The history of hiding money with a life insurance policy, how much money can you hide and withdraw tax-free is a historical story of the mutual influence, competition and progress of the government, insurance companies, and the market.
In the early 1980s, universal insurance UL products emerged, providing a huge improvement in the "flexibility" of premium payments and reinventing the life of Whole Life as a "iron-solid" savings and dividend insurance. At that time, since the relevant laws and tax regulations had not yet been kept up, many policyholders found that they could put a lot of money into the insurance policy, and at the same time they only bought a very small death compensation denomination, and then the income was completely tax-free!
Such good news cannot resist the spread of one to ten, ten to hundreds. Soon, this type of life insurance product, which was originally used to compensate for death, completely turned into a "tax-free" investment product.
By 1982, Congress began to pay attention to this issue and passed the TEFRA Act (Tax Equity and Fiscal Responsibility Acts of 1982, also known as the Tax Equity and Fiscal Responsibility Act). The law stipulates that all policies that can pay premiums flexibly must be qualified life insurance to enjoy cash value accumulation and tax deferral. In a word, speculation is not allowed!
According to TEFRA, there are two standards for verifying whether the policy is a qualified life insurance product. One is that the value of the surrender cannot exceed the net order premium amount; the other is that the death compensation must be reflected in a certain proportional relationship with the cash value.
GPT and CVAT 1984
Two years later, the Deficit Reduction Act of 1984 (DEFRA) clearly stipulates the statutory definition of life insurance. DEFRA applies to all life insurance policies with cash value, not just policy products with "flexibility premiums".
Since 1984, the life insurance contract issued in the United States, , is eligible to be treated as a life insurance contract only if it meets the requirements of one (or two) of the following two tests:
Guideline Premium Test t
Guideline Premium Test, referred to as GPT, contains two tests: Guideline Single Premium (GSP) and Guideline Annual Premium (GAP). The test specifies how much money can be saved for life in an insurance policy. Specifically, the total amount deposited by the insured cannot exceed GSP, or the accumulated GAP year by year.
Cash Value Accumulation Test, referred to as CVAT, requires that in an insurance policy, when the accumulated cash value is too much and the insurance company's risk increases accordingly, the death compensation needs to be increased accordingly.
If a policy does not meet the TEFRA or DEFRA test criteria, then this contract will not be considered a life insurance policy contract. Then the cash value of this contract is profitable and profitable, and the income from the cash value in this contract will be taxed as annual income.
7-Introduction to Pay Test
The game ends like this? Of course not.
At that time, withdrawing money from life insurance policies was based on the principle of "first in first out". It means that the paid premium is withdrawn first, because this part of the premium is delivered with after-tax money, so when withdrawing it, it is tax-free. Similarly, borrowing from an insurance policy is also tax-free, unless the policyholder waives the insurance policy, this situation is calculated separately.
Therefore, some life insurance companies have aggressively promoted insurance policies that can deposit large amounts of cash. The most famous one is a savings dividend-type lifetime life insurance product: Single-Premium Whole Life. This type of product is a compliant life insurance product, but it is more like a low-risk investment product.
The cost of borrowing such insurance policies is very low, and sometimes it is even completely costless. The insured can obtain the income part from the policy by constantly "borrowing" without paying taxes. After the insured dies, the policy will first repay the debt, and the remaining part will be paid to the beneficiary. Similarly, no taxes or fees will be incurred throughout the process (IRC Code.101).
Obviously, this type of savings dividend-type lifetime life insurance product (Single-Premium Whole Life) has begun to sell well.
The government soon discovered that it could not collect taxes from the rich.Congress began to find this approach inappropriate because it seems unfair compared to the treatment of other investments and harms public taxes. So the government quickly revised and introduced the US Code 7702 clause, strictly stipulated the definition of life insurance, and introduced 7-Pay tests to draw a clear boundary of how much money can be put in. Simply put, if the money deposited in the policy does not pass the 7-pay test, it will no longer be considered a life insurance policy, no tax incentives will be given, and all of them will be considered as investment products to pay tax.
7-Pay Test
7-Pay Test is used to confirm whether a contract is a qualified life insurance policy.
7-Pay points out the maximum amount of premiums that can be placed each year.
American life insurance example
Lao Zhang, 45 years old, does not smoke, hopes to insure 1 million yuan, without violating the 7-year test, save 10 years of money in the insurance policy, and pay for the future education expenses for the child in 10 years.
We assume that the maximum insurance cost of Lao Zhang is that every 1,000 US dollars insured, the maximum cost is $31.008, and the insurance amount is $1,000,000. Assuming that according to the 7-pay Test calculation results, the maximum deposited premium for the first year is: $31,008.
Based on his financial strength, Lao Zhang plans to deposit $20,000 into the policy every year. From the figure above, Lao Zhang deposited $20,000 into the policy for four consecutive years. After 4 years, Lao Zhang accumulated $80,000 to the policy, which is less than the upper limit of $124,032 in the fourth year as stipulated in the 7-Pay test.
In the fifth year, Lao Zhang decided to continue saving more money and deposit $50,000 a year, which is no problem in the fifth and sixth years. As shown in the picture above, in the 7th year, in order to keep this life insurance policy, Lao Zhang could only put $37,056 at most because at this time. The accumulated deposited premium is $217,056, reaching the upper limit of the 7-pay test in Year 7: $217,056.
As shown in this table, Lao Zhang’s payment method and amount ensure that Lao Zhang’s insurance policy never exceeds the specified amount, so it can pass this test. This policy can therefore always be treated as a life insurance policy, and the money in it can enjoy tax benefits.
Summary
The government has made great efforts to safeguard its own interests and prevent people from hiding their money in their life insurance accounts to avoid taxes and earn tax-free income, especially for early paid-in life insurance products. However, as a social or commercial institution, life financial insurance companies also share part of the government's social responsibilities, and the government also needs to give life financial insurance companies certain benefits to them.
At the same time, due to competition among the markets, financial insurance companies are constantly innovating and launching new products, and taking the lead in existing policies and systems. The dynamic balance environment between the government, the company and the market has created life insurance and financial products in the United States that are far ahead of other countries and regions and are also highly competitive.
There are many life insurance products in the US market that can flexibly pay premiums. Through the product selection and product plan design of professional financial consultants or brokers, you can not only deposit large amounts of cash, but also do not violate the 7-Pay testing principle. The most important thing is that even if the maximum amount of premium has been deposited, you can still withdraw large amounts of money from the policy in the form of "first-in-first-out" premium.
