StackedLife - Authorized Infinite Banking

009 Tax Advantages of IBC
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The death benefit just scratches the surface
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John Perrings: Most people know that life insurance has a tax-free death benefit, but did you know that that's only just scratching the surface of the story around whole life and taxes. Today I'm gonna talk about the three big tax advantages of whole life insurance, as well as a few tax strategies that when combined with The Infinite Banking Concept, could massively accelerate everything you're already doing in your financial life.

This is Stacked Life, the podcast that teaches you everything you need to know about The Infinite Banking Concept, whole life insurance, and the strategies that make it all work.

And I'm John Perrings, an authorized Infinite Banking practitioner. I've implemented IBC for hundreds of my clients and educated thousands more with original content from my podcast, articles, and courses at StackedLife.com.

By the end of this episode, you'll understand one of the reasons why whole life insurance is considered a financial unicorn, especially when compared to typical financial products. Today we will cover a little overview of taxation and more typical financial instruments. [00:01:00] We'll talk about the three main tax advantages of whole life insurance, the difference between withdrawals and policy loans, and why it matters for taxes.

We'll talk about some tax strategies with IBC and some common misconceptions about taxes and whole life. So let's jump into it.

Whole life is a cash equivalent
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John Perrings: All right. The first thing to do is remind ourselves about whole life insurance and what kind of asset whole life insurance actually is. Whole life insurance is not an investment. It's a cash equivalent asset. And the reason this is important to kind of refresh on is so that we can correctly compare it to other types of assets with regards to tax.

Tax problems with other assets
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John Perrings: When we do that and we compare whole life insurance to other, you know, other assets, especially other cash and cash equivalents, we can start to see some pretty big differences unfold. Let's talk a little bit about taxation on bank interest. When you keep your money in a savings account or a CD, that interest is generally taxed as income.[00:02:00]

So what happens here is you put your money into those types of products and you'll start to see some compound growth, but you'll also see compound tax. So that's a challenge with some of these types of assets where you get safety and liquidity, but you get a compounding tax experience going along with those. Then you have capital gains tax.

These are just gonna be anything you know from your. Brokerage account to real estate and you know, without jumping through a lot of hoops, this can create some inefficiencies when moving money from one asset to another. And then we have one of my favorites, which is tax deferral in the form of

assets that keep it largely out of your control. As you know, I'm not a huge fan of things like qualified plans like your 401K, IRA, 529's, all that stuff. And the reason for that is when you pay the tax is largely out of your control, and especially with some of these long dated retirement plan, [00:03:00] retirement account type of assets like a 401k or IRA, and all we really have to do is ask ourselves, are we deferring tax today during a period when it's historically low taxes to a period where most of us would agree that we.

Don't think taxes are gonna be lower in the future. So are we deferring tax today when we could be paying lower tax into a time where it's gonna be higher? And the only way to avoid that is to then try to structure your retirement or the, or your later years in life to live on less income, which I don't consider a very, attractive plan to live the, my later years in life. And then we have things like municipal bonds. These are pretty popular where you do get some tax free interest. You get some safety because it's a bond. And there's a catch with these though. Muni bonds, while the income is tax free, it actually adds to your adjusted gross income, which can [00:04:00] cause some of your social security income to become taxable.

There's always a catch with some of the tax treatment around some of these products. And then we have like a Roth IRA, which some consider the "gold standard" of tax efficiency. But

there again, while you don't necessarily have any handcuffs around the tax treatment when you distribute assets, you have some significant restraints with how much you can put into it, if you can put any into a ROTH at all.

Whole life is taxed kind of like a ROTH
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John Perrings: And I am bringing all this up again to help draw some comparisons and show you that whole life insurance really has some pretty incredible tax treatment.

One of the best treatments of whole life from a tax perspective is that if personally owned, it doesn't even need to be listed on a tax return at all. There's literally no place to put it in your tax return. So that's a pretty solid feature right there.

Whole life insurance, just to easily wrap our heads around it. It's kind of like a Roth IRA from a tax perspective, but for very, very different reasons. Again, the biggest one being you [00:05:00] don't even have to list whole life insurance on a tax return, but for personal use, after tax money is used to pay premiums.

And then the cash value can be accessed tax free from that point forward. And the death benefit is also income tax free. So after tax money goes into the, to the policy and then you can get to a tax free after that. I want to be super clear.

Whole life insurance does not touch the qualified plan area at all. But again, I'm just using this comparison to help you quickly kind of get your head around like how the, how it can be taxed from a macro perspective.

Okay, now let's get into the specifics of what that means. There are three primary advantages to whole life insurance from a tax perspective.

Number one, clarifying what I mean when I kind of compare it to a ROTH and you can get to a tax free. Technically cash value grows tax deferred, and I'll explain some of the ramifications to that. Does not grow tax free. It grows tax [00:06:00] deferred. However, it's easy to talk about cash value growing, tax free because you can get to it tax free, and that's through the use of policy loans.

So cash value grows tax deferred, but you can get to it tax free through the policy loan provision. So that's one and two. Number three is that the death benefit is paid income tax free, and I am emphasizing income tax free because it may not be estate tax free. So those are three advantages to whole life insurance itself.

One, the cash value grows tax deferred. Two, you can access cash value tax free through policy loans. And three, the death benefit is paid out income tax free.

Policy loans vs. "withdrawals"
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John Perrings: Now let's talk a little bit about policy loans versus withdrawals. And so this is gonna play into the tax conversation a little bit. The main way we talk about accessing cash value, tax free is through policy loans. And what you're doing with a policy loan is you're borrowing the [00:07:00] insurance company's money and the cash value of your policy is acting as the collateral for the loan.

Just like you would not be taxed on the amount received from a bank. When you borrow money from a bank for to buy a house for a mortgage, for example, you're also not taxed on the proceeds from a policy loan because it's a loan. In this scenario, you are borrowing against your cash value, not from it, and this is why it's tax free and this is why your cash value continues to grow while the policy loan is outstanding.

So all going back to The Infinite Banking Concept, one of the core principles of what we do with IBC. Now you can also "withdraw" some cash value on a tax-free basis. And I use quotes around "withdraw." Because what you're actually doing, I. Is not really a withdrawal. With whole life insurance,

it's actually what would be considered a surrender. Either a full or a partial [00:08:00] surrender of the whole life insurance policy itself. If you look at what cash value is, the technical name for cash value is actually called "cash surrender value" because this is the amount that the insurance company will pay you if you ever surrendered the policy.

When you do a surrender, you can do a full surrender where you surrender 100% of the death benefit, the policy goes away, and you get all the cash value that's available net of any outstanding policy loans and policy loan interest. Or you could do what's called a partial surrender where you do a partial reduction in the death benefit and you get some of the cash value from that policy.

When you do it this way. There's no policy loan there. You're actually partially surrendering the policy, which is a permanent decision by the way. When you surrender the policy or partially surrender the policy, you get that cash value and there's no loan obligation on that. You're just [00:09:00] receiving the cash value.

You don't have to pay any loan interest. A loan balance is not accruing if you don't pay it back. You just get that cash value, and that's that. But that death benefit can never be recovered in that same policy. If you ever wanted to get more death benefit again, you'd have to apply for a new policy and start a new policy to get that death benefit.

It's kind of a one-way decision.

When you do withdraw, you can withdraw up to your basis, which is the total amount of premium you've paid into the policy. You can withdraw up to your basis tax free because essentially what's happening is you're just getting the money that you put into it back. So you can withdraw all the way up to your full basis before having to pay any tax on the money that comes out from a withdrawal. Over and above your cost basis, meaning over and above the amount of total premium you've paid on the policy.

Then those withdrawals start to become taxable and they're taxed as [00:10:00] income.

Unique tax strategies
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John Perrings: Okay, so that's a pretty simple discussion. We've covered the some of the tax advantages of whole life insurance itself, but even more powerful than that are some of the tax strategies that become available to you when you own whole life insurance, when you have this guaranteed, permanent life insurance death benefit, a whole new world of opportunities opens up to you in the form of tax strategy.

And before I talk about this, I'm just gonna give a caveat. I'm not a, I'm not an accountant, I'm not a tax attorney, I'm not a tax advisor. So these are just some strategies that are available out there. It's pretty common knowledge, but this is not. To be considered advice of any kind, right? So here's a, here are a few examples.

A really easy one just comes from the retirement planning perspective where whole life insurance cash value can provide tax free retirement income, either through withdrawals or through policy loans, or through a combination of [00:11:00] the two. A common method that is talked about is to withdraw up to your basis and then borrow.

And what that means is since with withdrawals up to your basis are again, tax free, because that money is the money you already paid income tax on before you paid the premium. You withdraw up to your basis, and then once you hit your basis, you then switch over to policy loans with the intent of never paying the loans back.

And again, since it's a loan, you don't pay tax on it. The idea is you can run up a loan balance as long as the policy will support it, and then whatever's left over when you die just gets subtracted from the death benefit and your heirs get whatever's left over.

Now what's great to get into is it's even better than that. I mean, obviously it's great to get tax-free retirement income, but the guaranteed nature of whole life insurance creates a massive advantage in an overall retirement plan when you combine it with other retirement [00:12:00] assets like a retirement account.

You know, in its most simple form, the guaranteed whole life insurance cash value can be used as a volatility buffer that you can pull from when your retirement accounts are down from market losses. We know on average out of every 10 years, the markets are down 3 out of those 10 years. And what one of the big dangers is in retirement is when you're pulling money from a retirement account and you experience a loss from a down market, you get a little bit of a double whammy that's gonna hit you because your.

retirement account has lost money from the market being down. And then you withdraw on top of that and you have to liquidate more shares to get the retirement income you need. And it creates a scenario where your account can never bounce back even when the markets go back up. And this is called sequence of returns risk.

The earlier you get negative returns in the market, the higher the risk is that you could just completely run out of [00:13:00] money in your retirement accounts. So this volatility buffer strategy is where we can, when the markets are down and our retirement account is down for market losses, we just switch over to our guaranteed whole life insurance cash value to pull our retirement income for that year or the years that the markets are down.

And by doing so, this allows our retirement accounts to recover when the markets go back up and then we just switch back over to those retirement accounts to pull our income. And the result of this is because you. Your accounts can recover. You can actually significantly increase the distribution rates of the retirement accounts that you're pulling income from.

Another easy one to look at is just some basic estate planning. If you have enough money where you're going to owe estate taxes when you die, owning an income tax free whole life insurance death benefit, that's guaranteed and permanent. Is an incredibly powerful, [00:14:00] yet really easy way to prepare for those estate taxes.

You know, rather than liquidate other assets, the death benefit pays the estate tax for you, right? So it's kind of like, would you rather kill the goose that lays the golden eggs to pay the estate tax or just give up a couple of the eggs? Or if you're a "dairy farmer," do you want to have to sell an entire cow, or all your cows or just give up a little bit of the milk?

And that's the idea behind this. The crazy thing is the younger you buy this whole life insurance, the better it is. A lot of times what happens is, when people start thinking about estate planning, they're already in their sixties, seventies, maybe even eighties, and they're gonna go talk to their tax attorney and their tax attorney's gonna say, Hey, you should buy some life insurance to cover these estate taxes.

And there are some other more advanced planning techniques, but the, a lot of times it all revolves around having some life insurance where that death benefit can cover the estate tax. And by that time, assuming you can even qualify for life insurance, because of course [00:15:00] as we get older, the likelihood of us being in poor health goes up and the likelihood of being able to qualify for life insurance goes down.

Even if we can qualify for it. You're gonna be much older then, and the cost of insurance will have gone up significantly. Imagine if you had just thought about this 30 years prior and bought some whole life insurance when you're in your thirties, forties, or even fifties, and now you've not only

John Perrings: purchased life insurance at a time when the cost of insurance is lower. You've also got time working on your behalf where the death benefit can grow and grow and grow over time. So by the time you need it to pay that estate tax, it's grown to be a nice sizable death benefit for less premium dollars paid into it.

And then of course, you have the cash value all along the way where we can , implement The Infinite Banking Concept and buy other assets, which would just grow our estate even further. It's kind of a no brainer in my opinion. But, that's the idea where [00:16:00] having a permanent death benefit can pay for some of those estate taxes.

And the earlier you start, the better that strategy is.

Then another retirement strategy with major tax improvements. This one's a little more complex, and by the way, there are lots of strategies out there to, to use insurance to create some tax advantages in your life. I'm just naming a few just to give you an idea of what's possible out there.

But this one is a, it's kind of another retirement strategy. And that's called a charitable remainder trust. And in that scenario, what happens is, let's say you had a real estate property and you donated that property to a charitable organization. Well, if you donate that property, you wouldn't pay capital gains tax on that sale because you're donating it.

So the charity would actually be able to realize the full value of that property and then annuitize most of that value and create a guaranteed income stream for you [00:17:00] for as long as you live. And then what happens is because you donated that property, you actually get a tax offset so that if you liquidated another asset, say a retirement account, that you

owed taxes on, the donation would actually offset the tax due on that other asset. So what you're doing is you're massively increasing the amount of value that you get from one of your assets creating. A guaranteed income stream from the original property that you donated, and then where the death benefit comes into all this is the death benefit covers the value of that property that you donated so that your heirs are not "disinherited" from the value of that property.

Most kids don't want. A house anyway. They usually just want the value of the house. So the death benefit replaces the value of that house, and the end result is while you're still alive, you get to use and enjoy all more of the value that you've created through your life, during your retirement [00:18:00] years, and get to live a happier, more comfortable retirement, and your kids get to keep the value that you created through the death benefit replacement.

And then last, again, just tying back into The Infinite Banking Concept, policy loans give you a strategic advantage of investing without having to liquidate other assets and pay the tax on that in order to go out there and acquire other assets. So this just is a pretty simple one, especially if you're looking at The Infinite Banking Concept.

Common misconceptions about how whole life is taxed
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John Perrings: All right. As we start to wrap up here, let's just talk about a couple misconceptions about how whole life insurance is taxed. And one of the things that I think is super important to understand is whole life insurance is not a tax shelter. It's not a tax loophole. It's taxed exactly as it should be as insurance.

If you were to crash your car, you're not required to pay tax on the money that the insurance company sends you to replace or repair your car.

And it's the same thing with whole life insurance. [00:19:00] Insurance claims are paid to indemnify against a loss, and so that's all that's happening here. That's what insurance is, and this case, we're indemnifying a beneficiary against the loss of the insured's income. Or we're indemnifying against the spend down of other assets when we get into that retirement phase.

Another thing is that the death benefit may not be 100% tax free. It's easy to say that the death benefit is "tax free," but technically the death benefit is only _income_ tax free. If the estate is big enough, the death benefit could be included in that estate.

And depending on how you're structured, there are a lot of ways to create trust structures where this may not be the case, but if the death benefit is in the estate and that goes over the value of what's going to trigger an estate tax, an estate tax may be due.

Kind of an easy one I think most people know, but it's worth repeating, is that policy loans don't make everything tax free. It's easy to kind of get caught up [00:20:00] in the benefits of policy loans and getting some leverage on our cash value and having that tax deferred growth and getting access to it tax free, but

if you go out and you use a policy loan to buy an investment, you're gonna pay tax on that investment income or the gains on that investment.

And then lastly, I wanna say that it may or may not be possible to deduct policy loan interest. This is a kind of a common one, especially with real estate investors. And the one thing I will say on this is that be sure to work with a qualified tax advisor before making any assumptions on whether or not policy loan interest may or may not be deductible in your particular scenario.

Get my newsletter at Newsletter.StackedLife.com
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John Perrings: All right. I think this was a pretty short and sweet episode. I just wanted to cover a little bit of the tax advantages and tax strategies that are available when we buy whole life insurance and implement The Infinite Banking Concept. As always, if any of these ideas are resonating with you and you wanna find out how they could apply to you [00:21:00] specifically, in your life, head over to my website, StackedLife.com.

You can book a free 30 minute consultation with me right there, and we can talk about what's important to you.

Or if you're like, I was, and you just want to keep learning as much as possible before having to talk to anyone. I have a ton of resources at StackedLife.com, including free courses,

I have a paid course.

And then one thing I think you should do is get my newsletter at Newsletter.StackedLife.com,

where you'll get free weekly and exclusive financial education that's not available anywhere else in my ecosystem. Alright, thanks for listening. I'll see you on the next one.