Protecting Clients from Life Insurance Schemes

Katt, Peter C.
November 2002
Journal of Financial Planning;Nov2002, Vol. 15 Issue 11, p38
Academic Journal
This article offers advice on how financial planners can protect their clients from life insurance schemes. The inherent complexities of permanent life insurances make it a favorite asset for what some financial planners think of as cutting-edge tax planning. Developers, promoters and sellers promise tax-nirvana via permanent life insurance that generally comes in two forms. One is tax-deductible premiums. The other is the manipulation of the value of a policy for either income tax or estate and gift-tax purposes. Sometimes these two forms are combined into one plan. Tax avoidance using permanent life insurance has become so aggressive and widespread that the U.S. Internal Revenue Service (IRS) has itself aggressively attacked the issue. This has separated many financial planners into either believing the IRS is an out-of-control bully striking back because oh-so-smart planning developers keep creating tax breaks using tax code loopholes, or that the IRS is simply trying to uphold the spirit of the law in order to maintain a level playing field for all taxpayers. Despite the apparent certainty advanced by developers of such planning, there is no tax authority for any planning that allows income tax deductions for permanent life insurance premiums or for the calculation of the cash value of a policy that dramatically increases within several years without reference to future premium payments.


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