Tax-Avoidance Life Insurance Schemes Redux

Katt, Peter C.
March 2004
Journal of Financial Planning;Mar2004, Vol. 17 Issue 3, p24
Academic Journal
This article addresses issues concerning tax-avoidance life insurance schemes in the U.S. These tax-avoidance schemes will continue because financial product developers will always turn to permanent life insurance; it is complicated and high commissions that are hidden from non-expert advisors and clients. 412(i) is a defined benefit plan that uses deferred annuities and life insurance as funding assets. Several promoters claim that 412(i) plans can use life insurance for 100 percent of the funding. The Internal Revenue Service has signaled that several plans using life insurance are abusive tax avoidance schemes, mostly because they use life insurance policy springing-cash-values. Spring-cash-values refers to a policy that has artificially low cash-surrender values when measured for tax purposes, such as when purchased from a pension plan, then is illustrated to increase in value. One journal article described that there is a difference between the surrender value and the policy reserves in the early policy years because there are policy expenses to amortize. Employee welfare benefit plans under Section 419 have been a preferred platform to promise tax-deductible life insurance premiums, and often tax-free income benefits.


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