Life insurance products can be a bit overwhelming for most people to understand, as there are so many different types of products and variations available in the market. The purpose of this article is to try and simplify the many benefits that life insurance policies can offer.
The most basic and lowest premium type of life insurance is term insurance, which is simply a specific death benefit for a specified amount of years. There is no cash value buildup. While term insurance is the most economical way to get the insurance you need, the problem is that it is designed to expire before you do. Meaning that there is a very high likelihood that you will outlive the term of the policy leaving no value for you or your beneficiaries. Get accurate life insurance quotes.
On the other hand, cash value life insurance policies, such as whole life, universal life and indexed universal life offer permanent protection and depending on the design, can offer very attractive, tax advantaged cash value accumulation, which can be used to supplement retirement or for any other long-term savings needs. One of the most important aspects to understand is that cash value life insurance is given preferential tax treatment by the government. Meaning that whatever money invested into a life insurance product that does not go towards cost of insurance, taxes or fees, goes into an investment account that not only grows on a tax deferred basis, but when designed properly, can be withdrawn income tax free through both withdrawal of basis and policy loans. Life insurance death benefits are also income tax free and if structured properly can be estate tax free as well.
Furthermore, certain cash value/permanent life insurance policies can also provide many living benefits such as long term care protection and critical and terminal illness, making these insurance vehicles the ideal “life plan”, in that you are protected if you live too long, die too soon or become sick or disabled.
For example, in a recent case illustrated for a male age 45, we showed a contribution of $100k a year for 10 years into a cash value insurance policy and he was not only able to provide life insurance protection for his family but he was also able to take out over $3MM in tax free income at retirement, based on illustrated assumptions. It is also possible to take advantage of this low interest rate environment and borrow the premiums through a premium financing structure.
As an additional benefit, in certain states such as Florida, all cash value inside a life insurance policy (and the proceeds thereof) are completely exempt from the reach of creditors, making it an ideal investment vehicle for asset protection.
Lastly, all wealthy estates will benefit greatly with the purchase of a life insurance policy inside of an irrevocable life insurance trust, by providing the liquidity to pay estate taxes and avoid the need for the beneficiaries to sell valuable illiquid assets, such as business interests, real estate and art. With the new Biden administration, it is expected that the estate tax exemption will be reduced significantly, making even modest estates subject to estate taxes.
The year 2020 has seen an explosive growth in the purchase of life insurance, particularly for individuals under the age of 45, as people are becoming more aware of their mortality and the need for long term planning and protection for their family. In the era of Covid, it is becoming increasingly more difficult for the senior market to purchase life insurance. My advice for people with the foresight to think of their financial future, the time to consider purchasing a life insurance policy is now, while you are young and healthy.
Marc Wachter, Esq.
President of Wealth Planning Center (WPC) a firm dedicated to providing tax minimization and wealth accumulation and protection strategies for professionals and the highly affluent. WPC’s network consists of many of the most well respected legal, financial and academic professionals worldwide. Mr. Wachter is a professional for those who seek to minimize estate taxes, reduce corporate or personal income taxes; maximize tax advantaged investment programs as well as protect their assets from the claims of creditors. mw@wealthplanningcenter.com. (305) 479-8282
