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The Tax Prophet Newsletter   Issue # 73 May, 2009

REDUCE TAXES!
CHECK OUT THE TAX PROPHET'S Action Guides


In This Issue:
Introduction
Imploding Policies
Internal Loans
Action Steps
Conclusion


Is Your Life Insurance Policy Imploding?

Introduction

Taxpayers often use life insurance to fund potential estate tax liabilities, as well as provide for their families.

However, with certain policies (such as universal life, adjustable premium, variable life and variable universal life) your insurance company could be draining the cash value to keep it in force.

Imploding Policies

You may wrongly assume your policy is paid in full or generating sufficient income to pay premiums. Surprise! Policies in which premiums were based on investment results or interest rate levels could be targets for implosion.

The benchmark 10-year Treasury Note hovered in the 7-8% range in the early 1990's, when many policies, promising hefty returns, were purchased. Today, the rate is closer to 3.5%. Thus, policies that projected a 4%-6% rate of return could crumble in today's interest rate environment.

In addition, the stock market decline, coupled with low interest rates, creates a potential double-whammy that could trigger the collapse of many policies their owners thought were safe.


Internal Loans

You may be unaware that insurance companies borrow against the policy's cash value to pay shortfalls between the premium due and the earnings generated by the policy. Under some circumstances this borrowing could result in taxable income to you.


Action Steps

Compare your policy's current performance and cash value with the projections used when you purchased it.

If the cash value dropping, your policy could be disintegrating, in which case have your insurance agent run another projection using current investment assumptions.


Conclusion

If you are not paying the full premium on your life insurance policy, chances are your policy relies on internal growth to fund premium based on outdated financial assumptions.

With the combination of low interest rates and the decline in the stock market, the health of your policy could be at significant risk.




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All contents copyright 2009 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet is a registered trademark of Robert L. Sommers.