Life, Death, Taxes and Insurance

Chidem Kurdas

In this world nothing is certain but death and taxes, to quote Benjamin Franklin.  As politicians scrounge for more money, it is near-certain that taxes will rise for those with high incomes.

When the 2001 and 2003 tax cuts expire at the end of this year, there is a good chance Congress will not extend them, says tax specialist Sidney Kess. The top individual rate will most likely increase from 35% to 39.6% and the capital gain rate will likely rise from 15% to 20%, he said at a June 22nd briefing at the New York State Society of CPAs.

Then there are the extra payroll taxes on both wages and investment income for couples making more than $250,000, imposed to pay for the new medical entitlement bill.  And there is the matter of estate taxes.

Plan for higher income and possibly capital gains taxes on higher-income taxpayers, says Mr. Kess. What are the options for reducing the damage?

Investing through life insurance is one. Higher tax rates may make people more aware of the under-recognized virtues of private placement life insurance, argues William Dreher of Compensation Strategies Inc. The tax advantage of wrapping a portfolio of investments in a life insurance policy is substantial and will expand as tax rates on all sources of income almost certainly increase.

To be considered life insurance by the Internal Revenue Service, the wrapped investments have to be in insurance-dedicated funds. Mr. Dreher, who keeps a database of insurance-dedicated funds, says a wide array of funds, with track records that compare favorably with taxable investments, are available on life insurance platforms.

Moreover, he points out that a policy can fund a stream of tax-free retirement income and the cash value of a policy can be used as collateral for borrowing to finance other investments.

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