By David Appel and David Shannon
Many times, we are asked by prospects and other advisors, “Why do people have permanent life insurance policies?” That answer can vary, depending on the individual’s circumstances, the nature of the planning and the goals of all parties involved. There are many ways to use the powerful features of permanent life insurance, in the traditional planning sense, as well as some planning opportunities that were sometimes overlooked.
One of the cleanest and simplest uses of permanent life insurance often is associated with estate planning. Typically, this strategy involves an irrevocable life insurance trust owning and serving as the primary beneficiary of the life insurance policy. There are many funding strategies that individuals and families can use to complete this planning. All of these strategies are executed in the hope of reducing the tax burden to the next generation upon the death of the parents or grandparents. The answer to the “why” question in this strategy is twofold: 1) ownership of the policy by the irrevocable trust removes the death benefit proceeds from the estate of the individual or family, 2) the proceeds from the policy, when paid out, can be used to pay any pending tax burdens upon the last insured’s death, and the death benefit paid to the beneficiaries is protected from creditors and lawsuits when the policy is owned by one of these trusts.
The trust-owned life insurance strategy described previously is one that most advisors are familiar with executing, and they are discussing this with their clients almost every day. It would appear that the next step up from the “why permanent life insurance” question is more focused on the individuals and families who are not exposed to potential taxes upon the death of a family patriarch.
Over the past five to 10 years, the need for permanent life insurance has extended well beyond the “high net worth” client. Today, people are using permanent life insurance for the powerful use of its cash values and the freedom it provides in retirement, along with its ability to leave a legacy to family or charity. In these scenarios, life insurance is looked at more as an asset, rather than just for the death benefit.
The features of the permanent life insurance product portfolio have evolved over the years, which is positioning with a multitude of choices when it comes to products that build cash value. As always, the tax-deferred growth and potential tax-free distributions of the cash value still remain, along with the values of the policy being protected from both creditors and lawsuits. Cash value life insurance increasingly is being looked at as an intelligent savings vehicle for some individuals. The cash values can be used in times of emergency, for college funding and as a potential stream of income in retirement.
For example, the evolution of whole life products and the ability to structure the premiums in more defined ways, in terms of potential guaranteed premium amounts and lengths of time, have opened up many opportunities in our business. We have many clients who are working in the financial space. More of them are finding whole life products as an alternative to other investments in the portfolio. On top of the permanent insurance death benefit, using one of the limited-pay whole life products can provide a policy holder with guaranteed cash values. That cash value has tremendous value, and could be used to help supplement the individual’s retirement income. In doing so, the life insurance policy has created an asset class of its own within this individual portfolio.