Thursday, January 9, 2014

Life Insurance as a Diversification Asset

There may be no better time than now to inform your clients about the value of life insurance as an asset in and of itself. The continued tax-favored treatment still afforded life insurance along with some of the guarantees offered by certain insurance contracts make life insurance a viable option for any portfolio. Show your clients the value of living benefits of life insurance as well as the self-completing nature of life insurance due to early maturity. Living benefits can provide an income stream that is income tax free, if the distribution method is properly set up. While the tax free death benefits from life insurance will provide your clients a safety net for their families if their portfolio does not have time to recover before a premature death.

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.
PAIS 04122613

Thursday, January 2, 2014

Reasons to Use Indexed Life Insurance

Most agents sell indexed annuities, but not necessarily indexed life insurance, or vice versa. However, there are situations where one is clearly better than the other. This is why it’s important to know how and when you should sell each. Here are some added insights on reasons to use indexed life insurance.

There are a number of reasons for why an indexed universal life (IUL) insurance products are appealing to clients.

•High index participation relative to annuities.
•No tax-deferred cash value accumulation.
•Potential for tax-free distribution via contract loans.
•Income tax-free death benefit that’s more than premiums paid.

These are situations where indexed life insurance fits the client’s needs better than an indexed annuity.

  • An IUL may have more appeal to younger clients because they benefit from the combination of relatively low cost-of-insurance rates and very high index participation. Generally, they’re healthy enough to qualify for insurance.
  • A lump sum isn’t required for an IUL. There are clients who like to put money aside for future needs, but don’t have enough to meet the minimum premium requirements of an annuity. Indexed life insurance has low monthly premium without requiring up-front lump sums.
  • They may have a lump sum available to purchase an annuity, but it’s not enough to guarantee a comfortable retirement. Indexed life won’t instantly solve this dilemma, but it will provide for the owner’s beneficiaries should the insured owner die before accumulating retirement savings.
  • Some people are concerned about tax rate increases. Under current tax law, values found in an indexed life insurance contract can be accessed via contract loans on an income tax-free basis, as long as the premium pattern doesn’t violate the modified endowment contract limits.
If these situations appeal to your client, they may feel indexed life insurance is the ideal product.
This material is designed to provide general information about the subject matter covered. It should be used with the understanding that we are not rendering legal, accounting, or tax advice. Such services should be provided by the client’s own professional advisors. Accordingly, any information in this document cannot be used by any taxpayer for purposes of avoiding penalties under the Internal Revenue Code.

For financial professional use only. Not for use with consumers.
PAIS 03122613