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Tax Reduction Tools for Producers
Many people are exhausted after tax season. They’ve been busy tracking down receipts, filing paperwork and meeting deadlines. Many just want a break from numbers for a while.
But it’s an agent’s job to steer these weary taxpayers in the right direction. Make the aftermath of Tax Day (April 17) an opportunity to help your customers prepare for Uncle Sam’s inevitable visit next year.
The best way to do that is by touting the tax benefits of annuities and other similar insurance and retirement savings products that can shield their income from taxes.
Tax-Deferments: IRAs and Other Retirement-Savings Plans
Offering retirement plans that can also act as tax shelters will score major points with consumers still raw from tax time.
Some workplaces already offer tax-deferred retirement savings plans, such as 401(k)s and 403(b)s. But, sometimes, these opportunities do not kick in until after a certain period of employment, or they may involve certain limitations and restrictions.
Regardless, hard-working individuals should be taking advantage of all available opportunities to set aside a maximum amount of savings now without the IRS taking its initial cut.
IRAs are a good investment vehicle to fulfill this purpose.
Your clients should be informed, though, that they will eventually have to pay the deferred taxes on their savings stashed away in an IRA.
Although, if they are not prematurely pulling cash from the intended retirement prize, they may be in a lower tax bracket by the time they’ve retired. This means that what they end up paying in taxes on the IRA funds at a later date may be less than what they would’ve paid on the earned income during their working years.
Additionally, taxes are paid only on the amounts withdrawn, while the remaining money in the IRA continues to accrue unburdened by a tax.
Annuities
Money invested in an annuity also accrues tax-deferred. And unlike an IRA, there is no yearly cap on contributions.
That makes those closer to retirement age target customers for this type of investment; especially when they have some catching up to do on retirement planning.
It’s important to note, though, that once it’s time to dip into the annuity, not all income is untaxed.
Direct contributions by the consumer to the annuity are free from the sting of taxation. But earnings derived from the investment are taxed at the regular income-tax rate.
However, consumers opting for an annuity will have some flexibility in payouts.
And those wanting a steady cash flow that extends beyond their working days, and is (somewhat) tax-free, will likely find an annuity to be a desirable choice.
Life Insurance Policies
Life insurance is important. And certain types of life insurance policies may also qualify for certain tax benefits.
Qualifications for favorable tax treatment are dependent on IRS review.
IRS consideration is typically based on whether an insurance policy is meant to be insurance rather than an area of investment. In other words, life insurance is generally meant to replace income and not assets.
One benefit of a whole life insurance policy is that it can grow interest on the savings portion of the policy tax-free.
So long as your clients do not sell, surrender or withdraw from a policy with a cash value component, taxes are deferred. Otherwise, typically, the difference between what was paid in (insurance premium) and what is paid out (cash value), is taxable as income.
Also, the first $50,000 of any employer-paid contribution to a term life insurance policy does not need to be reported to the IRS as taxable income.
There are several other tax rules governing life insurance products, as well as various tax benefits in certain situations. Some are good, and some are not-so-good. None is necessarily bad. It just depends on what your client wants.
For instance, if family security is not needed, a whole life insurance policy is not the best option if your client is looking for a higher rate of return.
On the flip side, where family security is important, they may be able to save their loved ones from the burden of taxation on the death benefit received from a life insurance policy.
Annual Financial Review: Competitive Rates and Value-Based Products and Selling
Now that consumers made it through another tax season, they can finally take a deep breath.
And, depending on the hit they took, they may decide to shop around for some better deals for next year; especially with the recent news of corporate tax cuts.
That’s where you come in. Keeping rates competitive and fees minimal can work in your favor. You don’t want to consistently quote above-and-beyond fellow insurers.
Also, as your existing clients seek to cut costs by downsizing or eliminating their current coverage and/or investments, consider bundles or other incentives as an alternative.
But avoid selling strictly based on price. An emphasis on value is equally (if not more) important, including eventual and recurring tax benefits to the consumer.
This keeps your clients happy long-term, especially at tax time, which keeps your residual income streaming in year after year.
When Annuities Make Sense in Retirement
With life expectancies greater than ever, retirement could very likely be the longest phase of our client’s lives. Therefore, it is absolutely imperative for retirees to have a plan in place that;
• Provides the ability to spend and enjoy their money in retirement and
• Protects them from “living too long” and outliving their income.
Since retirement income planning is an extremely important and complicated process, this is something retirees should not attempt to do on their own. In addition to the risk of large investment losses and outliving their assets, there are other major challenges and considerations such as taxes, inflation, stock market and interest rate volatility, rising healthcare costs, taxes, and much more.
Why Consider an Annuity?
1. Growth Potential – Clearly every retiree wants their money to grow over time. The reason growth is so important is not only to accumulate more wealth, but also to fight against the aforementioned many “money predators’.’
Most retirees will tell you they prefer not to spend their principal, and would rather live off the income generated from their principal.
Therefore, in order for their income to keep pace with things like inflation, most annuities offer a well-diversified array of investment options to choose from which offer the potential to keep pace with one’s changing lifestyle and income needs over the long term.
2. Safety Provisions – By far, the two biggest financial fears for most retirees are: losing money and running out of money.
The fear of losing money and/or running out of money is not only understandable but also extremely critical. In fact, I firmly believe that “90% of a financial professional’s job is avoiding large losses”.
If your clients are taking income from their retirement assets and suffer significant losses (particularly in the early years of their retirement and income distribution) this can be extremely devastating and sometimes irreparable. In other words, the combination of large losses and withdrawing income can dramatically increase the probability of running out of money.
Therefore, annuities provide an alternative and solution, since most contain contractual guarantees that can insulate your clients against outliving their income, even if they suffer large investment losses.
3. Tax Efficiencies – I always jokingly say that my least favorite uncle is “Uncle Sam”. I have yet to meet someone who truly enjoys paying taxes. And of course, taxes come in all flavors; ordinary income tax, capital gains tax, taxes on dividends and interest, state taxes, estate taxes, and more.
John D. Rockefeller once said; ”The fastest way to accumulate wealth is to make sure you never pay tax on income you don’t use.” That may be one of the most brilliant statements I’ve heard aside from Einstein’s theory on compound numbers.
Annuities can offer two unique advantages with regards to taxes. First, while non qualified monies are accumulating inside an annuity, they are growing tax-deferred. Put another way, a client’s monies are not subject to tax consequences such as capital gains, dividends, and interest. Second, many annuities offer clients with non qualified monies the ability to provide tax-advantaged income when they are in the distribution stage.
Since we can’t beat the unbeatable opponent (the IRS), annuities provide our clients with options to minimize or avoid many forms of unnecessary taxation for non-qualified monies – where applicable and appropriate.
4. Income You Cannot Outlive – Given the exponential growth of the baby boomer generation, and the advancements made in modern medicine, life expectancies today are greater than ever. For example, when Social Security was first enacted in 1933, the average life expectancy for a male was approximately 59 years old…and yet Social Security didn’t start paying benefits until age 62!
Since males today have an average life expectancy of approximately 85 years old, it is easy to see why we are having such a tremendous battle with Social Security benefits. Many studies show that by the year 2030, more than 2/3 of the U.S. population will be above the age of 60.
So the message here is clear. Given the fact that today’s retirement plans are demanding a much longer period of income distribution, annuities are becoming increasingly popular alternatives.
5. Income Growth Potential – If a retiree needs their income to grow, their assets obviously need to grow at a rate that exceeds their withdrawal rate. Since many retirees have little to zero risk tolerance, annuities can provide a greater “peace of mind” to invest a portion of their monies in the stock market.
Back when interest rates were much higher, many retirees thought they could accomplish an adequate amount of retirement income by simply investing in bonds and CDs. However, most retirees found that these vehicles alone were simply not enough. After factoring in things like investment fees, inflation, and taxes, utilizing income-producing investments is usually solely capable of accomplishing income growth potential. Of course, this is especially true considering today’s historically low interest rates.
Given the many features, benefits, riders, and guarantees of an annuity, they can sometimes increase the willingness for a retiree to invest their retirement monies more aggressively than other investment options. Of course, this varies on a case-by-case basis. (continued on page 2)