That is the reason that seniors have a lot of their money in “secure” instruments like CDs, Money Market accounts, savings accounts, etc. And on some occasions, they may also put some of their money in things like bonds. The problem is that all these instruments provide a very low rate of return, and when it comes to bonds, they may be able to get a 2% rate of return, but they lose the liquidity aspect.
If seniors would like to open a 702j account, they would have to wait 6+ years to break even, and most people over 60 and 70 don’t have that many years to wait.
So that is why there is a different type of 702j account that seniors can open; some people called it the “Senior’s Account.” It is also using a participant life insurance, but it will be structured differently.
This new structure will allow seniors to make lump-sum contributions instead of annual/monthly contributions. We will be using the “Single Premium” participant whole life insurance. Now, there are some pros and cons.
Pros: Seniors will be able to break even in less than 2 years (compared to 6+ years with a normal 702j account). It will give seniors an immediate access to more than 95% of their funds in year 1. There are no penalties to take money out (unlike CDs). It will give them a much better rate of return than a CD, Money Market account, etc. They will have a nice death benefit on the side that will pay tax-free to their beneficiaries. The cash value, or money inside the policy, will grow tax-deferred.
Cons: Not everybody qualifies. You need to be in very good health in order to qualify. The cash value growth won’t be tax-free anymore – just tax-deferred. You need to commit for at least 2 years, otherwise you may end up losing some money; remember, it takes 2 (or less) years to break even.
Example for a 65 year old male in good health (non-smoker):
He has $200,000 sitting in a CD, with an interest rate of 1%. He gets a 1099 and needs to pay taxes every year, and he will get penalized if he needs to use his own money before the maturity date.
So he decides to put his money in a “single premium participant life insurance” policy. These would be the results:
A Senior’s Account is a single lump-sum contribution that people over the age of 59.5 can open and access without penalties.
In my experience, seniors are normally tired of all the speculation, volatility, risk, and stress that the stock market brings. So they are more concerned about having their money safe and liquid than pursuing high rates of return.
In order for this “Senior’s Account” to work, the person needs to make a decent lump-sum contribution. I normally recommend at least $100,000, but depending on the age of the person, the system could work with $50,000 or so.
The IRS will penalize you if you withdraw funds before the age of 59.5, which is the reason we don’t recommend this account for people under 59.
FIRST YEAR: He will have access to $194,625. What happened to the difference? This is the same as the normal 702j account: The Life Insurance Company is taking a big risk – if that person dies, they need to pay $342,745 in Death Benefit (permanent – not term). This is where part of the difference went, and, of course, part of the difference is the commission that the agent will make.
SECOND YEAR: The cash value will grow to $202,445. How much was the client’s single premium (or lump-sum)? $200,000. This person – in less than 2 years – recaptured all premiums paid, but he still has a death benefit of $350,606. We could say that the death benefit didn’t cost him anything at this point.
THIRD YEAR: The cash value keeps growing to $210,514; and the death benefit keeps growing to $355,599.
If this person would have left his money in a CD for 5 years, he would have a total of $210,202 available. But by using this strategy, he will have $227,369 and a death benefit of $365,815.
The money is completely secure, with no risks, and completely liquid. And because we are using a Mutual Life Insurance company rated A+, history has shown that this person’s money will be in a safer place than any bank in the US.
It is the third year, and this person needs $30,000. His cash value is $210,914, so he can easily ask for a $30,000 withdrawal.
Do you remember that we said that the cash value will grow tax-deferred? So how much would he have to pay in taxes?
In this example, he will have to pay income taxes on $10,914 (profits), not on the $30,000 because the other $19,086 was part of his cost basis.
Now, he has 2 options. He can ask to get a loan from his policy, or he can ask for a withdrawal. Which option is better? If this person is planning to put that money back in the near future, it would be better to request a loan. Otherwise, a withdrawal would be the right way to go.