A cap that President Barack Obama has proposed on the size of tax-advantaged retirement accounts is seen as potentially pushing savers to another product that limits payments to the government: life insurance.
Obama’s 2014 budget plan, unveiled April 10, includes a proposal to cap at about $3.4 million tax-preferred retirement accounts such as IRAs and 401(k)s. That would encourage wealthy savers to put more cash into insurance -- whose death payouts are typically exempt from federal taxes -- and annuities, where taxes are deferred, said Walter White, chief executive officer of Allianz SE’s North America life business.
“In our industry, in many ways, that could be helpful, because then you’ll start to look for tax advantages in other ways, and some of our products are geared toward that,” White said in an interview in New York.
Wealthy investors have long included life insurance as part of a strategy to limit taxes and pass on wealth to their heirs. The cap proposed in Obama’s budget would push more assets into life insurance and annuities as investors seek to limit taxes, said Ron Rubin, the CEO of Union Square Financial Partners LLC, which advises wealthy clients on transferring their assets.
Annuities are another type of insurance product that can offer a stream of income in retirement.
“We’re going to see a massive swing over to the after-tax, tax-deferred asset classes like annuities and life insurance,” Rubin said in a phone interview.
Tax-Free Loans
Life insurance payouts at death typically aren’t subject to federal taxes. In addition, living policyholders can withdraw premium payments from some forms of permanent coverage without triggering U.S. taxes. Policyholders can take out additional cash tax-free as a loan, which can be repaid with the benefit when the person dies.
The cap on retirement savings and another proposal in the budget to require non-spouses who inherit IRAs to take taxable distributions within five years instead of over their lifespan may increase the attractiveness of life insurance. That’s because many wealthy families place life insurance policies in trusts as a way of moving money out of their estates to heirs.
Obama’s budget proposes increasing estate taxes and limiting techniques used by the wealthy to transfer assets through trusts. Insurance payouts are one way high earners can transfer assets to their heirs, said Brian Batson, the chief operating officer of Krupin Partners LLC, a Beverly Hills, California-based insurance advisory firm.