Most people appreciate the benefits life insurance death proceeds provide -- ranging from providing for loved ones to funding the purchase of a business at the owner's death. But, in these historic times, are you emphasizing the various benefits cash value life insurance can offer during their lifetime?
The current economic storm is bringing hardship to millions of families. Within 18 months of Sept. 30, 2007, the stock market lost more than half its value. As of early July 2009, the market is still off nearly 40% from its high. The average 401(k) and IRA have also plummeted, a decline that is especially tough on older people, who have less time to recoup their losses. On the positive side, the personal savings rate, which had dipped into negative territory in 2005, has soared since the financial crisis emerged, reaching levels not seen since the early 1990s. Many individuals are fearful and are looking for high-quality, low-risk investment alternatives to provide some level of security for their future, but they don't know where to turn for advice.
During these turbulent economic times, producers are missing the boat if they do not seize this opportunity to educate clients and prospects about the guarantees and flexibility permanent cash value life insurance offers. It is information clients and prospects desperately need to help meet their financial needs during and after the current economic downturn. So, whether you sell primarily to the mass market or the affluent market, formulate a game plan to reach out now as a trusted financial advisor to your clients and prospects by re-introducing them to the living benefits of cash value life insurance.
At New York Life, we have been selling permanent cash value life insurance for more than 160 years. We have found that, while clients and prospects generally understand that life insurance pays a death benefit to beneficiaries and those proceeds are in most cases received income tax free, most do not fully appreciate the array of living benefits available from a permanent life insurance policy's cash values.
Living benefits in the mass market
For middle-income consumers, cash value life insurance offers a variety of advantages in helping meet retirement or other cash accumulation needs:
Guarantees: Against the backdrop of the volatility in today's equity markets, individuals are seeking secure, innovative financial products with more stable returns to help accumulate funds for retirement. Certain permanent life insurance products such as whole life policies offer guarantees -- guaranteed death benefits and guaranteed cash value -- that many other financial products do not offer. For example, at New York Life, we have a whole life product called Custom Whole Life with guaranteed cash values that allows policyowners to customize a premium payment schedule to meet their needs (unlike traditional whole life products that typically require premiums be paid for the life of the contract). As with most life insurance products, the guaranteed cash values are merely the minimum cash values that a policy will generate. Many products pay dividends or apply a crediting rate that may generate significant additional cash values in excess of the guaranteed amounts.
Tax-deferred growth of cash value: Any increases in the cash value of a permanent policy are not subject to income tax while the cash remains in the policy. And as long as the policy is not a modified endowment contract (MEC), the cash value can be withdrawn up to the investment in the contract without incurring an income tax liability.1 Furthermore, unlike any other type of tax-deferred vehicle, additional cash generated from growth in the policy's cash value can also be taken from the policy and never be subject to income tax if it is taken in the form of policy loans and provided the policy does not lapse.
Flexible cash accumulation vehicle: Permanent life insurance is one of the most flexible tax-deferred cash accumulation products available. Unlike qualified plans and individual retirement accounts, policy cash values are not subject to early distribution penalties or required minimum distributions. The policyowner can access cash values at any time, for any reason, without penalties or governmental limits. In addition, if the policyowner's financial situation improves, he or she can put any money taken out as policy loans back into the policy to again grow tax deferred for future needs.
This access to cash can have a life-changing impact on policyowners. For example, more than 10 years ago, the town of Spencer, S.D., was devastated by a tornado. Homes were destroyed and businesses lost. Steve Garry, a New York Life agent who had sold many permanent policies in the town, arrived in Spencer the day after disaster struck and helped his clients access loans from their policies. The policyowners were able to get cash immediately, right when they needed it most to pay for everything from rebuilding businesses to finding housing for their families -- money that could carry them through until they got back on their feet. Whether the need is for recovery from a storm, for funding education, for retirement, or for other needs and desires, cash value life insurance can help provide the funds.
Again, a policyowner can access cash -- for any reason, without any explanation required -- through a combination of withdrawals of and loans against the policy's cash value. Withdrawals up to the investment in the contract and policy loans are received income tax free, as long as the policy is not a MEC and is not surrendered or lapses prior to the insured's death. Of course, clients should understand that withdrawals and loans will reduce the death benefit and that policy loans will accrue interest.
A self-completing plan: Permanent life insurance is a powerful way to save for a specific goal -- a child's education, for example -- because it is a self-completing plan. In other words, whether the policyowner lives to fully fund the policy, becomes disabled or dies prematurely, the goal for which he or she was saving can be achieved. In the first instance, as long the policyowner pays the premiums, the cash value is guaranteed to be there (and potentially more, if dividends are reinvested) when the need arrives. In the event of disability, if the policyowner has selected a Waiver of Premium feature, the insurance company pays the premiums to keep the policy in force -- maintaining both the death benefit and the cash value growth. And, of course, should the insured die prematurely, the policy's death benefit is available to complete the plan, fulfilling the fundamental purpose of life insurance.
Creditor protection: Another often-overlooked advantage of cash value life insurance is the protection from creditors' claims that is afforded under the laws of the various states. All states and the District of Columbia offer some degree of asset protection for life insurance death proceeds and cash values. Laws, however, vary from state to state on the amounts exempted and the protected classes of policyowners and beneficiaries.
Living benefits in the affluent market
Cash value life insurance offers some additional benefits for your affluent clients:
ILITs and SLATs: Irrevocable Life Insurance Trusts (ILITs) can be used by high-net-worth individuals to own life insurance outside the person's taxable estate. However, with traditional ILITs, the client gives up control and access to the policy and its cash values. For high-net-worth clients who are reluctant to give up such control and access, the ILIT can be drafted to allow the trustee to make distributions during the insured's life to the ILIT's beneficiaries, including the spouse of the insured if the spouse is a beneficiary of the ILIT. When the spouse of a grantor is a beneficiary of an ILIT, people in the industry often refer to the ILIT as a "Spousal Lifetime Access Trust" (SLAT). As with any estate planning technique, qualified tax counsel should be consulted to assure the clients' estate tax and financial objectives are met, but this is a significant planning tool for the right family.
Provide seed money for sophisticated estate planning strategy: A technique commonly used by clients with large estates is to sell (rather than gift) a large block of assets to a trust created for the benefit of one or more family members. Cash value life insurance owned by the trust can play a vital role in helping this strategy meet tax law requirements. With this strategy, the client typically establishes a trust, then sells the assets to the trust in return for the trust's promissory note. To help assure the IRS will respect the transaction as a bona fide sale and purchase (and not treat the transfer as a taxable gift), tax practitioners typically advise that the grantor/seller fund or "seed" the trust with approximately 10% of the value of the promissory note. These trusts are also often the vehicle for purchasing life insurance needed to help fund the client's future estate tax liability. Also, policy cash values can help meet the 10% capitalization requirements. Moreover, some or all of the policy's death benefits may be used to pay off some or all of the remaining balance of the promissory note.
Lifetime flexibility to transfer: An individual may purchase a life insurance policy today and later desire to transfer the policy for any number of personal or planning purposes. Perhaps the individual's estate has grown significantly and the insured wants to remove the policy and its proceeds from the individual's taxable estate. Unlike all other tax-deferred assets (including tax-deferred annuities), the individual can transfer the policy to a family member, trust or other third party without triggering the recognition of gain in the policy's cash value.2 With limited exceptions, an individual may not transfer his or her interest in a qualified plan, IRA or tax-deferred annuity without triggering the recognition of the unrealized gain or income in the plan, account or annuity.
Renew, remember, reassure, reach out
Renew your knowledge and understanding of the living benefits available for all types of prospects and clients. Remember, especially in these times, to make living benefits a big selling point for your next presentation to a prospect. Reassure your clients and prospects that permanent cash value life insurance can be very attractive and can be a good foundation for a strong financial plan when offered by companies with unquestioned financial strength. Reach out to current clients during these uncertain economic times and help secure your status as your client's trusted financial advisor.
Mark W. Pfaff is the Executive Vice President in charge of U.S. Life Insurance and Agency at New York Life, responsible for the flagship Life Insurance product line and the three channels through which the Company distributes Life Insurance to U.S. consumers: Its core career Agency sales force of approximately 10,000 agents across the country; its exclusive partnership with AARP, through which New York Life is the No. 1 direct seller of Life Insurance; and Group Membership Associations. Mr. Pfaff joined New York Life in 1985. He and his wife reside in Charlotte, Vt., with their three children.
Footnotes:
1. A modified endowment contact is a life insurance product issued or materially changed after June 20, 1988, in which the premiums paid into the policy exceed the "7-pay test." Policies that become a MEC will still provide a death benefit income tax free. However, a policyowner may be subject to taxes and penalties on any distributions, including loans, from the policy during his or her lifetime. Consumers should speak to their tax advisors about possible MEC consequences.
2. The transfer may be subject to transfer taxes, but the individual's available annual and lifetime gift and generation skipping transfer tax exemptions can possibly be used to reduce these taxes.
