Saturday, October 17, 2020

4 Places For Money and Their Tax Consequences


In general, there are 4 places where money (assets) can be kept.  I'm going to leave out precious metals and cryptocurrency since the majority of people don't hold these assets, or if they do, it's an extremely small part of their net worth.

The most popular places people build wealth are:

Banks, Wall Street, Government (401k, IRA's), Life Insurance companies, and Real Estate so let's stick with these for the purposes of this discussion.

The 401k is under Uncle Sam’s control even when rolled over into an IRA.  Both are considered Qualified Retirement Accounts (QRP) --- that is, qualified with the government.  Rollovers (401k to IRA or IRA to IRA) don’t create a taxable event but eventually the government forces liquidations of these accounts thru Required Minimum Distributions at age 72.   

At the time of death, beneficiaries of 401k/IRA must withdraw all assets from an inherited IRA within 10 years following the death of the account holder according to the SECURE Act in December 2019.

Note: I  recommend looking at solutions that will help transition the account balance in an IRA rollover account to life insurance policies on your kids – or perhaps yourself if you might still be insurable - in order lower their future tax bill and also to create a multigenerational transfer of wealth.

Here's something to considering if you plan on doing a rollover from a 401k to an IRA (or IRA to IRA) to purchase an annuity:

With an annuity, the account balance equals the death benefit.  I mention this because the term death benefit in an annuity sometimes creates confusion for the public. Since an annuity is a contract with a life insurance company, the account balance upon on death is technically called a death benefit but there is no increase in the account value upon on passing like with a life insurance policy where cash values mushrooms and instantly becomes a much larger death benefit at the time of passing. (For example, a Whole Life policy pays a death benefit substantially larger than the cash value.)  


The life insurance death benefit does get included in your overall estate unless it’s in an Irrevocable Life Insurance Trust (ILIT) but the death benefit is income tax-free which makes it a superior distribution and transfer vehicle for beneficiaries.  A discussion on ILIT's will be important if your overall estate will in time exceed estate tax exemption.  In 2020, the estate tax exemption is $11.58 million for a single person.  Multiple this exemption by 2 for married couples.


Note:  If you've had a spouse that has passed, it's important for your advisor to know if you file IRS Form 706 at the time of his death to make an election to add his unused estate tax exemption to yours.


Let me know if this helps or if you have questions about your situation.  Here's my calendar to request a consultation:


Thank you,


John Montoya

Tuesday, October 13, 2020

IBC Q&A Mailbag: The Power of Zero (Review)

The following is an email exchange with an existing client:

Hi John,

I have read the Power of Zero book by Dave McKnight, along with listening to many of his podcasts. I seem to resonate with his approach to matters. Have you read, and are you a fan of his approach to things also?



My reply:

I am familiar the book and movie.  The director, Doug Orchard, actually produced and directed two of the videos on my website.   

(The 2 videos are at top of the page here:


I like the Power of Zero strategy with regards to how it applies to indexed annuities.  I do have a difference of opinion as it applies to IUL’s because of the increasing cost of insurance within those policies.  I don’t believe the industry does a very good job of disclosing the risks with IUL’s.  The only mention of risk to a prospective buyer seems to be that money can’t be lost if the market goes down.  This is a half-truth at best.


There are actual risk esposures IUL's have but they are usually never mentioned.  The cost of insurance in an IUL increases every year by a larger amount which poses a major problem during retirement years.  IUL are sold on the idea that the returns will be there, and while it is possible they could be, but it’s also possible they won’t. Then what?


For this reason, I would only recommend an IUL for two sets of people:

1) High net worth clients who can commit a minimum $20k a year while still maintaining diversified portfolio of other assets AND life insurance policies. 

2) Parents living with diabetes who cannot otherwise qualify for a permanent cash value policy.  There is an IUL only program specifically designed for those with diabetes, currently unavailable with Whole Life.

Outside of these two demographics of people, I wouldn't recommend an IUL because I see too many buyers of IUL putting the majority of resources into one IUL plan and little elsewhere.  It’s a recipe for disaster because here's what I know as an experienced advisor what go wrong with an IUL:

Here are 5 Perils of an IUL


1.  The IUL cost of insurance is based on annual increasing one year renewable term.  Cheap when young, cost prohibitive once a person hits retirement.

2.  Returns could be below illustrated.  The increasing cost of insurance will only erode returns further. 

3.  Planned premium funding falls off because life happens.  Examples include layoffs, an extra kid (or two!), unplanned college expenses, failing health, divorce, lack of financial discipline... even pandemics!  Life does happen and failing to maximize the policy contributions of an IUL has an adverse effect on the returns of the policy because less premium means less cash value potentially earning interest to offset internal increasing costs of the life insurance.  

4.  IUL’s never endow.  

Only Whole Life policies can endow---- this means the cash value is guaranteed to equal the death benefit by age 121.  The current cash value in a Whole Life policy is actually the present value of the future death benefit.  This is hard to grasp at first but it’s very powerful.  

Essentially, a Whole Life policy is reverse-engineered from age 121 with fixed premiums and a minimum guaranteed growth rate completely uncorrelated to the market or economy.  What this means is that what you want to happen, will happen. A Whole Life policy provides a blueprint guaranteeing policy owners that their policies will eventually grow to equal the death benefit—even if their not around to see it.  

Furthermore, the PUA rider in an Infinite Banking designed Whole Life policies speed up the process by turbo-charging the cash values AND death benefit at no future cost.   In comparison, IUL is a side savings account based on positive market returns combined with the rising cost of a one year term policy.  While it’s nice IUL’s have the potential for 1-2% higher average returns than Whole Life, returns are dragged down by the rising cost of insurance over time, the unpredictability nature of market returns, and lack of discipline to stick to the planned premium when life events invariably happen.)

Underfunded and/or poor performing IUL policies should not be the foundational basis of a financial plan because IUL's have no guarantee of performance.  Just a guarantee of zero AND a guarantee of increasing life insurance costs.  As you can guess, I like building a financial plan with growth guaranteed each year and guaranteed fixed premiums that combined create financial certainties... hence Infinite Banking designed Whole Life.

5.  Taking income from an IUL during years of low and no return makes the cash value disappear even faster, especially so when the cost of insurance is rising exponentially after age 65.  It's the triple whammy that can't be avoided: no return, loans coming out, exponentially rising cost of insurance.  (This perfect storm of risk is even more pronounced in Variable Universal Life (VUL) policies).  

For this reason, I mention an IUL is not suituable for middle class income earners because they won't have a fallback plan if the majority of their eggs are in this one basket.  There’s just too many perils for middle class clientele to navigate to make it their main strategy.   

Unfortunately, there is an army of inexperienced life agents and advisors touting an IUL as the best thing since slice bread, and worse yet, people show me their IUL plans that have been designed the wrong way because there is too much death benefit (which means higher commissions for the advisor and an increased likelihood of that IUL to fall short of expectations).


All this said, The Power of Zero with Indexed Annuities is an excellent way to go because there is no life insurance mortality costs to eat away at the returns and many indexed annuities can be purchased with no annual fees or if choosing an indexed annuity for income purposes, a guaranteed lifetime income rider that averages 1% per year which is an extremely low cost for the peace of mind knowing you'll always have an income.


My thoughts are if people really want "The Power of Zero" without any true downside risk (no market risk AND no rising mortality costs), then combine IBC designed Whole Life policies with uncapped Indexed Annuities.  You get the best of both worlds (upside growth and the IBC banking strategy) without taking any unnecessary risk.

And one more thing, remember that if you're doing Infinite Banking right, you will have more than one IBC designed Whole Life policy. 

We can discuss further if you like by scheduling time on my calendar here:


Thank you,


John Montoya

Tuesday, October 6, 2020

3 Things To Consider When You Delay Getting Started With IBC


It's possible you’ve been looking into Infinite Banking for a few months or even a few years now and perhaps you've yet to get started.  Sometimes the hardest thing is taking a leap of faith when doing something for the first time.  A few things to go consider:


  1. We don’t get any younger and our current health is never guaranteed.
  2. This is a guaranteed contract.  It’ll grow every year without any luck, skill, or guess work… and it gives you tax-free access to cash values via policy loans for any reason without interrupting the growth.
  3. If you have a family to protect, there is no better option for your “safe money”.


Check out my podcast if you’d like to continue to learn at your pace:


Calendar:  I’ll be here when you are ready.  

Just keep in mind point #1 above and remember this:  

Time is the one thing we don't get back.  

Until this is taken care of, there are no guarantees except, of course, death and taxes.