Calculating Taxable Income when Surrendering a Whole Life Insurance Policy Before Death

In general, whole life insurance involves overpaying ten times the cost of term insurance and placing that extra money into a separate account.

The State of California categorizes Whole, Universal, Variable, Indexed and several others under the category of Whole Life Insurance (as opposed to Term Life Insurance).

In order to determine the gain within a Whole Life Insurance policy, you must first calculate the cost basis.  The cost basis in most cases is just the total amount of premiums paid on the policy (see finance.zacks.com for more information).  In rare cases, there may be distributions in which case the distributions will reduce the cost basis.

Next, you determine the surrender value.  A common misconception is that a life insurance policy is worth the account value.  However, a more accurate estimation of value is today's value, which is the surrender value.

Gain = Surrender Value - Premiums

Compare this to a typical gain for any investment, such as a home:

Gain = Sale Price - Cost Basis

The Gain will be taxed under the IRS code 7702.  This gain is reported as ordinary income.  This is unfortunate, because most policies result in a loss and a capital loss would have the option to be offset with a capital gain.

Do Whole Life Insurance Loans Have to Be Paid Back?

Suppose you owned a home, fully paid off.  If someone said to you that you could take loans on the equity and never have to pay them back, what would you say?  What if they told you that you could last through retirement by taking these loans out on a yearly basis?

Let's take a look at this.  You could take loans on the equity, but once you did, it would reduce the amount of control you had.  If you ever wanted to get access to the remaining equity, you would have to sell your home and pay off the loans.

Not wanting to do this, you might continue to take loans out year after year.  However, if an emergency situation come up, where you became ill, you might be forced to sell the home to pay back the loans and get the equity.

If you were lucky, you might actually use the equity in the home to fund the retirement.  When you passed onto a better place, your kids wouldn't get the home you worked so hard for.  Does it really make sense to say that you never had to pay back the loans?

Now, some people actually use the equity in their home to fund their retirement.  What if the mortgage company said that in order to get access to the loans, you needed to pay for a special insurance which increased in cost each year?

When looking into a life insurance contract, ask yourself the question, if I take out these loans, would my net worth decrease or would the amount of money passed onto my children decrease?  If the answer is yes, then unfortunately I would truthfully say that you must pay back the loans.

Take care in the contracts you sign.  They may drastically affect your family's future.

This post was reposted from http://finlit.biz/life-insurance/do-whole-life-insurance-loans-have-to-be-paid-back/, originally written on April 10th, 2013.

3 Myths of Indexed Universal Life Insurance

There are many myths behind whole life insurance.  Some them include, "You don't have to pay for insurance after the first 15 years", "The cost of insurance never goes up" and "You don't ever have to pay back the loans".  All of these are myths that have been debunked within this blog.  Today, we will talk about each of these myths.

Suppose you have a whole life insurance contract and around the age of retirement, you start to take loans against the policy.  After a few years, you may have a half million dollars worth of loans.  Around age 70, you find the cost of insurance to be high.

At the point, you see the cash value in your life insurance contract not returning the expected amount.  You do some digging only to find that even though you aren't paying any premiums, you are still paying for expensive life insurance through your so called earnings.

At this point, you don't really change much because you already have taken out over a half million dollars in loans.  Around age 80, you see the cash value in your life insurance contract becoming stagnant.  You do some digging only to find that the cost of insurance is extremely high and has been increasing over the years according to your policy.  You look at the hypotheticals only to find that this cost is no where to be found.

At this point, you feel in a bind, because if you surrender the policy you will have to pay back the million dollars in loans.  So you decide to continue paying the high cost of insurance.  Eventually, you move on to a better place.

Your kids, ready to receive their inheritance then get notified that they will get the life insurance money but only after the loans are paid.  Most of your life's hard earned money has been drained leaving the kids with little to nothing.

Make sure this doesn't happen to your family.

This post was reposted from http://finlit.biz/life-insurance/3-myths-of-indexed-universal-life-insurance/, originally written on April 9th, 2013.

Do You Really Want to Pay for Life Insurance for Your Entire Life?

According to tpgbrokerage.com, an indexed universal life policy is structured so that one can "access the policy funds tax-free."  Imagine someone within your own family trying to access their policy funds tax-free.  When they need the money at a critical time, they are told that they can only access their policy funds tax-free if they continue to pay for life insurance coverage.  Do you really want to pay for life insurance coverage your entire life?  Are the benefits worth the sky rocketing prices?

Or worse, imagine that they "access the policy funds tax-free" which really means taking a loan.  Those of you who understand how these policies really work understand this.  Then, imagine that with this additional liability on their plate, they decide they don't want to continue paying the sky rocketing cost of life insurance.  Now, they cancel their policy and can be hit with taxes.  So much for tax-free access.

According to www.investopedia.com, "In addition, when you surrender your policy for cash, the gain on the policy is  subject to income tax, and if you have an outstanding loan balance against the  policy, additional taxes could be incurred."

Do you know someone who has a personal story like this?  Start the dialog.  Protect yours and those around you.  Get the right type of life insurance coverage.  Thanks for reading!  We will see you soon!

This post was reposted from http://finlit.biz/life-insurance/do-you-really-want-to-pay-for-life-insurance-for-your-entire-life/, originally written on March 16th, 2013.

25 Questions You Should Ask Before Purchasing a Permanent Life Insurance Policy

Previous articles talked about 6 Names Associated With Whole Life Insurance, Izu's RIPOFF Acronym and 6 Deceitful Ways Whole Life Insurance is Sold.

Here, we will discuss some of the questions you want to ask to help avoid being trapped into purchasing a whole life insurance policy.  Feel free to print this out when shopping for life insurance.

1. Have I taken notes and written down all my questions and answered them one by one?
2. Have I listened to someone who is willing to list the pros as well as the cons of the policy?
3. Is someone trying to get me to focus on something other than the details of this policy?
4. Why does this life insurance policy seem extremely complicated?
5. What happens if I trust the person writing the policy who may not fully understand the policy?
6. Why are there so many types of these policies and so many hypotheticals?
7. Am I being overwhelmed with too much information so that I can't focus on the policy?
8. Have thousands of people lost money in the past by placing their trust with the wrong company?
9. Are there new concepts that I am being taught and should I research these concepts?
10. Have I been asked enough questions to diagnose my needs?
11. For benefits, outside of life insurance, what costs are paid to access those benefits?
12. Am I being told to focus on the benefits outside of life insurance?
13. What percentage of people holding this type of policy will stop within the first three years?
14. How much money will I lose if I decide to stop this policy in five years?
15. What percentage of these types of policies don't pay out?
16. What happens to all the money dumped into these policies since they are not paid out?
17. What commission will be made on this policy?
18. Do I know the cost of the life insurance each year or do I just know the premiums?
19. Am I being told that the IRS specifically made a loop hole to avoid having to pay taxes?
20. What is the worst case scenario if I wrongly choose whole life over term life insurance?
21. Why Doesn't Your Whole Life Hypothetical Show Cost of Insurance?
22. Do You Get the Cash Value and Death Benefit in a Whole Life Insurance Policy?
23. Should Whole Life Insurance be Sold as a Personal Pension Plan?
24. Should Whole Life Insurance be Sold as a Savings Program?
25. Does the Loan on a Whole Life Insurance Policy Constitute Tax Free Retirement?

See what Suze Orman says at apps.suzeorman.com. See what Dave Ramsey says at www.daveramsey.com. See what Salman Khan say at www.youtube.com. See what CNN Money says at money.cnn.com. See what Smart Money says at www.smartmoney.com.



Thanks for visiting! Ask any questions you need answers to and we will do the research for you!

This post was reposted from http://finlit.biz/life-insurance/25-questions-you-should-ask-before-purchasing-a-permanent-life-insurance-policy/, originally written on February 17th, 2013.

6 Types of Life Insurance You Should Not Buy

According to money.usnews.com, you should never purchase a life insurance policy that is guaranteed to issue or related to accidental death. It should be pointed out that the article 4 Quadrants Relating to Insurance applies to both guaranteed issue life insurance and accidental death and dismemberment life insurance.  This can sometimes be purchased on late night television or online.

This article also talks about not purchasing whole life insurance or variable universal life insurance.  According to money.usnews.com, "And $100 buys a  heck of a lot more term life insurance than whole life.  In many cases, you can buy 10 times as much."

Here are the list of 6 types of life insurance you should never buy:

1. Guaranteed issue
2. Life insurance for children
3. Travel insurance
4. Accidental death and dismemberment
5. Whole life insurance
6. Variable universal life insurance

If you want to read more about whole life insurance, you may read 6 Deceitful Ways Whole Life Insurance Is Sold or you can search through the category of life insurance.

This post was reposted from http://finlit.biz/life-insurance/8-types-of-life-insurance-you-should-not-buy/, originally written on February 11th, 2013.

6 Deceitful Ways Whole Life Insurance is Sold

Do you get an uncomfortable feeling in your stomach when you are sitting in front of a whole life insurance policy?

Do you feel like not all the truths were laid out before you?  Can you not pinpoint the exact nature of what feels wrong?  Maybe this article can help you.

Here are 6 lies often told when whole life insurance is sold:

1. The policy comes with a savings account.
2. The policy has guarantees on your investment.
3. The policy provides a tax free retirement.
4. The policy provides a fixed cost of insurance.
5. The policy allows you to avoid probate and estate taxes.
6. The policy pays out the death benefit and the cash value when you die.

Why are these considered lies?  According to dictionary.reference.com, a lie is "a false statement made with deliberate intent to deceive".  So how are these statements deceitful?

Would the money in a savings account be kept by the company if you were to pass away?  Would the money in an investment account be kept by the company if you were to pass away?  The tricky part here is that people focus on the word guarantee rather than the word investment.  Should a loan really be considered a tax free retirement?  The tricky part here is that the death benefit of a life insurance policy does pass tax free to the beneficiary.  Although the premium may look fixed, the cost of insurance is going up and may even vary depending on the performance of the separate account.  If you would not have to pay probate or estate taxes without a policy, should you really be told that the policy allows this?  Once a policy is issued, you can read the contract to check various cases and what happens with the death benefit and cash value.

This post was reposted from http://finlit.biz/life-insurance/6-deceitful-ways-whole-life-insurance-is-sold/, originally written on February 10th, 2013.

Do You Know About the Deceitful Savings Account of a Whole Life Policy?

Have you ever heard of someone state that there is a savings account attached to a whole life insurance policy?  How would you feel about a savings account where the bank keeps the savings if something were to happen to you?

Did you know that a majority of people who purchase whole life insurance policies believe that if something were to happen to them that they would receive both the "savings" and the death benefit?

If a majority of people believe this, is it the insurance companies at fault, the insurance agents or the people purchasing the policies?  This is very difficult to answer.  My suggestion is that it is all of the above.  People need to take responsibility and learn for themselves about the contracts they are signing.  On the other hand, most people are so busy with their day to day lives that others must work hard to make sure they have ethical business practices.

In some cases, the death benefit is increasing over time to make it appear that the "savings" are being attached to the death benefit.  However, that increased death benefit just means that there is an underlying increase in the cost of insurance.  Is it ethical to call the cash value a "savings" plan?

This post was reposted from http://finlit.biz/life-insurance/do-you-know-about-the-deceitful-savings-account-of-a-whole-life-policy/, originally written on February 9th, 2013.

Life Insurance, What Happens if You Live?

Have you ever heard a whole life insurance agent ask, "What happens if you live?"  Let's quickly answer this question.  Well, if you live, you should be paying off your debts including your mortgage.  You should be saving money to pay for retirement.  Your kids will grow up and start becoming independent.  If you live, you will have no damage to your family financially, because you will be there to take care of them!

With life insurance, you are simply planning for likely scenarios, living and dying.  While life insurance is a piece of the puzzle, you really want to make sure your family is taken care of in either scenario.

According to www.livescience.com, "A 20-year-old U.S. woman has a 1 in 2,000 (or 0.05 percent) chance of dying in the next year, for example. By age 40, the risk is three times greater; by age 60, it is 16 times greater; and by age 80, it is 100 times greater (around 1 in 20 or 5 percent)."

So the question is, if you are a 40 year old woman and you know you have a 1 in 666 chance of dying in the next year, should you cover yourself with life insurance?  Assuming the risk is 1 in 666 over ten years (although the risk actually increases), you can calculate the probability that you live over the next ten years.  This probability is (665/666)^10=.985.  This means at least 1 out of 66 (66-100/1.5) women who are age 40 will die over the next ten years.  Is it smart to purchase a life insurance policy to cover this high risk to protect your family or should you gamble with your family's future on the fact that you will live?

This post was reposted from http://finlit.biz/life-insurance/life-insurance-what-happens-if-you-live/, originally written on February 4th, 2013.

3 Myths Around the Infinite Banking Concept

At www.becomingyourownbank.com, they give three myths which make people think that they should purchase life insurance policies.  I want to clearly point out some of the falacies of the video shown at this site.

This video states that life insurance policies provide tax free growth, allow for great returns from 4.5-6.5% and have no government restrictions.

These 3 statements are basically falacies.  Life insurance does not provide tax free growth, it provides tax deferred growth and to have access to this tax deferred growth, you need to pay for expensive life insurance.  The great returns of 4.5%-6.5% growth is based on the separate account and does not include the amount of money used to pay for life insurance.  Finally, the government does provide restrictions in terms of the account becoming a modified endowment contract if one decides to add too much money into the account, without also increasing the amout being used to pay for life insurance.

Of course, the video explicitly tells you not to do any research, but rather just to purchase a policy!  Here is a good rule of thumb.  Never trust someone who tells you not to get a second opinion!

This post was reposted from http://finlit.biz/life-insurance/3-myths-around-the-infinite-banking-concept/, originally written on February 3rd, 2013.

3 Statistics You Need to Know Before Purchasing an Indexed Universal Life Policy

First off, I wanted to state that fellow blogger at truthbyscott.blogspot.com has put out some great articles.  Thanks for posting!

According to www.lisa.org, "According to leading international actuarial firm Milliman, Inc., almost 90 percent of all life policies lapse or are surrendered rather than resulting in a claim."  You may want to think about that before pouring a bunch of money into a life insurance policy!

According to economics.sas.upenn.edu, "Life Insurance Marketing and Research Association, International (2009, p. 18) showed that the lapsation rates are about 2-4% per year for policies that have been in force for more than 11 years in 2004-2005."  This means that even after pouring a bunch of money down the drain, people have had to let go of their policies.

According to www.scribd.com, "That is why most policy holders don't realize that their agent will make a commission of between 55%-105% on their premium payments in the first couple of years."  Maybe the agents should have to disclose the amount of commission they are taking off the table.

What do you think?  Any other statistics out there that you would like to point out?

This post was reposted from http://finlit.biz/life-insurance/3-statistics-you-need-to-know-before-purchasing-an-indexed-universal-life-policy/, originally written on February 3rd, 2013.

6 Names Associated With Whole Life Insurance

Have you ever asked yourself, why there are so many types of whole life insurance policies out there?  Have you ever wondered why new products come out year after year?  You have the paid up 40, the pay by 50, limited pay, single premium, the flexible premium this, the variable that.  Doesn't it all sound like jibber jabber?

Well this article is going to discuss some of the various names out there and the slight distinctions between the types.

Here are the names you might see:

1. 7702 plan
2. cash value life insurance
3. variable universal life
4. whole life insurance
5. universal life insurance
6. indexed universal life

Each of these types of policies is an example of a whole life insurance policy. According to en.wikipedia.org, whole life insurance is insurance that is meant to be owned for one's entire life. The policy accumulates a cash value over time that supposedly eventually matches the death benefit. Universal life was created to allow overfunding of the policy and accumulating interest in a separate account which could later be used to pay for the cost of insurance. Variable universal life allowed the same concept with the separate account being capable of holding investments. Indexed universal life typically has principal protection with guarantees on the separate account, less adminstrative costs.

Read about some of the flaws of whole life insurance in this earlier post.  Thanks for visiting and we welcome any comments or additions to the discussion!

This post was reposted from http://finlit.biz/life-insurance/6-names-associated-with-whole-life-insurance/, originally written on February 3rd, 2013.

Do You Get the Cash Value and Death Benefit in a Whole Life Insurance Policy?

Most people who purchase a whole life insurance policy believe that they will get their "savings" along with their death benefit if they were to die prematurely.  One common reoccuring theme is that people don't know enough about the financial products they own.

Should this mean that they were ripped off?  Or is it the responsibility of the individual to figure it out?  If they were lied to, can they do anything about it?  If they were told exactly how the policy worked but ended up walking away thinking that they would receive both the death benefit and the cash value, who's fault is it?

What kind of "savings" account tells you that the company will keep the savings account if you die?  With all the other gotchas in a whole life policy, isn't it hard to sort through to see what is happening?

Read more at wiki.answers.com

This post was reposted from http://finlit.biz/life-insurance/do-you-get-the-cash-value-and-death-benefit-in-a-whole-life-insurance-policy/, originally written on February 2nd, 2013.

What is the Worst Thing Happening in the Life Insurance Industry?

Here it is.  Simple and clear.  You take two terrible concepts and combine the two.  The result is a quick buck for a whole life insurance agent and another person set stranded.

From, the two posts at securities-fraud-blog.com and www.sos.mo.gov, you can read more details.  However, I will try to simplify the explanation to make your life easier.  I'm telling you, you need to read this so this doesn't happen in your family!

An agent sells a variable universal policy to someone as a personal pension plan. Since this person can't afford the high cost, the agent convinces them to take the equity out from their home using a negatively amortizated loan to fund the policy.

So, variable universal life policies are terrible for middle class Americans.  However, with flash and mirrors, these policies get sold everyday.  Of course, using a negatively amortizated loan is terrible because rather than paying off debt, people get deeper and deeper into debt.

How in the world did we not only let this happen but allow this company to continue to do this?

Related articles:

• Should Whole Life Insurance be Sold as a Personal Pension Plan?
• Should Whole Life Insurance be Sold as a Savings Program?

Isn't it time you made the decision to donate to charity, reign in your spending and allow yourself to grow your income?

This post was reposted from http://finlit.biz/life-insurance/what-is-the-worst-thing-happening-in-the-life-insurance-industry/, originally written on January 31st, 2013.

Should Whole Life Insurance be Sold as a Savings Program?

You see it time and time again.  Whole Life Insurance, Variable Universal Life Insurance, Indexed Universal Life Insurance, 7702 Plans, etc are sold to middle class Americans as a personal pension program.  Often, it is argued that the forced premium payments on a whole life insurance policy guarantee that you stock away money over the years.

You hear people against "Buy Term and Invest the Difference" argue, this only works if they actually save money.  Wrong!  So wrong!  Most people don't have the discipline to save on a monthly basis.  If someone does not have this discipline, you definitely shouldn't sell them a whole life insurance policy.  This is what will happen.  In a few years, they will take a loan out on their policy.  Which is better:

essay writing service reviews

• A simple term life insurance policy with no savings or
• A complex whole life insurance policy with loans on the cash value

When you see people asking questions like "Should I get out of a whole life insurance savings plan, and what is the best way to do so without losing to much $$$$?" at askville.amazon.com, you know something isn't quite right.

Do the research and compare apples to apples.  What do you think?

This post was reposted from http://finlit.biz/life-insurance/should-whole-life-insurance-be-sold-as-a-savings-program/, originally written on January 30th, 2013.

Have You Ever Heard of Izu's RIPOFF Acronym for Whole Life Insurance?

This is an acronym which allows people to remember some of the major hiccups with whole life insurance.  Typically, something is a ripoff when it surrounds something deceitful.  If these policies were explained clearly, I would just call the policy over priced.  However, time and time again, I see the client purchase the policy thinking one thing only to receive something else when the policy is delivered.

You may review the original posting of the acronym here: sizusfinlit.blogspot.com.

"R" stands for retirement and college savings.  Typically the agent sells an insurance policy as an investment.  An insurance policy is not an investment!

"I" stands for inhibited money transfer.  As soon as you sign the dotted line (okay, 45 days later), you might lose 10,000 if you surrender the policy.  Please, whatever you do, don't ever front load a whole life policy with money.

"P" stands for promised rate guarantees.  The guarantees are typically so complex, its hard to understand what is being guaranteed.  Typically a customer gets a guaranteed rate minus some non guaranteed costs like administration fees and mortality expenses.

"O" stands for optional coverage for life.  As soon as you sign the dotted line, the whole life insurance company will either take your money if you lapse the policy or drag more and more money out of you if you continue the policy.

"F" stands for fraudulent commissions.  Before you sign a contract, shouldn't you know how much the person selling you is getting paid from the deal?  In this case, the commissions can be ridiculously high.

"F" stands for fake tax free retirement.  The tax free retirement promised by whole life insurance companies is a joke.  All life insurance payouts are tax free.  By the way, so are home and auto insurance payouts.  You might want to ask yourself why auto insurance companies don't hold separate accounts.

This post was reposted from http://finlit.biz/life-insurance/have-you-ever-heard-of-izus-ripoff-acronym-for-whole-life-insurance/, originally written on January 23rd, 2013.

2 Questions You Need to Ask Before You Purchase a Whole Life Insurance Policy

Let's say I was trying to sell a very expensive whole life insurance policy. Let's say I knew that my client would never buy if they knew how expensive it would be to pay for life insurance for their entire life. Let's say I knew that the cost of insurance would become so great that one day my client would refuse to pay. How could I configure a policy that would sell?

The answer is easy.  To solve the first problem I would sell the policy using a hypothetical which did not show the cost of insurance.  I would only show payments that did not increase so that the client would believe the cost of insurance was not increasing over time.  To solve the second problem, I would charge double, triple or even ten times what is necessary during the first few years and hold that amount in a separate account.  When the client finally decided to stop paying, I would automatically build into the policy a way to pay the premiums from the separate account.

Here are the 2 questions you need to ask:

• Why doesn't a whole life insurance hypothetical show the cost of the underlying life insurance each year?
• Knowing that the cost of insurance increases each year, how is the cost of insurance covered since the payments are not increasing?

Read more about whole life insurance policies here:

• Does the Loan on a Whole Life Insurance Policy Constitute Tax Free Retirement?
• www.foxbusiness.com

Thank you so much for visiting. Please let me know how I am doing by leaving some comments. I appreciate your time.

This post was reposted from http://finlit.biz/life-insurance/2-questions-you-need-to-ask-before-you-purchase-a-whole-life-insurance-policy/, originally written on January 23rd, 2013.

Does the Loan on a Whole Life Insurance Policy Constitute Tax Free Retirement?

It is a common misnomer that the loan from the cash value in a whole life insurance policy allows for a tax free retirement. In fact, this "tax free" retirement is not only invalid but in addition comes at a great price.

In order to keep this "tax free" retirement, one is forced to pay the high cost of whole life insurance. At money.cnn.com, you will see the following words: "Whole life is expensive." In fact, many third party consumer advocates state the same thing.

Now, let's really look into this "tax free" retirement. What is terrible about this concept is that you put after tax money into the whole life insurance policy and then if you decide to stop paying for insurance and surrender the policy, you will be hit with taxes on the gains (eventually).

On the other hand, you have the option to keep paying the premiums, which get extremely expensive and end up eating all of your cash value. Doesn't it make sense for the whole life insurance company to offer you a loan to dig you even deeper into a ditch? Doesn't a loan have to be paid back?

The list of issues with whole life goes on and on. Keep reading here. Thanks for visiting. We appreciate your interest!

This post was reposted from http://finlit.biz/life-insurance/does-the-loan-on-a-whole-life-insurance-policy-constitute-tax-free-retirement/, originally written on January 23rd, 2013.

How Much is Your Whole Life Insurance Contract Really Costing You?

Continuing from this earlier post, what is the real cost of whole life insurance?  Did you know that a typical whole life insurance hypothetical does not even show the cost of the underlying insurance? Did you know that most people only receive access to the cost after their policy is issued? Did you know that most people don't actually take the time to review their life insurance contract or make the necessary calculations to discover the cost? Is it ethical to issue an insurance policy before you even know how much the insurance will cost?  Which of the following is the separate account in a whole life insurance policy really for?

• A. To allow you to be the bank to create wealth or
• B. To allow the whole life insurance company to draw from the separate account when the cost of insurance becomes so high that you can't afford the premiums?

Contracts can be difficult.  Thanks for reading and come back to find out more questions people should be asking before obtaining a life insurance policy.  For more information, visit www.smartmoney.com.

This post was reposted from http://finlit.biz/life-insurance/how-much-is-your-whole-life-insurance-contract-really-costing-you/, originally written on January 21st, 2013.

Should You Purchase a Whole Life Insurance Contract Which Promises Tax Free Retirement?

Have you ever heard an agent promise a tax free retirement with a whole life insurance contract?  Have you ever heard of a 7702 plan?  Would it be ethical for a whole life insurance agent to say that the IRS created the 7702 code in order for Americans to have a tax free retirement?

The IRS created the 7702 code so that Americans could not shelter wealth in a whole life insurance policy.  There are limits to the amount of money one can put into a whole life insurance policy's separate account and they are based on the amount of life insurance coverage.  If one even tries to shelter money in the account beyond a certain limit, the whole life insurance contract becomes a modified endowment contract.

According to www.ameriprise.com, "The IRS definitions are essentially tests to ensure that an insurance policy isn't really an investment vehicle."  Other third party consumers such as Suze Orman and Dave Ramsey also advise people to avoid purchasing whole life insurance policies.

A loan is not tax free retirement!  Some agents promote the fact that you are allowed to take a loan on your policy, which will allow you to not have to pay taxes.  This is true of any loan but would not be a good reason to purchase a whole life insurance contract.  For tax purposes, using after tax dollars to fund the policy and still having to pay taxes on earnings if you surrender the policy is completely ridiculous.  Later, I will show you how to actually create a tax free retirement and there are ways to do this no matter how much income you make.

This post was reposted from http://finlit.biz/life-insurance/should-you-purchase-a-whole-life-insurance-contract-which-promises-tax-free-retirement/, originally written on January 21st, 2013.