- Cash-value life insurance can grow tax-free, provide a tax-advantaged death benefit, and is protected from lawsuit creditors.
- Investors take advantage of life insurance as an investment because of the flexibility it offers as a financial planning tool.
- No other ﬁnancial, tax, insurance or legal tool can play as many roles in a ﬁnancial plan as life insurance.
Physicians are often surprised to read that life insurance can be one of the most important tools in a financial plan. Financial advisors who regularly work with high-income, high-liability or high-net-worth clients, have long viewed life insurance as a critical component in any plan.
No other ﬁnancial, tax, insurance or legal tool can play as many roles in a ﬁnancial plan as life insurance. For instance, in the case of cash-value life insurance—permanent insurance policies (whole-life or universal life insurance) the excess premium is invested in a tax-efficient manner with a cash-value account for the beneﬁt of the policy owner.
Key Characteristics That Make Life Insurance Valuable
Life insurance has many characteristics and offers a variety of benefits. investors take advantage of life insurance as an investment because it can be a ﬂexible planning tool that can address many planning challenges in an efficient way. These attributes make permanent, cash-value life insurance especially attractive to investors:
- Amounts in life insurance policies grow tax-deferred: While investments outside of retirement plans and life insurance policies are taxed on income and realized capital gains, funds growing within a cash value life insurance policy grow tax-free. This makes life insurance attractive as a wealth accumulation and tax reduction vehicle. It is seen as the unlimited after-tax retirement plan by many successful business owners in the United States.
- Account balance values in life insurance policies can be accessed tax-free at any time: When you take funds out of a retirement plan (pension or IRA), these withdrawals are always subject to income tax and may be subject to a penalty if withdrawn before age 59½. With a cash value life insurance policy, you can take tax-free loans against the cash value at any time. There is never a tax penalty and there is no tax on the loan so long as you keep the policy in force and the policy is not a modified endowment contract (MEC).
- Life insurance is asset-protected: All 50 states give some measure of asset protection to cash value life insurance policies. Thus, this asset can play a role in your asset protection plan. Working with your advisory team, you can determine how best to Leverage the rules in your state.
- Life insurance has beneficial tax valuation: When managing the 70% tax on pensions and IRAs, life insurance can play a very valuable role. The essence of this rule is that life insurance enables the plan owner, who would otherwise lose 70% of the plan holdings to estate and income taxes. Instead the investor can pass most, if not all, of those dollars on to heirs.
As you can see, life insurance can offer so many benefits to policy owners. It can grow tax-free, provide a tax-advantaged death beneﬁt, and is protected from lawsuit creditors. This ﬂexibility is what allows investors to use life insurance to meet planning challenges more efficiently.
The most important characteristic of life insurance is that it is ﬂexible. You don’t have to decide exactly what you want to use the life insurance for before you buy it. You can add more premium later, gift the policy to a person or entity, sell the policy, save it for the death beneﬁt, use the cash values for lifetime needs and return the money you take out, or not. The biggest misunderstanding about life insurance is that most people don’t see it as an investment tool. In many cases it can outperform mutual funds.