One important question to ask your clients is if their goal is income or wealth transfer. If their goal is income than the living benefits and diversification mentioned above of life insurance will play an ever increasing role in the management of any client’s portfolio.
If, however, their answer is wealth transfer, then life insurance can again be used as a portfolio diversification asset that if used correctly can be passed to heirs both income and estate tax free. The real value though is to look at the internal rate of return (IRR) of life insurance at life expectancy of your clients. We are talking about the IRR of the death benefit, not the cash value, in this instance. The value of life insurance can be quantified using IRR and this is what is becoming increasingly important to your clients as a measuring stick given the uncertainty and volatility in today’s financial markets.
Policy loans from life insurance policies generally are not subject to income tax, provided the contract is not a Modified Endowment Contract, as defined by Section 7702A of the Internal Revenue Code. A policy loan or withdrawal from a life insurance policy that is a Modified Endowment Contract is taxable upon receipt to the extent cash value of the contract exceeds premium paid. Policy loans and withdrawals will reduce cash value and death benefit. Policy loans are subject to interest charges. Please tell your clients to consult with their attorney or tax advisor in regards to their specific situation.
The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, your clients should consult their own tax or legal counsel for advice.
Guarantees provided by annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank of the FDIC.
For financial professional use only. Not for use with consumers.