All too often we discuss life insurance and concepts with the expectation that everyone we deal with has an advanced understanding of how these contracts work and how best to apply them to their various clients’ situations. That’s just not the case. The truth is that we work with a wide variety of insurance producers, ranging from the very experienced lifers to the less experienced new-to-the-biz advisors. So every once in a while, it’s a good idea to dial back the advanced sales rhetoric and revisit the basics. And really, even the most experienced can benefit from a refresher. For this post, we’re taking a closer look at the basics of Cash Value Life Insurance.
Cash value life insurance provides coverage on an insured person’s life through a death benefit that generally passes to beneficiaries free of federal income tax. The tax-free death benefit can be especially important for those concerned about estate taxes. But cash-value life insurance can also provide significant tax benefits while you’re still alive.
Why Should Anyone Purchase Cash Value Life Insurance?
There are a great number of reasons that someone might be interested in this type of insurance policy. We won’t cover them all, but the aforementioned tax benefits are a great place to start.
Here is a brief overview of some of the tax advantages associated with cash value life insurance:
- Tax-deferred earnings: You do not have to pay taxes on any gains in the policy during the year in which they are earned or while they remain in the policy. Taxes are deferred until the policy is surrendered, lapses or when certain distributions occur. Gains left in the policy can continue to accumulate and lead to potentially higher policy values.
- Tax-free withdrawals: Premiums paid into a policy can be taken tax-free up to your cost basis in the policy.
- Tax-free loans: If there is still sufficient cash value in the policy, you can continue taking money out in excess of your cost basis, through tax-free loans. The loan interest rate is generally lower than the loan rate charged by banks for similar secured loans.
- Federal income tax-free death benefit: In most cases, the death benefit passes to your beneficiaries free of federal income taxes, providing an excellent way to transfer wealth to a spouse or the next generation.
The tax advantages create a lot of flexibility in these policies. Consumers put a lot of value in flexibility. The cash value that is built up in a policy can be used to help pay premiums, pay for college, provide a down-payment on a new home, a new boat, a new car, supplement retirement income, and more. Or take this into account: life insurance products and pricing are changing constantly. What can you do if during an annual policy review you find your client’s current policy no longer fits their needs or is under-performing? Cash value buildup can help your clients exit an existing policy and make the purchase of a more appropriate policy a more affordable venture.
Who Is the Ideal Client for Cash Value Life Insurance?
Cash Value Life Insurance and permanent insurance in general is not for everyone. For some clients, the cost of the premiums outweighs the value – perhaps for those clients, take a look at a small cash value policy blended with a larger term policy. After all, it’s hard to argue with the opportunities provided by a cash value policy. The ideal client is hard to pinpoint in reality. It’s anyone who has death benefit needs that sees benefit in accessing tax advantaged money.
Insurance companies offer a wide variety of cash-value or permanent life insurance products with different features and benefits. It’s important that you and your clients do your research before selecting a life insurance policy to ensure that you understand how its features and benefits work, as well as what fees and charges are associated with the policy.