What is a Section 79 Plan? Simply put, it is a tax-plan where small business owners are allowed to take a 20-40% deduction through their business to purchase an individually owned cash value life (CLV) insurance policy. This is the huge selling point of the plan.
If you just read the above paragraph, you’d think that a Section 79 Plan is the nirvana of plans because you’ve been trying to get your profitable small business owners to buy CVL for years.
Why are the finances of Section 79 so marginal? In short, the reason Section 79 Plans are up to 40% deductible is because the life insurance policy purchased is a crummy policy by design. That’s right, by design, the policy is a terrible cash accumulator.
The better the policy, the less the deduction. A good policy (Retirement Life) for example would receive only an 8-10% deduction through the plan.
Improving the finances of the Section 79 Plan Section 79 Plans are funded into a crummy cash accumulating policy for five years. Then the client is shown how the policy can be flipped to a variable life policy earning 9% annually going forward. Besides that this is not a conservative example, the numbers are marginal even assuming a 9% rate of return.
Now in the marketplace is a new Section 79 Plan using an EIUL policy. The EIUL policy was also designed to be a crummy cash accumulating policy in the early years so the client can obtain his/her 30-40% deduction (not to mention that the company screwed up their plan for groups under 10 employees by not dealing the non-medical underwriting issue).
Why are so many agents trying to sell Section 79 Plans? This is what really moved me to write this newsletter. Agents are pitching Section 79 Plans to clients for two simple reasons: 1) Many small business clients will buy any plan that is “deductible” because they so despise paying income taxes. 2) Insurance advisors want to sell life insurance.