Brian Gruss Licensed Insurance Planner

Tax Advantages of a Permanent Life Insurance Policy

Most of us are aware of the benefits of obtaining a life insurance policy – the death benefit.  The death benefit protects your family from the financial hardship that may arise after your death.  But there is a second benefit of life insurance.  Permanent or cash value life insurance can offer unique tax advantages that cannot be found through other options.

Permanent life insurance, including whole life and universal life, provides long-term life insurance for the policyholder.  Most policies feature a level premium over the life of the policy.  You will always know your premium amount so you will not be surprised by increases, as you might be if you renewed a term policy.  Because of the permanent nature of this type of insurance, you also have the added benefit of accumulated cash value.  That cash value can be used by the policyholder through loans and other withdrawal options, and can be an important addition to your retirement planning.

There are several unique tax advantages of permanent life insurance that are not found with other financial tools.

o       Cash value accumulates free of taxation.  You will not be required to pay income tax on interest or other earnings that are credited to cash value.

o       Borrowing the cash value may be done without having to pay income tax.  Loans are generally treated as debts and are not subject to income tax.  In addition, these loans may not need to be repaid.  If you build up a large amount of cash value and maintain a minimum death benefit to cash value ratio, you can borrow against the cash value for systematic payments that can supplement your retirement income.  Be aware, however, that the cash value may be subject to income taxes when there is a withdrawal from or surrender of the policy, or if the cash value to death benefit ratio is not maintained.  Also, loans accrue interest and they can reduce the overall value of the policy.  And lastly, if the policy is a modified endowment contract, the loan may be taxable upon issuance.

o       Your beneficiaries receive the death benefit free of income taxation.  This tax advantage is true of both term and permanent policies.

o       By arranging the beneficiary designations in accordance with current laws, you can avoid potential estate taxes and probate costs.  By placing ownership and naming beneficiaries outside your estate, you may be able to avoid the proceeds of the policy going into your estate and thus being subject to estate taxes.  Keep in mind, however, that to avoid estate inclusion for existing policies, you must transfer the policy at least three years before your death.

Permanent life insurance policies offer unique tax advantages, as well as the traditional death benefit enjoyed by all life insurance policies.  Consult your insurance agent, Brian Gruss, and attorney to discuss the advantages of this financial product so that you and your loved ones may reap all the benefits it has to offer.

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Group Life Insurance Alone May Not Fully Protect Your Family

If you are thinking about life insurance as a means to provide for your family, then you should think beyond the group life insurance that may be provided by your employer.  When insured by a group policy you may feel a false sense of security in believing you have adequate coverage.

While some employers may offer several times your regular salary in life insurance benefits you must ask yourself, is this enough?  How long would this amount last given your current debts and expenses? There is also the question of providing for your children, and their higher educational needs.  It is important to take the time to calculate how much is enough to cover your family’s financial needs should the unthinkable happen.  This is especially important if you are the sole wage earner for the family.

As a rule of thumb, people should have seven to ten times their annual salary in life insurance, particularly younger people with families to raise.   Younger people have to realize that now is the optimum time to purchase life insurance; as their policy will cost much less than if they wait a few years.

If you are beginning a new job or thinking about switching jobs there is vital information about group life insurance benefits you should know about.

If you leave a job, the downside of most group policies is that you cannot take the coverage with you; it may or may not be portable.  Even if the coverage is portable, the insurer will normally require conversion of your term policy to a higher priced whole life policy.  Certainly, it is preferable to accept the high priced conversion policy rather than having no coverage at all.

Advantages of group life policies:

o       Employers provide policies, most often at no charge to you.

o       Can be used as a supplement to an individual life policy.

o       Most policies are guaranteed issue with no medical underwriting required.

Disadvantages of group life policies:

o       Group term life insurance has no cash value and cannot be borrowed against.

o       There is no flexibility or choice with regard to the terms of the policy.

When it comes to life insurance do not leave your family in a precarious position financially.  Ensure your coverage is more than a fraction of what is really needed.

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Using Single-Premium Life Insurance to Manage Your Estate

You’ve probably heard your mother say it a million times, “Don’t throw that out, one day it will come back in style.” And some how, some way her words always ring true and you find yourself looking at an item in the back of your closet that once again has become the hottest thing on the runway. Well, what’s true for fashion is true for like insurance.

Single-Premium Whole Life (SPWL) policies are coming back in vogue as a way for aging Baby Boomers to maintain asset liquidity while protecting their principal and efficiently planning with regard to taxes.

As the name implies, with a SPWL policy you pay the full premium due for the duration of the policy in one payment. Generally, any policy with a cash value feature can be purchased with a single premium. These policies fell out of favor back in 1988 with the passage of the Technical and Miscellaneous Revenue Act (TAMRA) because the valuation method in which income was realized was changed to a formula known as “Last In First Out” (LIFO). In other words every dollar withdrawn from the policy’s cash value will be taxable until you exceed the original basis.

However, in spite of this, SPWL has several real benefits when used in estate planning because it allows you to maximize the money left to heirs while maintaining control over that money during your lifetime. The first advantage to this policy is that the cash value grows quickly because the policy is fully funded from the beginning. Your cash value builds on a tax-deferred basis and you will only pay tax on earnings if you withdraw from the policy. Your named beneficiaries, however, will receive death benefits free of income tax. This is a significant benefit because it provides your heirs timely access to the estate you have provided them without all of the legal costs associated with probate.

In addition, you never lose control of the money that comprises that estate. You have access to cash for living expenses by switching your dividend option from increasing death benefits to cash payments.  Even though this could be considered a partial surrender, you will not incur fees because today’s SPWL policies do not have surrender charges.

You can also use the cash value to borrow against the policy. In general a policy owner can borrow up to 90% of the policy’s cash surrender value. This will, of course, reduce both the policy’s cash surrender value and the death benefit. However, you have the option to repay the loan and reinstate the original death benefit at any time.

Keep in mind that charges can result from withdrawals or loans from your SPWL policies because they are usually considered modified endowment contracts under TAMRA. This translates into a 10% IRS penalty on all gains withdrawn or borrowed before age 59 1/2. Of course, you will also have to pay income tax on those earnings too.

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