Business Innovators Radio - Interview with John Martin of Compass Wealth Strategies Discussing Using Life Insurance for Retirement

Episode Date: January 11, 2024

Hard-working business owners and Professionals shouldn’t have to forfeit paying unnecessary taxes while working and especially during retirement.John Martin, CEP, RFC, IAR of Advanced Tax Planners started his career 27 years ago as an independent financial advisory & wealth management firm in New York.He has served the business community by providing tax reduction strategies, along with creating, protecting, and preserving his client’s wealth for their families.John integrates education with holistic financial planning as the foundation for building real Financial Independence more rapidly, especially when taking advantage of all the tax reduction methods the tax code allows.Each client can expect the highest level of integrity and confidentially working together to design and implement the right strategies to best achieve their individual goals and aspirations, and to control their financial life.John is based in Western New York and married to his wife Kit. They have a son and a granddaughter Emma. He enjoys time with family, reading, golfing, and traveling.Learn More:https://www.compasswealthstrategies.net & https://redwoodtaxadvisor.comFinancial Advisors do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation. Separate from the financial plan and our role as a financial planner, we may recommend the purchase of specific investment or insurance products or accounts. These product recommendations are not part of the financial plan and you are under no obligation to follow them. Investment Advisor Representative offering Independent Investment Management utilizing Tactical Active Management through Redwood Private Wealth, SIPC.Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-john-martin-of-compass-wealth-strategies-discussing-using-life-insurance-for-retirement

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of influential entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with this John Martin with Wealth Compass Wealth Strategies talking about using life insurance for retirement. John, welcome back to the program. Hi, Mike. Nice to be with you again. Yeah, I'm excited to talk about this because I know a lot of people when they hear that word life insurance, their red flags go up and go, I'm good to go.

But you're saying using it as a retirement tool. So I want to hear all about that. Where do you start when you're working with clients starting to educate them on that topic? Well, I think in a lot of cases, probably most cases, life insurance should be, a foundation of anyone's financial and retirement portfolio or retirement plan. You know, first of all, if, you know, life insurance, if you don't live long enough, the life insurance death benefit makes the retirement plan for your spouse and family really self-completing. If you don't live long enough to accumulate enough money to retire on the death benefit,

which is tax-free makes the retirement plan for your error is self-completing. And we look at it as a core or a foundational asset in one's portfolio. Yeah, I see what you mean there. And I think a lot of times people get confused on the types of life insurance. And there's probably dozens of types. But the two that come to my mind are term life. and then like permanent life. Can you talk about the differences between those

and when they might be useful? Yeah, term insurance is, as it says, it's temporary. It's for a period of years, usually 10, 20, 30 years, and then it ends. It does not build any equity or cash value. It's just straight protection like a homeowner's policy. We emphasize or focus on the cash. cash value type, which builds cash value. And those are variable life, their whole life policies.

There's indexed universal life policies. And those are the type that can be used in retirement. The cash that can be used in retirement to supplement what's retirement income from other other assets. And the money, the cash value comes out on a tax-free basis. So you borrow the money out. You're not actually withdrawing the cash. You borrow the cash value from the insurance company using the cash value as collateral, which means, which is a big benefit, is that the cash value is still in the policy

earning interest. and the loan is a separate loan from the insurance company. And typically the loan rate is 5%. But the cash value of it's earning anything above 5%, which it typically does, you know, it continues to grow. Yeah, because the kind of the arbitrage, if you're borrowing it five but earning more than that, then you're actually at a positive.

Right, exactly. You know, you mentioned equity and buildup and homeowners insurance. And it made me think of this analogy, you know, like when you pay your homeowners insurance for a year or two and you don't have a claim, you can't call the company and say, give me back my premiums because it's a cost. And it's similar to like when you rent a home, you pay your rent and you don't have tax writeups. You don't have equity buildup.

But when you buy a home, you do. And so that's a good correlation comparison between term life, which is like renting house and whole or permanent life insurance, which is like buying a house because you have some extra benefits like you described. Yeah, exactly. It's ownership versus renting. Yeah. And so let's think about something when you were talking about cash value.

How does cash accumulate? Because you think that you, I think a lot of people assume I buy a whole life policy for this much premium per month. Well, that's just to pay for the insurance. the death benefit, but what about how does cash build up in there? Well, that's, that's, if it's, if the cash value policy, if it's properly structured and funded, it, the cash fare grows according to a certain index or what the insurance company pays out in a dividend per year as a dividend gets credited into the cash value.

account. We typically structure it to buy the least amount of death benefit and putting in the most money or contributions that you can to keep it as a tax advantaged product. Where most people look at life insurance is buying the most death benefit with the least amount of premium. And that typically is a term policy or a very low cash value earning policy. If we're going to structure this as a supplemental retirement vehicle, we want to buy the least amount of death benefit given a certain amount of premium going into it. And that allows the cash value to accumulate or grow on a tax-free basis, and it can be withdrawn through loans on a tax-free basis.

and the cash value, like I say, it gets credited every year based on a certain market index like the S&P 500 index or a dividend with a cash value policy that the insurance company will pay out every year. You know, you mentioned S&P and things like that. Those are indexes they're tied to. I think a lot of times people that think of their retirement accounts and, you know, needing money for retirement really kind of have a, you know, red flag when they hear the market because volatility and losing money. Can you lose money in these kind of products? No. You have a floor of zero. So if the S&P is an example of an index and declines or as negative in a year, you get a zero percent earnings on your cash value. And the positive year,

in the positive years is typically a cap of anywhere from, you know, 8% to, you know, 13% is usually the cap. So if the market earns 13%, you get credited 13%. Because your cash value is not directly in the S&P, the insurance company ties the crediting to your cash value on the S&P index. Yeah, but I love that floor because I know a lot of people would say, hey, in a horrible year, if everything crashed, if I'm not going to lose a dime, that's a big win. Right, right. You know, we oftentimes refer to cash failure life insurance if it's properly structured

and funded as the Swiss Army knife. People look at, you know, trying to find the perfect investment. you know, which includes liquidity, safety, expense ratio, return potential and tax efficiency is really not too many assets, classes that have all of that. But with life insurance, the cash value is totally liquid. It's available to you at all times. There's no market risk, as I said, has a zero floor. there's really no expenses over time.

Tax deductible contributions it does not have. Right. Tax-free growth, tax-free distributions, and tax-free transfer to hairs. So the perfect asset really doesn't exist. But cash value life insurance probably comes as close. to a perfect investment or an asset as possible. There's more liquidity. There's more safety.

There's less expenses. There's more total return potential and more tax efficiency than other types of assets. You mentioned like the difference between term and whole life. And I think that a lot of times people think, oh, well, what's the death benefit? You know, oh, you bought a term policy for a million dollars or a whole life policy for $250,000 or whatever that is, that's the death benefit. But I know that some of the things you have been mentioning, those are benefits. And those are benefits you can take advantage of while you're still living.

So what are some of the other living benefits that you can get even before, you know, if someone passes on, you have this type of policy and you can get specific benefits even now? Yeah. Like I said, the cash value is always available while you're living, to use to pay for you know, college education or a new roof on the house or a new car, whatever you need. The other real benefit is it has long-term care benefits, which is an acceleration of the death benefit prior to your death to pay for home care, assisted living care, nursing home care. so they accelerate the death benefit that you can use during your life to pay for those types of

expenses on a tax-free basis. So it's the only investment or product that allows that to happen. Like if you have a 401K, most of your money's in that, and you need expenses for long-term care, you have to withdraw the 401K funds, pay taxes. it and then pay for that long-term care expense. You know, that's an interesting point because like the example that I gave about the homeowners insurance saying, hey, homeowners company, I didn't use anything this year with claims, so give me my premium back.

You don't get that. And I know that there are standalone long-term care type insurance policies, which I'm sure there's wonderful benefits with those. But one of the downfalls, I would suspect, is if you didn't use it, you don't get the premiums back. So it's gone. Whereas what you just described is if you don't need long-term care within this life insurance policy, that's wonderful. You're not paying extra for it. But if you did need it, you can tap into that death benefit to pay for that long-term care. So it takes care of that without wasting money. Yeah, it does. Yeah. So if you don't, if you don't need it during your

lifetime, then the full amount of the death benefit goes to your errors upon your death. Yeah, that's huge. You know, and you said another phrase that I think is really important, properly structured, meaning I think a lot of times we all are in society hearing something and we go, ooh, that's a good idea. I'm going to go Google it. I'm going to find this, bye, but, but, and set it up. Well, you can't just go Google this type of policy and just go click and set it up.

These are intricate and need to be properly structured. So talk a little bit about some of the ways that people, you know, make, actually make mistakes. You know, what is a not properly structured policy like this? Well, if they're based on their on their current age, if they don't buy enough death benefit on a given premium that they're going to put into it, they'll create what's called a mech, which is a modified endowment policy, which means the cash value will grow tax free or tax deferred. but when you withdraw that cash value, it'll be taxable. It will be treated like an IRA or an annuity. And, of course, the death benefit always is tax-free,

but you don't not want to surpass the guidelines to the limits to create a mech, which is called a mech policy. Yeah, that's a big one because one of the big benefits, you know, benefits. and, you know, kind of attractive points is when that cash value grows, it's growing tax-free, and then you pull it out tax-free. But if you trigger that limit and you find out later you have to pay taxes, that's a big, big thing. So I think that people just need to. Yeah, yeah, you lose out a lot of that.

So, yeah, work with someone that knows what they're doing, how to properly structure this. And these are going to be different for everybody, every person, every couple, every family. would need something completely different. So, you know, I've even heard business owners will get these type of policies to use them as kind of like a incentive for employees or pension plans. And so there's so many uses for this kind of a financial tool. Yeah. Business owners oftentimes use it to as a recruiting and retention tool for key people,

gives them a specific benefit. not only currently a death benefit, but at some future point, a large amount of, you know, tax-free income that they can tap into. So, yeah, it's used quite extensively by business owners and individuals. And then just kind of let's wrap up with this thought, because I know that one of the big holes in the bucket of retirement is taxes. And so you mentioned that these, you know, grow tax-free, and then you can transfer it to your heirs tax-free. And that becomes a big benefit because some types of financial products, if it's transferred to heirs, there's a tax that needs to be paid.

So talk a little bit about the tax implications for this type of policy. Well, at death, when it gets transferred to the heirs, the death benefit is always income tax-free. Now, if someone has a large estate, then we might want to be. to consider putting the life insurance policy in a trust and have the trust to own the policy thereby keeping the death benefit out of the taxable estate. It's still income tax free, but it could be taxed in their estate if they have a large enough estate that they face estate taxes. And other assets like 401Ks and IRAs, those are all going to be taxable to their

errors other than a spouse, but then when the spouse passes on, those assets are going to be subject to taxes at their, at their errors tax rates. So, and who knows what tax rates are going to be in the future. Many people think are going to be higher than they are today due to our huge debt and deficit that we face in order to stay solvent. So, you know, who knows what that might be. Yep, exactly. Now, do you recommend to your clients, I've heard that these types of investment tools or life insurance policies, you can get several.

So would you recommend potentially in the right case? Maybe you need one for the husband and also one for the wife. And you just have multiple policies. Is that a strategy that is helpful? Yes, especially if the spouse is contributing, you know, a sizable amount of income to the family. and without that income, then, you know, the life insurance would replace that income on a year-to-year basis for the surviving spouse. So, yes, we look at insurance needs for both spouses.

Absolutely. Yeah. And like anything, there's no cookie cutter templated solution that's right for every single person. Everyone is different. So, you know, many types. And you even mentioned different types of permanent, whole life, index, this and that, all of those different ones. And they're all going to have benefits to one party versus another.

So it really does pay to sit down with someone that knows the landscape, knows what you need, and make recommendations. Because, again, getting back to that properly structured, that's so important to keep in mind. So John has been really great hearing some of your insights. If someone is interested in learning more, what's the best way they can learn? learn more about this and also reach out and connect with you. Well, they can go to my website, compasswealthstrategies.net, or they can call me at 716, 823-1869. Excellent. Well, John, thank you so much for coming back on today. It was a real pleasure talking with you. Thank you, Mike. It was my pleasure. Thank you.

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