Expand your toolbox with cash value life insurance

Cash value life insurance can be used as an asset in a diversified investment strategy or as a hedge in an investment plan.

By Jeff Snyder

While the market may only do three things in a given day (go up, go down, remain flat), recently it seems that the ups and downs are more extreme and occurring more frequently.

Because this is today’s investment reality, no longer should we use traditional asset classes and allocation strategies alone to reduce risk. Nor should we continue to rely solely on traditional investment products and planning strategies created during different times when constructing investment portfolios and developing planning strategies today. We must be more creative and evolve with the times.

To paraphrase David McKnight, people really do not want to save or invest more money; they want to be smarter about the money they are saving and investing. So, as we evolve, how can we be more creative when implementing savings and investment strategies that will work over time and are more efficient with planning dollars?

The answer is simple: Expand your toolbox. How, you ask? Simply consider a tool that has been available for centuries that is now being used as a “new” alternative investment in today’s new world. This tool’s general features include:

» Most favored asset class status in the IRS Tax Code.

» Tax-deferred growth and tax-free income distributions for any reason.

» Liquidity without penalty before and after age 59 ½.

» No traditional qualified plan funding limitations.

» No required minimum distributions.

» Distributions are not included in IRS provisional income calculation to determine whether Social Security income is taxable.

» Cash value and distributions are not considered in college financial aid calculations.

» Professional and institutional investment management.

» Leveraged asset transfer efficiency, unlike other assets.

» Can be a “no work and no worry” proposition with guarantees.

So, what is this “new” investment alternative that has been around for so long? Ready? Answer: cash value life insurance. Yeah, I know: letdown, right? Hold on! Keep reading.

You see, as the investment world has grown and evolved over time, so has the life insurance industry. Today’s cash value life insurance products offer all features mentioned above and more. Furthermore, every one of these features is a benefit that any and every saver or investor wants.

Additionally, life insurance eliminates potential investment liquidity at death, preserving investment portfolios. Cash value life insurance also can be used as an asset in a diversified investment strategy or as a hedge in an investment plan. Today’s cash value life insurance can be designed to offer guaranteed interest, fixed-income-like returns with guarantees, market index indices return with guarantees and complete equity market upside potential like other traditional investments.

Furthermore, in addition to providing attractive competitive returns, tax-free growth, tax-free income, and access to cash for purchases, expenses, emergencies, opportunities, and things like college funding and retirement, cash value life insurance may also be designed to provide living benefits for things such as terminal and chronic illness.

Today’s life insurance products can allow for death benefit acceleration under certain circumstances while the policy owner is living. General life situations where death benefit acceleration may be helpful include the following.

Critical illness: A sudden acute medical condition or event. Examples of qualifying conditions include major heart attack, coronary artery bypass, stroke, invasive and blood cancers, major organ transplant, end-stage renal failure, paralysis, coma, and severe burns. Conditions vary by carrier and state.

Chronic/cognitive illness: Doctorverified inability to perform two out of six activities of daily living, requiring assistance or supervision for severe

Look closer at the most common cash value life insurance products

• Universal life: Offers short-term interest rate yield with a minimum contractual guarantee and no cash value downside risk as long as required premiums are paid.

• Guaranteed whole life: Offers contractual guaranteed interest typically higher than short-term interest rates without traditional equity market correlation — no cash value downside risk.

• Participating whole life: Offers contractual guaranteed minimum compounding yield and potential for nonguaranteed dividends that, when paid, combine to offer fixed-income-like yield without traditional equity market correlation and with no cash value downside risk.

• Indexed universal life: Offers specific correlated index-like yield with a downside floor and a capped or an uncapped upside. Market segment premiums are 100% exposed to index indices performance within floor and cap parameters, but cash value has no equity market downside risk.

• Variable universal life: Offers direct correlation to equity market yield based on underlying separate account investment options. Cash value is always 100% exposed to market upside and downside risk. This product is registered as a security.

cognitive impairment. Those activities of daily living include walking, bathing, dressing, eating, toileting and transferring. (Note: Some carriers do not require permanent diagnoses.)

Terminal illness: A physician-diagnosed medical condition that is expected to result in the death of the insured within a specified period of time, usually 12-24 months.

The following may apply to each or all of the benefits described above and vary by carrier:

» These benefits are typically available as a part of the policy contract and or may be offered as a rider on a contract.

» These benefits usually have a minimum and may allow for a percentage up to the full death benefit amount to be accelerated as long as the insured qualifies as stipulated in the policy and/or rider. However, many carriers cap the amount available below the full death benefit.

» These benefits may be offered at no cost at policy issue but charge a fee (fixed or formula) at time of access or may charge a premium in addition to the cost of the base policy.

» Electing to accelerate any amount of death benefit will reduce the amount a beneficiary receives upon the insured’s death.

» Chronic illness riders may or may not have an elimination period and may or may not be indemnity benefits.

» Qualified accelerated benefits that are received generally will not be subject to taxation under Section 101(g) of the

Internal Revenue Code. However, receiving an accelerated benefit may affect the recipient’s rights to receive certain public funds, such as Medicare, Medicaid, Social Security and Supplemental Security Income. As with all taxable matters, clients should consult with a tax advisor to determine the tax consequences prior to electing to receive benefits.

Another life situation is disability. Although this does not trigger death benefit acceleration, many carriers offer a disability rider for an additional premium that pays the policy premiums, as stipulated in the rider, if the policy owner becomes disabled. This allows the policy owner to keep their life insurance death benefit and cash value without having to pay premiums while disabled.

The world and the economy continue to evolve, forcing the financial services and insurance industries to evolve to meet the demands of our new world. Your toolbox must expand to meet your prospects’ and clients’ holistic planning needs while you help them become smarter about how they plan and save and invest their money. Now is the time to add cash value life insurance to your planning toolbox if you haven’t done so already. Jeff Snyder is executive vice president of business development and insurance with Gateway Financial Advisors. He may be contacted at feedback.com.

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