Establishing significant liquid cash reserves is the 3rd step of the 4×4 Financial Plan and, frankly, it could easily have been the 1st step as it is so critical to the success of your achieving and maintaining your Financial Independence. Why? We need cash reserves for two reasons:
- When Things Go Bad
- When Opportunities Present Themselves
We’ve published a complete article on this concept which you can find by selecting the link below:
In the article mentioned about we addressed a unique and powerful way to utilize a CALI (Cash Accumulation Life Insurance) contract to provide us with cash reserves in a safe, liquid and tax-advantaged vehicle. While this is an outstanding strategy for most people at any age, it will generally provide more benefits to those who are younger.
As we age we begin to understand that our healthcare issues become more frequent and the costs to cover these issues become more expensive. To address these potentially devastating costs many seniors purchase long-term care insurance. Traditional long-term care polices provide a powerful way to leverage one’s money to provide tax-free long-term health care benefits. However, there are 3 significant downside risks to this strategy.
- You may never need the benefits (aka a waste of your money)
- The insurance carrier could increase the costs of premiums
- The insurance carrier could reduce the benefits provided
This article is not about long-term care insurance per se, however, it is about how to utilize a unique and specific type of long-term care insurance program to not only provide long-term care benefits, but to also provide a solid cash-reserve fund AND it will eliminate the 3 downside risks associated with traditional long-term care insurance products as well.
Asset-Based Long-Term Care Insurance
Asset-Based Long-Term Care Insurance (AB-LTCI) has been around for more than a decade yet most consumers and few insurance agents know about this product. AB-LTCI can provide a number of extremely valuable benefits and, whereas traditional long-term care insurance suffers from significant downside risks, AB-LTCI policies do not.
- If you never use the benefits, and want your money back, you can have it.
- If you never use the benefits, and you die, your heirs receive them income tax-free
- The insurance carrier cannot change the cost of the premiums or reduce your benefits
Think about this. If you need it, it’s there for you. If you don’t need it, get your money back or transfer the benefits to someone else upon your death and, there is never an increase in premiums or a reduction in benefits. What could be better, right? Well, it actually can be better because the premiums you’ve paid into this policy can be accessed whenever you want them or need them, even if you have no long-term care issues whatsoever!
Although these AB-LTCI policies are designed to provide long-term care benefit while you are living, actually, they are life insurance contracts. As such, the accumulated cash values inside these policies can be accessed at any time via loans at very low fixed interest rates. They are safe (guaranteed) and liquid as you have access to your money when you need it. Having access to your cash, when you want or need it, via loans you can choose to repay or not,….doesn’t this sound a lot like a great cash-reserve account?
Super-size your 401k/IRA or Other Retirement Plan Assets with AB-LTCI
Another variation on the use of these AB-LTCI insurance contracts is when you fund them with money that is currently inside your 401k, IRA or virtually any other type of tax-deferred retirement accounts that will allow for rollover transfers. While this is not a good substitute for a cash-reserve account, this is an amazing strategy to provide you with tax-free long-term care benefits from your, ultimately, taxable retirement accounts.
In this situation we implement a 2-step process; a tax-free rollover and a taxable transfer. For example, let’s assume you would like to fund an AB-LTCI contract with $100,000 that is currently inside a retirement account. Let’s make that retirement account an IRA for simplicity. For you to end up with $100,000 to fund your AB-LTCI contract you may need to withdraw $130,000 from your IRA to cover the taxes due.
Instead of withdrawing all that cash at one time we implement a tax-free rollover from your IRA into a specifically designed annuity. This annuity is designed to automatically fund your AB-LTCI policy. The annuity itself is safe with no risk of your principle and it provides a guaranteed rate of interest rate as well. The annuity is linked to your AB-LTCI policy so that each year a small distribution from the annuity will be transferred into your AB-LTCI policy. Those small transfer are taxable, however, because they are much smaller amounts than the $130,000 lump-sum withdrawal they are generally taxed at a much lower rate.
Then beauty of this strategy, in addition to the tremendous benefits you already receive from the AB-LTCI contract it’s funding, is that you IMMEDIATELY have access to 100% tax-free long-term care benefits should you need them. In addition, should you die, your heirs will receive a large “bonus” of tax-free income from the death benefit. Typically, the immediate tax-free increase in the value of your otherwise taxable IRA is 50-100% or more depending on your age and your health. That’s right, you can DOUBLE the value of your money overnight using this strategy with no risk.
The 401(k) Loan Option
What if you don’t have an IRA and you have a 401(k) instead. However, your 401(k) does not allow for rollover transfers? Hopefully, your 401(k) will allow for loans. Typically, the loan provisions from a 401(k) allow you to borrow 50% of the value of your account up to $50,000. Using this strategy, you would borrow $50,000 from your 401(k) and use it purchase your AB-LTCI contract. In this example the AB-LTCI contract is a single-premium payment meaning, once paid, you’re done. There are no further payments due.
The 401(k) loan is also a non-taxable event. Yet, you receive the immediately bonus on your money of 50-100% and you also have immediate access to 100% of the AB-LTCI benefits should you need them. Then, your repay your 401(k) loan via payroll deductions, typically over 5 years. As an added bonus, the interest you pay on your 401(k) loan is actually paid to your favorite person in the world, you!
Creating a cash-reserve account is not only useful, it is essential when creating a sound financial plan. Using an AB-LTCI contract is a powerful way to not only fund a cash-reserve account, but to provide you with tax-free long-term care and death benefits and potentially doubling the value of your money overnight, risk free.
For more information about AB-LTCI or any questions you may have about retirement planning, asset protection, estate planning or tax planning please email us at [email protected] and/or please, leave your comment below.