Tax Avoidance | How to Legally Reduce Investment Taxes

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It’s my goal to help my clients legally avoid paying taxes, or as keep it as low as physically possible. There are many write offs, tax deductions and if you are a business owner like myself you try to write off everything that moves. However, when it comes to investments there are very few ways to save money on taxes and investment fees are just part of life, right? Not anymore!

When you hear someone saying on TV or in person, “I got a 10% return last year”. Your first question should be, was that a 10% Net Return? Probably not. Lets break it down. First of all there are Short Term Capital Gains at your income tax bracket rate (lets say 25% or 28%), and Long Term Capital Gain rate at 15%. Lets average this at 20%, as mutual funds continually buy and sell stocks or bonds (which cause a taxable event).

The second part is Mutual Fund fees, the average mutual fund fee is 1.25%. The third part is if you have an investment adviser they generally charge 1.0% to ensure you are property diversified and keeping your financial goals on track (which is honestly a great service).

Lets add this all up, so the 10% rate of return is now only 5.75% (10 – 2 – 1.25 – 1). That’s a total cost of 42.5% of your actual return. It gets even worse, as you pay these fees every single year the compounded effect means your money loses more value to excessive fees every year.

There is a better way to save money and legally avoid ever paying taxes on your investment gains again! By using Life Insurance as an investment vehicle it enables you to over fund a policy with tax free growth and tax free payout. So even if you get the same 10% return you will save more money by investing in a Life Insurance policy. It’s not magic, as you simply never pay taxes on investment gains ever again.

There are two main life insurance products, Whole Life (lower volatility with a current rate of return of 6.34%) and Indexed Universal Life (IUL) which fluctuates based on the stock market between 1% min and 12% max (both are great products that work similar yet slightly different). That’s right, even when the stock market loses 38% like in 2008 you still make 1%. This is done through low cost stock options. Like I said its not magic and it all pencils out (it’s best to give me a call and can walk you through a simple overview).

Total costs of an IUL policy for 45 year old Male

Total costs of an IUL policy for 45 year old Male

You may be asking what the fees are, right? Well they are surprisingly low. For Indexed Universal Life (IUL) we can see all of the fees simply laid out to the left hand chart for a male Age 45. These are all the fees paid for his entire life, again it’s really that simple.

The average expense of an IUL is 1.66% of the premium paid from year 1 to 10 and 1.57% from year 11 to 20. Those are all the fees, nothing hidden or added on. You can see with your own eyes the costs. In the 1st 10 years the cost of all fees is $16,579/$100,000 premium, then divide that by the 10 years = 1.66% per year cost of an IUL policy for the premium dollars you paid in (as I want to show you the math on how the fees are calculated).

This is cheaper than all the mutual fund fees. In year 20 lets say the mutual fund fees are only 1.0% of the CURRENT Investment Balance of $370,000 (cost to you is $3,700). The IUL policy fees in year 20 are $1,850, which is based only on the PREMIUM Amount Paid of $10,000 that year (no fees are charged on the Investment Balance ever). Now you can see the difference and how an IUL has lower fees than traditional mutual funds.

Overall you will have more investment money over time and the fees you pay as “investment expenses” go toward paying for life insurance. So technically your fees are actually benefiting you as well. Win/Win. As mentioned earlier you also NEVER pay taxes on the investment gains.

Next time you hear someone saying that Permanent Life Insurance has “high fees” send them to this article, as this is factual real life example. The fee structure you see above can NEVER change once you buy a policy.

We will make sure to lay out all your options, then allow you to customize a policy that best fits your budget and coverage needs. Typically this might be obtaining a smaller policy now and upgrading your coverage down the road. Whether you want to invest $300 or $3,000 per month the strategy works exactly the same (the more you put in the more taxes you legally avoid).

If you have any questions please give us a call anytime at 425-802-2783.

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Gary Franke, MBA
Independent Broker
Achieve Alpha Insurance, LLC           
12507 Bel-Red Rd, Ste 103
Bellevue, WA 98005
(425) 802-2783

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