Revenue Objectives Int'l., LLC.
Tax Objectives:
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We offer specialized knowledge on an extensive array of innovative products and services for employee retirement programs. These plans are designed to help recruit, reward, and retain valued employees - they can also provide valuable tax advantages and large contributions for business owners.
Qualified Retirement Plans
- 401 (k) / 403 (b) / 457 Plans
- Profit Sharing / Pension Plans
- SEP / SIMPLE / Solo 401(k) Plans
- Defined Benefit Plans
- 412 (i) Plans
- 419 Plans
Executive Compensation and Business Success Planning
- 401(k) overlay plans
- Bonus Plans
- Split Dollar Plans
- Cost Sharing Plans
- Deferred Compensation Plans
- Buy/ Sell Agreements
Tax Management Strategies:
ROI offers four universal life (UL) products with these key features:
1. Indexed Universal Life
2. Universal Life
3. Whole Life
Fixed Indexed Universal Life Insurance
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Success in business requires careful planning but there is one contingency that many businesses fail to plan for the death of a business owner or key employee. Whether your business is a sole proprietorship, a partnership, or a close corporation the death of a business owner or a key employee can be costly to your business and your family. Key Features of Universal Life Products:
Income tax-free death benefit – Choose either a level or increasing death benefit. The death benefit becomes payable when the insured dies and may be included in your estate for federal tax purposes.
Under current tax laws, there are generally no federal income taxes on life insurance death benefits paid to your beneficiaries. In addition, money that accumulates in a life insurance policy grows tax-deferred. That means you don't pay taxes on the growth on your policy until you take it out.
Premium payment flexibility –Always consult with a tax advisor before making changes in the amount or frequency of premium payments as there may be federal tax consequences. Choose the amount and frequency of your premium payments.
Access to cash accumulation and benefits – Because any earnings are tax-deferred until you withdraw them from the policy, your policy account values have the potential to accumulate faster. You receive a guaranteed minimum rate of interest on the policy’s cash value.
You choose if you want your policy to Provide easy access to death benefit if the insured should become terminally ill.
Guarantee that your policy stays in force for 20 or 30 years-
Pay a benefit for each month you are totally disabled beyond a specific waiting period.
Allow the policy's mature date be extended at no extra cost.*
Affordability –Premiums may be more economical than certain other life insurance products because UL is designed for the long term.
The Internal Revenue Code and Overfunding Life Insurance*:
To better grasp the powerful concept of “overfunding” a life insurance policy, one must clearly understand the IRS regulations that must be met to avoid unnecessary taxation. Some of the legislation affecting the strategy of overfunding indexed universal life includes Internal Revenue Code Section 7702A, the Deficit Reduction Act of 1984 (DEFRA), and the Technical and Miscellaneous Revenue Act of 1988 (TAMRA).
Internal Revenue Code Section 7702A describes the seven-pay test which requires that cumulative life insurance premiums over any seven year period cannot exceed the seven-pay premium limitation. The seven-pay premium limitation is the maximum cumulative gross premium payment over any seven year policy period. Seven-pay premiums are calculated based on the specific insurance company’s cost structure and the insured’s age, health class, sex and benefit amounts. If the policy is overfunded up to or within the seven-pay premium requirements, then it will meet the Internal Revenue Code and policy cash surrender values may be accessed at any time tax-free. If premiums exceed the seven-pay test maximum, the life insurance policy becomes a modified endowment contract (MEC) and may incur taxes on distributions of cash values.
The Technical and Miscellaneous Revenue Act of 1988 (TAMRA):
The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) first defined a modified endowment contract (MEC) as a life insurance policy that fails to meet the premium limitations established under the seven-pay test. Once a policy is classified as a MEC, any policy cash value distribution above the policy’s premium basis will trigger a taxable event which includes a 10% penalty tax on any gain received prior to the policy holder’s age 59 1/2. The policy’s premium basis is usually the sum of all premium payments less any dividends received. Policy distributions are any surrenders, withdrawals or policy loans. The intention of overfunding any universal life policy is to access cash values at some point in the future, so a MEC should be avoided at all costs with this strategy.
The Deficit Reduction Act of 1984 (DEFRA):
The Deficit Reduction Act of 1984, DEFRA, sets the minimum policy death benefit based on the sum of the premiums paid and the age and gender of the insured. Sometimes referred to as “the cash value corridor test” or “guideline premium test”, this requirement in effect limits the amount of premium payments for a given minimum face amount of insurance. Complying with DEFRA limitations is required for a policy to maintain its status as life insurance. If overfunding an indexed universal life policy is a strategy you are considering, DEFRA will in effect establish the minimum death benefit based on any maximum premium payment.
How to Overfund Indexed Universal Life Insurance:
Overfunding is a life insurance cash accumulation strategy that leverages the maximum allowable policy premiums with the smallest life insurance death benefit to achieve highest return on premium payments net of policy costs over a given time period. There are essentially 3 steps to determining the combination of maximum premiums and minimum death benefits necessary to selecting the most leveraged indexed universal life policy:
1. The first step is to determine your maximum premium commitment over your given time horizon. The premium amount selected should be an amount that you can consistently and easily make without interruption. Universal life insurance polices offer the capability for flexible premium payments, but to get the maximum leverage you must stick to your premium commitment for a given face amount of insurance.
2. Secondly, you must determine the minimum insurance face amount for the DEFRA commitment and age and gender. The insurance company’s sales illustration will provide the actual premium amount limits that meet the DEFRA minimum requirements.
3. Finally, determine the maximum premiums allowable under Internal Revenue Code 7702A and the TAMRA seven-pay premium limitation. As discussed above, as long as the total premiums or any seven year period are equal or less than the maximum allowable premium for the seven-pay test, cash surrender values may be accessed ay any time tax-free.
Once each of the IRS regulations above are met, the maximum premium allowable for the minimum death benefit is defined and the equity indexed universal life policy can be constructed with the optimum policy premium for the overfunding strategy. By choosing the overfunding approach, a policy holder can take complete advantage of all tax advantages of the life insurance policy and with reasonable index interest credits accumulate a significant cash value that may be access in retirement tax-free.
Overfunding a universal life insurance policy is a long term strategy!
Because of the insurance costs and expenses associated with buying an equity indexed universal life policy and the likely fluctuations in indexed interest credits, the time horizon for growing and accessing cash values should be at least ten years or longer. It will take some time for the leveraging effect to reduce the costs of insurance and thereby increase the net rate of return on policy premiums. Keep in mind, policy costs are a necessary evil to maximize tax advantages and the bottom line is return over time on your premium payments.
* The above tax information is for information purposes only and is provided to explain the basic tax treatment of life insurance based on the Internal Revenue Code. Any individual or entity considering any life insurance policy should consult with their own independent advisor that understands their particular tax circumstances. This information is not intended to be tax or legal advice.
Not Legal/Accounting Advice
The information presented on this Web site is not to be construed as legal advice. Legal advice must be tailored to the specific circumstances of each case. Every effort has been made to assure that this information is up-to-date as of the date of publication. It is not intended to be a full and exhaustive explanation of the law in any area. This information is not intended as legal advice and may not be used as legal advice. It should not be used to replace the advice of your own legal counsel.