What is a Section 79 Plan? Simply put, it is a tax plan where small business owners are allowed to take a 20 percent to 40 percent deduction through their business to purchase an individually owned cash-value life (CLV) insurance policy.
If you just read the above paragraph, you'd think that a Section 79 Plan is the nirvana of plans (a tax deductible way to buy CVL insurance). However, when you break down the math and the sales pitch, you'll know why I despise these plans.
Group underwriting for businesses with fewer than 10 employees
For businesses with fewer than 10 employees, the law prohibits full medical underwriting of the policies that are issued ("group" underwriting is required, which is much more risky for an insurance company). Amazingly, one of the insurance companies offering these plans doesn't have the ability to issue non-medically underwritten policies. This is laughable and pathetic all at the same time.
Why are the finances of Section 79 Plans so marginal? Section 79 Plans are up to 40 percent deductible because the life insurance policy purchased is a crummy policy by design. That's right, by design, the policy is a terrible cash accumulator. The better the policy, the less the deduction. A good policy, Retirement Life(TM), for example, would receive only a 5 percent to 8 percent deduction through the plan.
Converting the crummy policy after year five
Section 79 Plans are funded into a crummy cash accumulating policy for five years. Then, the client is typically shown how the policy can be converted to a variable life policy or EIUL policy earning 9 percent annually going forward. Besides that, this is not a conservative example, the numbers are financially marginal even assuming a 9 percent rate of return.
Why are so many agents trying to sell Section 79 Plans? This is what really moved me to write this article? Agents are pitching Section 79 Plans to clients for two simple reasons: 1) Many small business clients will buy any plan that is "deductible" because they so despise p
What is a Section 79 Plan? Simply put, it is a tax plan where small business owners are allowed to take a 20 percent to 40 percent deduction through their business to purchase an individually owned cash-value life (CLV) insurance policy.
ReplyDeleteIf you just read the above paragraph, you'd think that a Section 79 Plan is the nirvana of plans (a tax deductible way to buy CVL insurance). However, when you break down the math and the sales pitch, you'll know why I despise these plans.
Group underwriting for businesses with fewer than 10 employees
For businesses with fewer than 10 employees, the law prohibits full medical underwriting of the policies that are issued ("group" underwriting is required, which is much more risky for an insurance company). Amazingly, one of the insurance companies offering these plans doesn't have the ability to issue non-medically underwritten policies. This is laughable and pathetic all at the same time.
Why are the finances of Section 79 Plans so marginal? Section 79 Plans are up to 40 percent deductible because the life insurance policy purchased is a crummy policy by design. That's right, by design, the policy is a terrible cash accumulator. The better the policy, the less the deduction. A good policy, Retirement Life(TM), for example, would receive only a 5 percent to 8 percent deduction through the plan.
Converting the crummy policy after year five
Section 79 Plans are funded into a crummy cash accumulating policy for five years. Then, the client is typically shown how the policy can be converted to a variable life policy or EIUL policy earning 9 percent annually going forward. Besides that, this is not a conservative example, the numbers are financially marginal even assuming a 9 percent rate of return.
Why are so many agents trying to sell Section 79 Plans? This is what really moved me to write this article? Agents are pitching Section 79 Plans to clients for two simple reasons: 1) Many small business clients will buy any plan that is "deductible" because they so despise p