability to make that loan, which really hurts you from a tax perspective.
00:21:53.000 | The rule is you generally want to fund contracts at least so they pass the seven-pay test, where you pay premiums for at least seven years into them.
00:22:01.000 | And so, either you have to actually pay premiums or you have to pass the seven-pay test with regard to how you set the contract up.
00:22:09.000 | So, I don't want to get into the weeds any more than that.
00:22:12.000 | But a single premium life insurance contract still does retain its creditor-protected status.
00:22:18.000 | So, if you had a million dollars and you were trying to move that million dollars from a non-creditor-protected status to a creditor-protected status, you could do that through the purchase of a life insurance contract or an annuity contract.
00:22:33.000 | And so, that's a really flexible thing.
00:22:35.000 | But unlike retirement accounts, where you're limited to a statutory maximum of, say, $60,500 or $53,000 or whatever your statutory maximum is, there is no maximum amount that can be put into a life insurance contract.
00:22:49.000 | You can fund a $10 million single premium life insurance contract.
00:22:52.000 | And as long as you have the income and the assets where the insurance company is willing to take that risk on you personally, they'll be happy to take that check.
00:22:59.000 | And you'll have a very happy insurance agent who will sell you that contract.
00:23:03.000 | So, you have incredible flexibility with putting money into it.
00:23:07.000 | The second thing that has revolutionized the life insurance industry is the use of different types of investment options in a life insurance contract.
00:23:16.000 | Now, here I always have to be careful because I think most people are often – would be better served with – most normal people, most mere mortals would be better served with traditional life insurance contracts.
00:23:29.000 | I get very nervous when unsophisticated people start purchasing universal life insurance instead of whole life insurance.
00:23:35.000 | I get very nervous when unsophisticated people buy variable life insurance contracts instead of fixed life insurance contracts because there's tremendous value to a life insurance contract that's stable, that's boring, and that's predictable.
00:23:50.000 | Back during the 1980s, so many contracts blew up because you had unsophisticated people buying them with unrealistic promises and statements by the life insurance agents and a lot of people got hurt.
00:24:05.000 | And it really put a big black mark on the insurance industry.
00:24:08.000 | So, I get very nervous when unsophisticated people buy universal life insurance and when they buy variable life insurance.
00:24:15.000 | But I have to concede that from the perspective of asset protection planning, you can use these contract types to give you a tremendous tool into which you can put cash that is protected from the claims of creditors and has the benefits of a life insurance contract.
00:24:31.000 | So, the two things I'm focusing on, I first spoke about universal life insurance contracts as compared to whole life insurance contracts.
00:24:38.000 | And the challenge is even those terms are no longer a bright line. You can get whole life insurance contracts that have flexible funding options on them, even though they're not universal life insurance contracts.
00:24:49.000 | But then the second thing has to do with what investments are held in the contract.
00:24:53.000 | Traditionally, life insurance contracts, especially whole life insurance contracts, were part of an insurance company's general portfolio, their general account, the amount of money that the insurance company manages that is used to pay out to its own claims that it owes for insurance contracts.
00:25:09.000 | And as such, they're very, very stable assets, but they don't have a lot of high growth.
00:25:14.000 | They're largely invested in bonds, fixed income investments. They're largely invested in perhaps a real estate portfolio, but they don't have much exposure to the world of equities or risky investments.
00:25:26.000 | Now, you can also purchase a contract, however, that invests through what's called a separate account, through its own separate account.
00:25:33.000 | And that separate account can be used to invest in various things that are like mutual funds.
00:25:39.000 | They're called subaccounts, and so they're like mutual funds. They're not actually mutual funds, but they'll often be managed by the same mutual fund company.
00:25:46.000 | And so you can purchase inside of a life insurance company mutual funds that are invested in stocks.
00:25:52.000 | And if you wanted to go all the way, you can even build private placement life insurance contracts that have just a few companies in them.
00:26:01.000 | You can really use a life insurance wrapper to do some pretty cool things.
00:26:05.000 | But I'm going to keep this for mere mortals.
00:26:07.000 | So you can put yourself in a situation where if you're using a flexible, universal, variable, universal life insurance contract, you can put yourself in a world where you own a policy that allows you to put flexible amounts of premiums into it, which can change year by year.
00:26:26.000 | And you can own a policy that allows you to invest into mutual funds or the mutual fund equivalents that are held inside life insurance contracts, which gives you the potential for market returns, which might be, if everything goes right, might be higher than the company's general account.
00:26:42.000 | Of course, that'll come with additional volatility. It'll also come with the additional fees.
00:26:47.000 | Now, most of the times the argument that goes against this type of financial move is in reverse.
00:26:53.000 | And somebody will say, listen, first of all, it's hard to find index funds in life insurance contracts, although I bet you that's changing.
00:26:59.000 | I haven't gone and priced the market since I haven't sold life insurance in years, but I bet you could buy index funds in some sub accounts now with life insurance contracts.
00:27:07.000 | But everyone talks about, well, you have the cost of the insurance.
00:27:10.000 | That shouldn't be something that's ultimately dissuasive.
00:27:14.000 | You should look at that and consider the cost of insurance, because that's the challenge that investing through a life insurance contract or an annuity contract has as compared to a simple mutual fund account.
00:27:26.000 | You have what's called the mortality and expense charge.
00:27:28.000 | That's how the insurance contract actually pays out for the death benefits, be those death benefits that are applied to a life insurance payout or to an annuity payout, which also has some features of life insurance in it.
00:27:38.000 | But if you compare the cost of that, first of all, if you value the life insurance policy and if you value the benefits of having life insurance, and if you look at the asset protection that that brings to the account, there's a very compelling argument for many people to purchase some life insurance contracts that will, because of the asset protection standpoint of it, if you can find a good company.
00:28:04.000 | Now, I don't want to go deeper into finding a good company in that. I've done so many shows on life insurance. It's been a couple of years since I've done it, but I need to do a whole bunch on it.
00:28:11.000 | My point is simply the life insurance wrapper from the perspective of asset protection planning can be really powerful.
00:28:19.000 | It's not the only way that you can get protection for assets.
00:28:23.000 | You can always set up an asset protection trust, but it can be a powerful way of protecting assets.
00:28:31.000 | And if you live in a state that doesn't protect the base contract, you can possibly use something like an irrevocable life insurance trust to also give you benefits for that particular contract.
00:28:44.000 | An irrevocable life insurance trust was created as a way of helping you to move a life insurance contract out of your personal estate so that you could save on estate taxes.
00:28:55.000 | The way you do it is you establish a separate trust, you make a transfer of that life insurance contract to the trust, or sorry, the trust buys the contract in the first place, and then each year you make a contribution to the trust.
00:29:06.000 | And usually that contribution to the trust is lined up to equal your annual gift tax exclusion amount.
00:29:13.000 | So what is that today? About $16,000 a year.
00:29:16.000 | So you could transfer up to $16,000 a year into the trust.
00:29:20.000 | And so what this does effectively is it takes that life insurance contract, which if you owned it personally, the gross value of the contract, the death benefit would be includible in your personal estate.
00:29:31.000 | If you own $3 million of life insurance as a death benefit, term insurance, and you die, that $3 million that's paid out on your term insurance policy is included in your gross estate.
00:29:42.000 | This is not a problem today under the United States when you have about a $5.5 million individual exclusion amount on your estate taxes.
00:29:51.000 | But it is a problem if you own $10 million a face amount, life insurance.
00:29:55.000 | And so you would never want to own that kind of insurance contract personally.
00:29:58.000 | But the point is you can move that contract into an irrevocable life insurance trust called an islet.
00:30:05.000 | And that islet, because it's additionally a separate trust, can then have creditor protections.
00:30:09.000 | And that islet can have beneficiary protections, spend-thrift protections for the beneficiary.
00:30:14.000 | So there are some cool things that you can do.
00:30:16.000 | It may be possible also to set up your islet in a way where even though it was an irrevocable transfer of your contract, it may be possible for you to set up that islet in a way that the islet would be able to lend you back money if you need to.
00:30:30.000 | So you can get some benefits from asset protection without losing all of your control.
00:30:34.000 | And that is beyond the scope of this particular policy, this podcast.
00:30:39.000 | I just want to point out to you that there are options in this world if you're using life insurance contracts as a personal -- as part of your asset protection planning.
00:30:53.000 | There are ways that you can do it using some of the merging of life insurance contracts and legal tools.
00:31:00.000 | In addition, remember that sometimes you can use a life insurance contract in conjunction with a tax-qualified retirement plan and get major benefits there.
00:31:11.000 | This would fall under what are called 412(i) plans.
00:31:14.000 | And a 412(i) plan is a defined benefit plan that you can set up which allows you to potentially put really hundreds of thousands of dollars into the plan far beyond what you can do into a defined contribution plan.
00:31:28.000 | And you get the benefit, the asset protection benefit of that plan being a qualified plan and also the fact that it's funded with a life insurance contract.
00:31:37.000 | So this only works usually if you're older, if you have a very high income, if you have only a few employees.
00:31:44.000 | But for those particular cases, a 412(i) plan can be a useful way to get multiple benefits.
00:31:55.000 | Consult a qualified advisor who can talk about your specific circumstances.
00:31:59.000 | And then finally, I alluded to the fact that you can also go abroad.
00:32:04.000 | You can go abroad and you can use life insurance as a funding tool for some of your activities offshore.
00:32:11.000 | You can purchase a private placement life insurance contract which basically can give you not only the benefits of being offshore but can give you tremendous personal control over the choices of the investment manager.
00:32:25.000 | You can't control the investments yourself personally but you can choose an investment manager who would align with your own personal life insurance – sorry, your own personal investment goals which would give you much more flexibility than even what's available if you purchase mainstream US-based life insurance contracts.
00:32:42.000 | So it is a really thorny world to work through so I want to stop on that topic there.
00:32:50.000 | So let me bring it back to life insurance planning for mere mortals and I want to just give you a very simple example of how these three things can go together for normal households.
00:33:05.000 | If we assume for a moment that you live in a state that gives you good strong credit or protection with these exemption planning ideas such as the state of Florida, you earn an income.
00:33:17.000 | You can do three basic things with that income.
00:33:20.000 | One, you can pay down and pay off your own personal residence and that personal residence, your homestead, will be protected from the claims of your creditors.
00:33:31.000 | Two, you can fund retirement accounts, maximize your 401k contributions, maximize your Roth IRA contributions and if you want to participate in other accounts like an educational savings account, 529 accounts, those additionally have their own asset protections.
00:33:46.000 | But maximize your contributions to those accounts and those accounts give you asset protection.
00:33:52.000 | Number three, you can purchase a life insurance policy, especially a life insurance policy that accumulates cash value and that gives you asset protection.
00:34:02.000 | Now think about three different things of how this can benefit just an average family.
00:34:07.000 | One, you have exposure to real estate. So you can benefit from the appreciation of the house that you live in and you can benefit from the fact that that appreciation is very tax efficient and that appreciation is protected from the claims of creditors.
00:34:25.000 | So you can live in a house and if you can purchase carefully, buy carefully, try to get yourself a deal, if that house appreciates in value over time, then that appreciation will be protected from the claims of your creditors because it's your homestead.
00:34:40.000 | It's also very tax efficient because if you sell that house and you qualify under the section 121, the two years out of five, then all of the appreciation up to $250,000 for a filing single or $500,000 for a married couple filing jointly, all that appreciation is completely tax free.
00:35:04.000 | There's no income tax, there's no capital gains tax, there's no employment tax, it's completely tax free.
00:35:11.000 | And so you have tremendous asset protection mixed with tremendous tax efficiency.
00:35:17.000 | What about your retirement accounts?
00:35:19.000 | If you maximize the contributions to your retirement accounts, you get excellent tax benefits, you get a deduction on things like your 401k contributions or your IRA contributions.
00:35:30.000 | And as we've talked about previously, that deduction, even if you wind up making an early distribution from the account prior to age 59 and a half, that deduction is extremely, it's tax efficient.
00:35:41.000 | You should do that.
00:35:42.000 | And you get creditor protection mixed with the fact that you have broad investment opportunities.
00:35:49.000 | You can, most 401ks have pretty good investment choices.
00:35:52.000 | You can invest that account all in stocks, get exposure to a good, strong, aggressive investment policy.
00:35:58.000 | And you get, so you get high tax efficiency and you get high, good possible returns, good investment options.
00:36:07.000 | So you have exposure to real estate and you have exposure to stocks. You've got good tax efficiency on both of those things.
00:36:13.000 | If you couple that with something like a Roth IRA contribution and you and your spouse make contributions every year, you put $5,000 into the Roth IRA.
00:36:21.000 | You have, if your state protects Roth IRAs as from the claims of creditors, you have great creditor protection.
00:36:28.000 | And if you leave that money in cash, you have, you can use that as part of your emergency funds, your savings.
00:36:36.000 | Or if you want to go ahead and invest it, you can invest it.
00:36:39.000 | But remember, you could always take out of a Roth IRA, your annual contributions without any tax penalties.
00:36:45.000 | So if you put $5,000 in for every year for the next 10 years, and then you need $50,000 from something, you could just take a $50,000 distribution out of the Roth IRA.
00:36:54.000 | There'll be no tax paid on that distribution and you can go and use it for something that you need.
00:37:00.000 | Now, add to that a life insurance contract, just a traditional whole life insurance company.
00:37:06.000 | Choose a traditional contract, a strong contract.
00:37:09.000 | We don't need to get into the difficult world of a universal life insurance contract and making sure it stays healthy.
00:37:13.000 | Just a traditional whole life insurance contract with a good well-run company, a good mutual company, a New York Life, a Mass Mutual, a Northwestern Mutual.
00:37:22.000 | One of those just old, boring companies.
00:37:25.000 | Keep that contract invested in their general account.
00:37:28.000 | You have decent returns.
00:37:30.000 | Hopefully, your stocks are going to do better, but decent returns.
00:37:33.000 | But now you have that contract that's protected from the claims of creditors.
00:37:37.000 | And because it's a life insurance policy that you can take policy loans out against with no tax consequences,
00:37:43.000 | you can have a very, very efficient and decent asset that you own.
00:37:48.000 | So you get good asset protection and you get decent investment performance, decent growth on the money,
00:37:55.000 | certainly more than you would expect in your savings account.
00:37:57.000 | And you get the benefit of having a big fat life insurance death benefit for your beneficiaries.
00:38:02.000 | Now, take those three things.
00:38:04.000 | All three of those things are low-hanging fruit.
00:38:07.000 | They are tax efficient and they are protected from the claims of creditors.
00:38:14.000 | Add to that the extensive work that I've done to share with you ideas on credit cards.
00:38:20.000 | So make sure that you have a good credit card portfolio.
00:38:23.000 | Now, think about how this can be used.
00:38:25.000 | First, if everything's going well, the money just continues to grow and it's protected from the creditors,
00:38:32.000 | but you just continue to grow and you get decent investment returns, good investments in your 401(k), your Roth IRA.
00:38:37.000 | Hopefully, your house is a good investment for you.
00:38:40.000 | Hopefully, you choose life insurance contracts well that are good investments.
00:38:43.000 | Everything goes great.
00:38:44.000 | But if everything goes badly, then all of your assets are protected from creditors.
00:38:54.000 | They should be protected from market downturns, probably diversified, etc.
00:38:58.000 | So if the stock market goes down, you have money that you could access in your house.
00:39:02.000 | You have money that you could access in your life insurance contract.
00:39:05.000 | If you're choosing a traditional whole life insurance contract, your account values never go down.
00:39:09.000 | That's one of the big benefits there.
00:39:11.000 | If the real estate market goes down, you could access money from your stock accounts or your life insurance contract.
00:39:16.000 | If real estate and stocks do go down, you could access money from your life insurance contract and your credit cards.
00:39:21.000 | The only way it's possible for life insurance contract values of a traditional whole life insurance contract to go down is if the company goes out of business.
00:39:30.000 | In that case, they're taken over by the guaranteed corporation that life insurance companies subscribe to.
00:39:37.000 | So that's your basic, your ultimate safe haven, your ultimate safe asset.
00:39:41.000 | If you use a flexible system like this and you pair that with saving physical cash, making sure that you have physical cash on hand,
00:39:50.000 | there's not a lot of reason for you to keep extensive amounts of money in bank accounts.
00:39:55.000 | There's not a lot of reason for you to keep extensive amounts of money in a money market account that's exposed to the claims of creditors or bank accounts that are exposed to the claims of creditors.
00:40:03.000 | Keep some money in physical cash so you get the benefits of that, and then keep credit card lines of credit available to you that are unsecured lines of credit that you could use in an emergency situation.
00:40:13.000 | And then you have the choice at that point in time to take distributions from the life insurance contract or take a loan against life insurance contract to pay off the credit cards if you need to.
00:40:22.000 | Or you have the opportunity to take distributions from your retirement accounts and pay off the credit cards if you need to or replenish your cash supply.
00:40:29.000 | Or you have the opportunity to refinance the house and take money from that to use that to pay off your credit cards and/or to replenish your cash supplies.
00:40:38.000 | So I hope the simplicity and the elegance and yet the strength of that plan comes through in just that short description.
00:40:46.000 | By understanding these exemptions, normal people can protect their assets from the claims of creditors and simultaneously get extremely tax efficient and good investment outcomes just by understanding these exemptions.
00:41:02.000 | You don't need to go and set up an offshore trust.
00:41:06.000 | You don't need that at this level.
00:41:08.000 | All you need is those three basic tools.
00:41:12.000 | I'm sorry if your state doesn't care very much about protecting your assets and giving you financial situations.
00:41:20.000 | That is hard because there are states just they just stink.
00:41:23.000 | You should consider moving if this is important to you.
00:41:26.000 | Or you will have to spend money and pursue some other strategies that we'll talk about and you'll need to be much more diligent about taking your assets offshore.
00:41:34.000 | Remember this. States should be competing for your business just like countries should be competing for your business.
00:41:39.000 | If your state doesn't offer good laws, then go and make sure that your assets are going to be governed under the jurisdiction of another place that does give you good laws.
00:41:47.000 | But if your state has decent laws around exemption planning, you can really put some cool stuff together in the way that I have just described to you.
00:41:55.000 | You don't need an attorney. You don't need any, you know, a lot of money.
00:41:58.000 | You don't need to hire expensive financial advisors.
00:42:01.000 | You can do it even if you're a mere mortal and you can get very strong protection.
00:42:07.000 | Those three tools work beautifully together and give you wonderful results.
00:42:13.000 | So I hope that helps to pique your interest a little bit on life insurance.
00:42:17.000 | It's not the only exemption, but I just wanted to put that together because those three put together are really powerful and they are available to you.
00:42:25.000 | They really are. As I go, I remind you to that a component of that was my credit card course.
00:42:31.000 | You should go to radicalpersonalfinance.com/creditcardcourse and purchase my credit card course if you haven't already, because part of that plan is important for you to understand in advance how to set that up and how to use your credit cards and how to set them up so that they're available to you in a time that you need it.
00:42:47.000 | I don't have a problem. I think for most people, if you ask them about what their emergency fund is, their answer as to what their emergency fund is, is usually a credit card.
00:42:56.000 | That's only a problem if you don't have something to pay off the credit card when the bill comes due.
00:43:03.000 | And most people don't have something to pay off the credit card when the bill comes due.
00:43:07.000 | But credit cards are one of your best tools in the situation that I described because they can solve your problems because they allow you to buy the things that you need to buy.
00:43:18.000 | And they give you time to take the distribution from a life insurance contract.
00:43:23.000 | They give you time to take some money out of your Roth IRA to pay those bills off.
00:43:27.000 | And the cool thing about it is if you follow my advice in the credit card course and you set it up to where you can borrow money at 0%, then you never have to run the risk of even touching those assets.
00:43:38.000 | So if you have an emergency, you lose your job, and you have your cash, but you recognize, "I have a tremendous borrowing potential in my credit cards. I've set it up. I've got $100,000 available to me.
00:43:48.000 | It'll probably take me a couple of months to get a new job. Our household expenses are $7,000, but we're going to tighten our belts in, so we're going to be $5,000 a month."
00:43:56.000 | And you just start putting that $5,000 a month onto your credit cards.
00:44:00.000 | You take a cash distribution, an ATM distribution to pay your rent.
00:44:07.000 | You put some money in your bank account to pay your mortgage payment if that's necessary.
00:44:13.000 | You swipe the credit card to pay your bills.
00:44:16.000 | And so you start to accumulate those credit card balances.
00:44:19.000 | Now, you have massive amounts of credit available to you, so you can easily put $10,000, $15,000 on your credit cards without it causing you any problems at all.
00:44:28.000 | Now, three months in, you get a job.
00:44:30.000 | All that credit cards, you've refinanced it onto a 0% credit card.
00:44:33.000 | You're paying no interest.
00:44:34.000 | You're not paying $100 or $200 here and there in transfer fees or inception fees, but you just apply for a new 0% on purchase of cards.
00:44:45.000 | Very, very efficient.
00:44:46.000 | And you have all the money sitting behind those creditor-protected accounts.
00:44:51.000 | You have all that money sitting there as a backup in case you need to pay off the credit cards.
00:44:56.000 | You do go ahead and get a new job.
00:44:58.000 | You're in a situation where now you can just pay those credit cards back.
00:45:01.000 | But if something else bad happens, you're out of work for six months instead of three months, you're out of work for a year instead of six months, and all of a sudden your spouse gets cancer, well, you keep on going.
00:45:13.000 | But you keep all of that money that we talked about safe.
00:45:16.000 | Keep things going for as long as possible.
00:45:19.000 | But in a worst-case scenario, you have to declare bankruptcy.
00:45:23.000 | You're still protected because you put the tools in place.
00:45:26.000 | You can only do that if you have all those tools set up in advance.
00:45:30.000 | You can't do it when you need it.
00:45:32.000 | Because now when you go to apply for a credit card when you need it and they say, "What's your income?"
00:45:36.000 | You say, "I don't have an income."
00:45:38.000 | Or you have to lie to them.
00:45:40.000 | So do it before you need it.
00:45:42.000 | Report your income when it's high.
00:45:44.000 | Get those amounts available.
00:45:46.000 | Get those cards lined up or other--and there's so many situations I could go through.
00:45:50.000 | So I'm going to quit there.
00:45:51.000 | My ad is done.
00:45:52.000 | Go to RadicalPersonalFinance.com/CreditCardCourse.
00:45:54.000 | Hope you enjoyed the show, and I'll be back with you soon.