You may get the wrong impression by the title of this article, but don’t let it throw you off. I am still a great proponent of term life and no-lapse guarantee universal life; however, in today’s economy, the value of cash value is still strong.
Unfortunately, once again the tax advantages of life insurance products are being threatened! Millions of families are unaware that a slight change in tax law on life insurance can have enormous implications for their financial future and dire consequences for 20 percent of Americans’ savings.
Let’s take a moment to revisit some of the benefits of cash value life insurance. First and foremost, it is a permanent life insurance policy designed for protecting loved ones for an insured’s lifetime, being there when needed. Here are some other benefits that you may not have thought about in a while.
• Forced Savings. When you sell a whole life or universal life insurance policy, your client is forced into saving money. These types of policies build cash value, unlike a term policy. Many of us do not have the discipline needed to invest money every single month without exception. We get around to it whenever we can, and that usually is not very often. With whole life and universal life policies, your clients will be saving part of their premiums paid every month—which will grow over the years to a fairly large balance.
• Tax Deferral. The interest accumulation in permanent life insurance grows tax deferred, which means your client does not have to pay tax on any of the growth until it is withdrawn.
• Accessing the Cash. The cash value of a life insurance policy can be accessed in two ways.
1. Withdrawals. When withdrawals are made from a policy, your client first receives the premium paid or cost basis and no tax is due on that return.
2. Policy Loans. Loans are made from the general funds of a life insurance company using the life policy as collateral, and interest is charged on the loan balance. Funds still accumulate inside your client’s policy even with a loan, but keep in mind that loans do reduce the face amount of the policy if not repaid. The net cost of the loan can be 1 to 2 percent net. Generally, loans are not considered a taxable distribution unless the policy is classified as a modified endowment contract. In that case, a loan may be reportable as taxable income if the policy’s cash value exceeds the cost basis (premiums paid into the contract).
Reasons why your client may need to access the cash: medical bills, starting a new business, college tuition, retirement income, premium offset, unexpected expenses, etc.
I challenge you to take another look at permanent life insurance that accumulates cash value—whether it is whole life, accumulation universal life, or indexed universal life. Offer your clients the value of cash value, forced savings and some of the last tax advantaged products available to them today!
