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Old 04-21-2018, 09:15 PM
ActuaryFromMTL ActuaryFromMTL is offline
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Default Corridor factor

Hi all,

What is the reasoning behind the corridor factor?

I know that it's a way for the government to make UL products more insurance products rather than investments products and to prevent people from abusing this product to not pay taxes.

But can someone give me a clear example of how a person might use this product to not pay taxes? and how the corridor factor prevents them from doing it?

Thanks.
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Old 04-22-2018, 01:10 PM
Chuck Chuck is offline
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Death benefits are paid tax-free from life insurance.

The tax law (IRC 7702) defines these corridors as one element in the definition of how contracts must qualify as life insurance in order to continue the tax benefit.
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Old 04-22-2018, 01:23 PM
Academic Actuary Academic Actuary is online now
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When universal life products first appeared they could be constructed to have a small amount of pure insurance with a large savings element which would accrue tax free and as mentioned paid out without taxation if paid as a death benefit. These were effectively tax sheltered savings products rather than insurance.
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Old 04-22-2018, 01:55 PM
ActuaryFromMTL ActuaryFromMTL is offline
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Oh I think I understand now.

So, let's say I purchase a small UL insurance policy of $10,000 and I want to avoid paying taxes. All I have to do is pay way more than the minimum premium required by the UL policy (let's say $15,000 every year) and grow my AV that way (and with interest) and at some point in the future take my money out without paying any taxes.

The corridor factor prevents me from doing that.

Am I right?
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Old 04-22-2018, 02:34 PM
Abraham Weishaus Abraham Weishaus is offline
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Actually you have to die to avoid taxes altogether. If you take your money out while alive by surrendering, you'll have to pay tax on the excess of proceeds over premiums at that time. Still, you got the insurance tax free and you deferred taxes on the gain.

The corridor factor limits the amount of tax you can defer.
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Old 04-22-2018, 03:40 PM
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SirActSci SirActSci is offline
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Awesome, I like these practical explanations.
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Old 04-22-2018, 11:49 PM
ThereIsNoSpoon ThereIsNoSpoon is offline
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Quote:
Originally Posted by Abraham Weishaus View Post
Actually you have to die to avoid taxes altogether.
Now that's a whole new level of avoiding taxes!
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Old 04-23-2018, 09:47 AM
Chuck Chuck is offline
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Quote:
Originally Posted by ThereIsNoSpoon View Post
Now that's a whole new level of avoiding taxes!
When you think about it, we have a great new slogan for the life industry...

We Change the Certainty of Death AND Taxes to Death OR Taxes.
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