Many an adviso
r or agent has asked me about tax deductibility of premiums when in fact that could change some of the best attributes of the 4 way tax shelter or the Super Roth for the higher compensated person. That is right other than the insurance costs which over a long period of time could be as low as 1% over the life time period. After tax money used for premiums grow tax deferred, allows under the roof of the insurance tax free switches in the different accounts, tax deferred growth, tax free income, and of course the death benefit is federal income tax free.
When one deducts the premium, it could reverse all these tax free benefits. As a wise man once asked would you rather pay taxes on the seed or the harvest. This means would you rather pay tax on a small amount the seed, or would you like to pay taxes on the har
vest which could be more than 100 X the premium, THE DEATH BENEFIT.
There ARE certain ways that could make the premium tax deductible and one may not have adverse tax consequences on the benefits. One could put it in their qualified plan (401k profit sharing, Keogh and defined benefit). In a buy sell where there is an owner that enters an agreement with one fop the key employee(s) where the owner deducts it as a bonus (Section 162 of the IRS code). In addition, that bonus could have significant restrictions where that same key person could only use it for buy sell purposes. This plan is called a REBA a restricted bonus agreement or a GEBA plan.
The next newsletter may expand on this and how to use this concept to solve business owner’s liquidity if catastrophe or retirement happens.
