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Life Insurance Information

Cash value life insurance offers great competitive advantages 

Whether your needs are general protection, business protection, estate planning or supplementary retirement needs, these advantages fall into three categories:
1) Tax Advantages          2) Financial & Actuarial Advantages          3) Legal & Contractual Advantages  
These inherent advantages make cash value life insurance a financial asset that should be an important component of virtually every asset portfolio mix.    
....more information

What about term insurance you might ask?
Certainly term insurance has a place in many planning scenarios where protection needs might terminate after a fixed period of time. However, because of its design, term insurance cannot offer the major advantages offered by cash value permanent insurance. Term insurance ends after a fixed number of years and only pays a death benefit if the insured dies while the policy is still in force. Cash value life insurance can be designed to pay a death benefit whether your client lives to their life expectancy or not....more information

Permanent Life Insurance policies come in different flavors .... depending on your situation and risk profile. These policy types may include no-lapse Universal Life (UL); Indexed Universal Life (IUL); or maybe Traditional Whole Life (WL). Most of these permanent types of policies offer a unique combination of features and benefits that place them in a class by themselves.....more information

Federal Tax Benefits of Life Insurance .......

Here are a number of federal tax benefits that give a significant competitive edge to cash value life insurance versus other fixed financial assets:

  • IRC Section 101(a) provides that death benefits of life insurance are generally income tax free when paid to the listed beneficiary or beneficiaries. This is true whether the death benefit is paid to an individual, a business entity, a trust, or an estate. The death benefit can also be made estate tax free if the policy is owned by an irrevocable trust.
  • The policy can pay out to the policy owner before the death of the insured. For Non – Modified Endowment Contracts also known as a (MEC -policy), cash can be withdrawn from the policy tax free -- in most cases -- up to the adjusted cost basis (FIFO - First in, First out - of the amount you have paid into the policy) under IRC Section 72(e)(5). Withdrawals will reduce the policy’s cash value.  
  • The policy can pay out tax-free cash to the policy owner in the form of policy loans at a stated rate of interest. Loans will reduce the policy’s cash value and may reduce the death benefit. This assumes the policy never lapses while the insured is still alive. (Keep in mind that the tax free treatment of policy loans only applies if the policy is not a MEC).
  • Tax-free cash value withdrawals or loans are not subject to the 3.8% passive income tax under the Affordable Care Act (ACA). Also, tax-free withdrawals or loans are not considered as income for purposes of calculating income taxes on Social Security retirement benefits. And cash value life insurance is not considered to be a countable asset on the FAFSA application for financial aid at public colleges. 
  • The policy owner may receive an income tax free advance of a portion of the death benefit for certain long term care expenses, chronic, or terminal illness under IRC Section 7702B or IRC Section 101(g). These potential tax free benefits depend on the design of the policy which may or may not include certain long term care riders.
  • Growth of policy cash values in excess of the cost basis (the amount you paid into it) are typically income tax deferred while they remain in the policy. Please keep in mind, that a complete surrender of a policy in a gain position will have income taxes on the gain in excess of adjusted cost basis.
  • A policy in a gain position can be exchanged tax-free directly to another insurance company under IRC Section 1035(a). This exchange from one policy to another should result in some kind of a gain in overall benefits to the policy owner. Such as a greater death benefit, lower or no future premiums, or a combination of the both.
  • A policy in a gain position can be exchanged tax-free to another carrier for either a deferred annuity or an immediate annuity under IRC Section 1035(a).

Financial and Actuarial Design Advantages of Life Insurance....

  • Life insurance is a financial asset that is designed using the mathematical models of actuarial science.  The pricing and features of these contracts are determined by present value and future value calculations over an assumed life expectancy of large numbers of deceased individuals over a long periods of time. 
  • The policy may be structured so that death benefits have the potential to increase from year to year.  Policies may be designed with different crediting methods based on no-lapse guarantees, current assumption interest crediting, crediting based on a stock index like the S&P, or dividend assumptions from certain carriers.
  • Policies may utilize certain riders for term insurance, long term care, waiver of premium for disability, over-loan protection, cash value enhancement and other features
  • The life insurance industry is one of the most competitive industries in the U.S. This product, pricing, and feature competition of policy design assures that U.S. consumers have a wide variety of product types, features, and carrier financial strengths to choose from based on their personal financial and protection needs.
  • Often, the present value cost of life insurance at life expectancy and beyond is the lowest method of financing a family, business, or estate protection compared to other fixed financial assets with taxable yields. This is especially true in this continuing low interest economic environment.

Legal and Contractual Advantages of Life Insurance......

  • Your life insurance policy is a legal contract between you, the policy owner and the insurance company. Any guarantees specified in the contract are legally enforceable under state law protections of all the states. 
  • These Insurers are heavily regulated in all 50 states and are required to reserve significant assets to pay future death claims
  • This industry has established state “guarantee funds” to pay claims under policies issued by any carrier that are insolvent or in receivership. Insolvent life insurance carriers are an extremely rare event. You should ask for the current ratings of each carrier with which you propose to do business with.
  • Many states have adopted statutory law that protects policy cash values and death benefits from the claims of the policy owner’s creditors.

Your financial picture can be enhanced dramatically with the unique financial asset of cash value life insurance. However, unlike other financial assets, its purchase is not an automatic transaction. Life insurance companies have underwriting rules and guidelines to gather and evaluate the proposed insured’s medical and financial situation. If these underwriting requirements are successfully met, a policy will be issued to the policy owner and benefits will be active upon the necessary premium payment established.

Consider using “Life Insurance” death benefits to pay the income taxes on a Roth conversion at death.  That way, any future distributions if done correctly, will not incur income taxes or cause additional possible taxes or excess surcharges, from your entitlement programs, such as Medicare and Social Security (Under current law)....more information  

Could this Strategy Work for You?

I have had many clients tell me something like this: .... I retired at 62 and started getting Social Security shortly after. It took about a year to get use to the “new budget”, you know not having that weekly paycheck coming in week after week. But after about a year, we’re doing alright, and have gotten use to this thing called retirement and fixed income .....NOW, I WANT YOU TO FAST FORWARD 8 YEARS, TO AGE 70 1/2 .... The “Required Minimum Distribution Age” where you must begin to withdraw a scheduled amount each year from your qualified accounts (ie: YOUR IRA’s)...... Often times, I will hear something like this: ..... Do I really have to take these distributions? ....... We’re doing fine and really don’t need them – Nor do we want to pay the taxes on them. ..... My reply is usually: Sorry....Yes, you do ..... That’s why they are called .... “Required Minimum Distributions” ..... Because they are REQUIRED ! ...... So after talking a while, we put together a strategy, that will take these “Required Minimum Distributions” out as required ..... And .... After paying some taxes, pay them into a permanent life insurance policy, to complete the strategy at some point in the future.....more information

Who can convert to a Roth?  There are no income limits (Under current law).

·         The participant can convert to a Roth.  So, if you have any warning of your death, you can exercise the conversion, even on your death bed. 

·         The surviving spouse of the participant can convert.  So, even if you had no warning of your death, but you are survived by a spouse, the spouse can convert and use your life insurance proceeds to   
           fund the income taxes that would occur because of the conversion.

Please keep this in mind: A non-spouse beneficiary (inherited IRA) cannot convert to a Roth.  But, the life insurance would be there to fund the income taxes as heirs remove money from the cookie jar.

With this strategy, the tax-deferred account (the IRA) will have its taxes paid with pennies on the dollar using the leverage of life insurance - a tax-efficient and cost-effective solution using life Insurance....more information

Contact us to learn what options could benefit you and your family the most!


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This material is for informational purposes only and is not affiliated with the U.S. government or any governmental agency. It is not intended to provide any tax, legal or investment advice or provide the basis for any financial decisions. Please consult a qualified professional before making decisions about your financial situation.

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