by Stephen Sabo, Simple Society

Most clients and advisors that we work with think of life insurance as a necessary evil– something you must have (and pay for) to protect the ones you care about if the unthinkable happens. Life insurance absolutely is that– and I have seen first-hand the positive economic impact it can have on the loved ones of someone lost too soon.  But what if it could offer significantly more– not just to the beneficiaries, but clients themselves while they live?

Permanent life insurance has a cash value component that builds up during the life of the policy and is fully accessible to the policy owner for use while the insured is still living. There are a variety of different policy constructs that allow for customization to the needs and risk tolerance of each individual client, ranging from very stable and predictable (whole life) to more aggressive (variable life). Regardless of which end of the spectrum the design falls on, however, if properly structured the plan enjoys favorable lifetime tax treatment.

Generally, life insurance is funded with post-tax capital, but then policy values grow tax-deferred, income can be taken tax-free during life, and any remaining death benefit is ultimately paid tax-free to beneficiaries. Therefore when designed correctly, permanent life insurance provides lifetime tax abatement– and in doing so provides high-income clients access to a tax favored asset location when other more traditional routes (think Roth IRA/401k) may be more difficult or even impossible to accumulate a meaningful amount of capital in.  Also, unlike those other vehicles dedicated to traditional retirement planning, there are no age-based rules on distribution dates, no income thresholds restricting access, and no contribution limitations on amounts that can be dedicated to this part of the overall allocation.

We are seeing surging interest in this type of asset, as astute advisors and clients are working to position client portfolios for the likely inevitable tax rate increases down the line. A legislative change in late 2020 has increased the overall efficiency of many of these types of plans– reducing the cost “friction” and making these types of plans even more attractive. There are also many funding options, including a strategy called premium financing (which uses bank credit to fund the policy premiums instead of client capital) that have significantly increased the efficiency of this planning due to the low interest rate environment.

Whether or not you have reviewed cash value life insurance in the past, give life a new look– you may find it more attractive than you anticipated!


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