Protection Plus Insurance Contracts VS. Roth IRAS
Battle of the Financial Vehicles
A Protection Plus Insurance Contract (PPIC) has many of the advantages of a Roth IRA,
with a few added benefits!
Like with Roth IRAs, the money contributed to a Protection Plus Insurance Contract is made with after-tax dollars. And like with Roth IRAs, you can use the cash-value of your account without having to pay taxes (when you use the cash value as collateral for a loan, you pay zero taxes). Consider the following chart for a comparison of the attributes of an IRA, Roth IRA, and a Protection Plus Insurance Contract:
When you negotiate your insurance contract, you pick the amount of premiums you pay annually, which is limited only by your income and your insurable interest. If in the future you want to increase your maximum annual contribution, you can establish a new insurance contract.
There are a variety of insurance contracts. You can choose higher risk contracts, with potentially higher reward, or you can choose a contract that has a guaranteed minimum return, which is usually around 6% annually.
You are ineligible to make contributions to a Roth IRA if your modified adjusted gross income exceeds a certain amount. That amount for 2019 is $137,000 if you're single and $203,000 if you are married.
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You can withdraw up to the amount of your contributions without having to pay any penalties or taxes, but withdrawing the earnings on your contributions invokes tax consequences. But if set up right, you never withdraw from the PPIC, and instead take out loans against the cash value. Then there are no tax consequences.
You can withdraw up to the amount of your contributions any time without penalty or tax. But to withdraw the earnings on your contributions without penalty or tax, you have to be at least 59½.
You see from the comparison that the one real drawback to a protection plus insurance contract is that health is a factor—you can only insure a life that is in decent health. But the insured does not have to be the owner of the contract. You could create a PPIC on a spouse, a child, or a key employee. That way almost anyone who wants a PPIC can use one.
Yes, you can do both!
Roth IRAs are a great investment vehicle and don’t come with the major drawbacks of a traditional IRA or 401k. But top income earners cannot use Roth IRAs, and no more than $6,000 can be contributed annually. And a great way to diversify your portfolio would be to have a higher risk Roth IRA (if you’re young and can afford to) and a low risk PPIC.
If you have questions, or are interested in finding out more about protection plus insurance contracts, call the experts at the Alpha and Omega.