"Life Insurance"
Life Insurance as an Asset
Most people understand the basic concept of life insurance. You pay a premium and your beneficiary gets paid a death benefit when you die. Relatively few people realize there are two broad categories of life insurance: term insurance and permanent insurance. Term insurance accumulates no cash value and its only value is the potential of a death benefit payment. Term insurance premiums are guaranteed to remain level for as little as 1 year to as much as 35 years; usually some time period in between those two extremes, like 15 or 20 years. Permanent insurance is either whole life insurance or universal life insurance. Permanent insurance accumulates a cash value in addition to paying a death benefit.
Tax-Free Benefits
There are two main tax benefits to life insurance. First, death benefit proceeds paid to a person (as a named beneficiary) are free from income tax. Second, the cash-value of a permanent insurance policy accumulates tax-free. Any gain over and above the amount of premium paid into the policy is taxable only upon withdrawal, but there is a method using policy loans (you are really loaning yourself your own money) that may allow you to receive a tax-free income.
Why Buy Permanent Insurance?
Every person who calls themselves a financial planner, financial advisor, wealth manager, agent, broker, pundit, expert, etc., seems to have an opinion on permanent life insurance. Through the years, careers of so-called “Superstar Advisors/Personalities” that have their own radio programs, books and/or TV shows are often staked, at least partially, on having a very strong opinion on the question of term versus permanent insurance; usually their predictable mantra is “buy term and invest the rest” or something similar. These advisors usually target middle class America. Closer scrutiny often reveals that the Superstar Advisors/Personalities have an aligned selling force recommending where to “invest the rest.” They usually tell you where to buy the term insurance as well!
What is the point? The point is that permanent life insurance is an extraordinary investment vehicle with unparrelled tax advantages. The disconnect between that idea and the herd mentality of “buy term and invest the rest” is that most people don’t realize that the benefits do not accrue for at least 10 years, and often take up to 20 years to really demonstrate their value. You have to have a long-term perspective to realize the value of permanent insurance. It won’t perform financial magic over the short-term, but then again, what legitimate investment does?
Don’t believe us? What if you learned that life insurance as an asset is a favored strategy of the very wealthy? The Wall Street Journal published an article on October 3, 2010 stating, “A growing proportion of the tax benefits of life insurance goes to the well-off.” Why? Because the wealthy know a good opportunity when they see it. Just consider the following benefits of certain types permanent life insurance:
According to previously cited Wall Street Journal article, 55% of all life insurance assets were held by just 10% of America’s wealthiest families. The pundits and their army of advisors may be telling the middle class to buy their term insurance and invest in their mutual funds, but the truly wealthy apparently aren’t listening. You have to ask whose opinion seems the most valid; the advisor/pundit with the conflicts of interest, or the people that are actually rich?
Tax Advantaged: They’re not Kidding!
We mentioned the tax-free benefits earlier, but how big are the tax breaks? According to the Congressional Budget Office (CBO), eliminating the tax break for insurance investment gains alone (without touching the tax-free status of the death benefit) would generate $265 Billion over 10 years. That is tax revenue alone ; not the actual investment gains which would be far above $265 billion. Best of all, even though presidents and congress often look for new sources of tax revenue, taxing widows and orphans is probably one of the least politically-palatable places to look! It would seem that the tax advantages of permanent insurance are safe from political tampering, even in this day and age. Permanent life insurance, for the right person or family, has unique and powerful advantages you cannot disregard. You owe it to yourself to learn more. Call us at 801-466-5055.