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Life Insurance As An Asset
April 24, 2017
Life Insurance Corner, What’s New,
ASSET – A resource having economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit. Traditionally, life insurance has been thought of as a necessary expense needed to protect a family’s financial future, but it has the potential to offer far more when you consider its advantages as an asset.A Key Component of a Diversified Portfolio
- Leverage a limited number of premium payments into a sizable death benefit to protect your family in the event you die prematurely.
- Provide access to cash value which could be utilized to supplement retirement income or help fund a child’s education.
- Transfer wealth created over a lifetime with an income tax free death benefit. The life insurance death benefit even has the potential to be estate tax free if properly owned and structured.
Permanent Life Insurance Benefits
- Income tax free death benefit paid to beneficiary
- Tax-deferred growth of policy cash values
- No contribution limits due to income
- Potential for income tax-free withdrawals and policy loans
- No 10% penalty tax on cash value distributions prior to age 59 ½
A note about life insurance distributions:
Tax-free distributions assume that the life insurance policy is properly funded, is not a Modified Endowment Contract (MEC), and distributions are made up to the cost basis and policy loans thereafter. Distributions may need to be reduced, stopped and/or premium payments may need to be resumed if the policy does not perform as expected or to avoid a policy lapse. Should the policy lapse or be surrendered prior to death of the insured, there may be tax consequences.Preparing For the Ifs in Life
Life insurance is for living. Wouldn’t you live better now if you had more confidence in your ability to:- Create financial protection for your family
- Grow equity with which to preserve your lifestyle
- Leave a legacy to the ones you love
Consider Income Taxes When Funding Your Portfolio
Taxes can have an impact on how much of your savings you ultimately get to use to enhance your lifestyle. Taxes can also have an impact on how much of any remaining assets are received by your beneficiaries. In the last thirty years, U.S. income taxes have been comparatively low. The top Marginal Tax Rate for the highest income earners is currently 35%, but the average top rate over the last one hundred years has been nearly 60%. Even though the future income taxes is unpredictable, it would be reasonable to assume they will continue to evolve over time, experiencing high and low periods. You can help protect retirement assets from being diminished by taxes by allocating savings to assets that permit tax-free distributions. This action has the potential to enhance your retirement income because your savings will be sheltered from income tax, regardless of the rates in effect at the time you need income. 4 assets with tax-advantages- Roth IRAs
- Roth 401(k)s
- Municipal Bonds
- Cash Value Life Insurance
| General Overview of Federal Tax Features | |||||
| Feature | Life Insurance | Qualified Plan/ Traditional IRA | Deferred Annuities | Roth IRA/ Roth 401K | Municipal Bonds |
| Funding/Contribution Limits | NO | YES | NO | YES | NO |
| Potential Income Tax-Deferred Accumulations | YES | YES | YES | YES | TAX EXEMPT |
| Income Tax-Advantaged Withdrawals/Loans | YES | NO | NO | YES | TAX EXEMPT |
| Income Tax-Free Insurance Death Benefit | YES | N/A | NO | N/A | N/A |
| Penalty Tax for Early Withdrawal | Only if MEC | YES | YES | YES | NO |
| Cost of Insurance Changes | YES | NO | YES | NO | NO |
Taking a Closer Look at Cash Value
MEET JACK
Jack Martin is 35 and owns his own landscaping company. He has recently divorced and needs to make sure his two children are provided for financially, should he suffer an untimely death. He has decided to purchase life insurance to meet his need. Jack has always reinvested almost all of his profits back into the company and now he feels the need to catch up on preparing for retirement. He has a SIMPLE IRA in which he invests the allowable maximum each year and feels comfortable he has an additional $10,000 per year that he can devote to insurance premiums and added savings. Jack’s financial professional shows him an illustration for a MetLife Whole Life policy. Assuming Jack qualifies for a preferred, non-smoker rating and pays $10,000 premium each year until age 100, the guaranteed death benefit on the policy would be $909,506. The death benefit has the potential to increase with higher crediting rates or dividend payments that are non-guaranteed features of the policy. Jack’s financial professional explains that the cash value grows slowly in the early years of the policy, but can grow into a significant source of funds for supplemental income by the time he retires. The he shows Jack what the policy’s cash value may mean to him at age 55, 65, 75 or 85 depending on his future income needs. Based on the policy’s non-guaranteed dividends, Jack would earn slightly more than a 4% rate of return on premiums paid if he waits until retirement age to take any loans or withdrawals from the policy. However, If Jack initiated a moderate supplemental income stream from the cash value using withdrawals and loans – being careful not to lapse the policy- he may realize his income on a tax-free basis. A significantly higher rate of return would be necessary to distribute an equivalent amount of income from a taxable account, due to capital gains or ordinary income taxes. If Jack does not need additional income during his retirement, he can either continue paying premiums, allowing the cash value and death benefit to increase, or he could allow future dividend payments to reduce his premium outlay and keep the death benefit relatively stable. Jack really likes the flexibility of this life insurance product and moves forward with his application for the policy.| MetLife Whole Life Policy Cash Value | |||
| AGE | Guaranteed Cash Value | Assuming Current Dividend Crediting Rates | |
| Cash Value | Yield | ||
| 55 | $214,643 | $310,721 | 4.03% |
| 65 | $373,807 | $644,438 | 4.56% |
| 75 | $543,885 | $1,153,122 | 4.62% |
| 85 | $697,591 | $1,879,646 | 4.52% |