Part I—What’s Wrong With Section 79 Plans 
What is a Section 79 Plan? Simply put, it is a tax plan where small business owners are allowed to take a 30-40% deduction through their business to purchase an individually owned Cash Value Life (CVL) insurance policy.
Why a CVL Insurance? Because cash in a CVL policy can grow tax fee and be removed tax free in retirement. I explain the benefits of growing wealth with CVL in my book Retiring Without Risk (www.retiringwithoutrisk.com).
My book explains how to use CVL insurance with money that has already been income taxed. Therefore, the idea of buying a CVL insurance policy in a Section 79 Plan and receiving a 30-40% deduction is a very easy sale for life insurance agents (which is why the plan is so prevalent in the marketplace today).
However, when you break down the math and the sales pitch, you’ll know why I despise these plans.
If you’d like to read Part II of this article series titled Why You Have to Lie to Employees to Implement Section 79 Plans, please click here.
Group underwriting for businesses with fewer than 10 employees
For businesses fewer than 10 employees, the law prohibits full medical underwriting of the policies that are issued (“group” underwriting is required which is much more risky for an insurance company). Amazingly, one of the insurance companies offering these plans doesn’t have the ability to issue non-medically underwriting policies. This is laughable and pathetic all at the same time.
Why are the finances of Section 79 Plans so marginal? Section 79 Plans are up to 40% deductible 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 approximately a 5% deduction through the plan.
Converting the crummy policy after year five. Section 79 Plans are funded into a crummy cash accumulating policy for five years. Then the client is typically shown how the policy can be “converted” to a variable life policy or EIUL policy earning unrealistic returns going forward.
Why are so many agents trying to sell Section 79 Plans? 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. 3) The commissions with Section 79 Plan sales are huge. One reason the life policies in Section 79 Plans are so crummy is because of the commissions that are paid.
This brings up an interesting issue. If the plan is marginal from a wealth-building standpoint, then why are agents selling it? Again two reasons: 1) Most advisors have not broken down the math so they can come to a correct conclusion which is that the plans are not worth implementing from a pure financial standpoint. 2) Some advisors know the plan is marginal from a financial standpoint and don’t care because they know they can still sell it to business owners who are looking for deductions and make huge commissions.
1) above is almost excusable (since most agents take the insurance company’s word that these plans are good)
2) above is what helps gives life insurance agents a bad reputation.
Business owners would be better off paying tax on their money and funding a “good” cash value life policy for wealth building
It sounds crazy, but it’s true. The math does not lie. Business owners would be better off paying tax on their money and taking it home to buy a “good” cash accumulating policy.
The following example assumes a business will pay a premium of $100,000 into a Section 79 Plan life policy for the business owner (age 45) each year for five years who will borrow the maximum out tax-free from the policy from ages 65-84. I will then compare that to taking an equivalent amount of after-tax dollars and fund a “good” cash building policy (Retirement Life™) each year for five years and borrow the maximum out tax-free from ages 65-84.
How much could be removed from the Section 79 Plan policy? $83,646 every year tax free from ages 65-84.
How much could be removed every year from the Retirement Life™ policy? $125,084
Which one would your prefer?
If you simply talked about taking a 40% deduction to fund a plan vs. not taking a deduction, the business owners would always opt for a Section 79 Plan. However, if you give full disclosure on the ultimate benefit, I can’t imagine any of them choosing to implement a Section 79 Plan.
Bottom line
The bottom line is that Section 79 Plans are extremely marginal from a wealth-building standpoint and are mainly sold by advisors who do not understand the math or do understand the math and don’t care because the plans help them push/sell life insurance.
If you are an advisor, manipulating a client to use a Section 79 Plan that is so very marginal from a wealth- building standpoint because it is sexy to sell a 40% deductible plan may not be the path for you to go down.
If you are a non-advisor who has been pitched a Section 79 Plan and want to have me show you why the numbers don’t add up, please feel free to e-mail me at roccy@badadvisors.com.
If you already had a Section 79 Plan and want to discuss a Section 79 Plan “rescue,” please e-mail me roccy@badadvisors.com.
