We’re always looking for ways to meet our client’s unique needs. This week we’re looking at ways to have a life insurance benefit and at the same time accumulate cash value.
Life insurance is more than about peace of mind. It’s about possibilities. Life insurance policies can offers a range of life insurance products that protect you today and prepare you for tomorrow. They provide a life insurance benefit for those you love, and help to create a nest egg for when you’re ready to retire. Our life insurance products are designed to adapt to your life’s changing needs. And over time, you can also potentially use your policy to help pay for major life events, such as college tuition, down payments, start a business, weddings and more. In essence, life insurance can offer both death benefit protection for your family and the cash value can act as a “Private Reserve” for you, your family, and your business. You can borrow, and even pay back, loans from a policy, depending on your needs.1
Problem: Tom Needs Life Insurance to Protect his Family and Needs to Save for Goals
Tom is a 35-year-old, preferred non-smoking male. He needs $500,000 of life insurance to protect his family. His income is over $100,000 per year and he has maximized his tax qualified contributions to his IRA and 401k. Tom likes the idea of purchasing life insurance to provide a death benefit but would also like to accumulate cash value in order to pay for important life goals he wants to achieve. His Financial Professional, Diane, shows him the Private Reserve strategy illustrated by AXA.
A Possible Solution: A Private Reserve Strategy
Diane shows Tom an illustration where he pays $10,000 in premium each year until he’s 65, purchasing a $500,000 face amount. This may seem like more than the minimum premium required tomaintain the death benefit — and in fact, it is, but by overfunding his policy, he gets death benefit protection, plus he can potentially build policy cash values tax free. With Tom as the policy owner, Diane shows that over time he has the potential to borrow money out of the life insurance policy to help fund his milestones. In addition, Tom may be able to take a retirement income stream of $53,500 per year from the policy from age 66 to 85. If Tom is in a 28% tax bracket — this is the equivalent of $74,500 taxable income.
How can a “Private Reserve” work for you?
If you have a need for life insurance protection, the policy’s cash surrender value might also provide:
- A flexible source of cash for life’s major purchases or events.
- A means to supplement your existing retirement plans and create a future potentially tax-free source of income.
- For business owners, a way to provide a relatively hassle-free and efficient source of dollars for yourself or to reward and retain key employees.
In addition to the family protection offered by his life insurance policy, the cash values offer Tom:
Flexibility — Using a Private Reserve Strategy, Tom may have the flexibility of taking policy loans from his policy for future life events, which could be a house down payment and/or starting a business. This is after several years of premium payments, since loans may not be immediately available. While this example does not show repayment of his loan, if Tom does want to pay back these loans, he has the flexibility to decide the timing. This will, in turn, potentially increase the future supplemental income available since he is replenishing his life insurance policy cash values.
Value — Tom uses tax-free loans and withdrawals in this strategy. This strategy can be used with an Indexed Universal Life policy, as well as Universal Life or Variable Universal Life. Your Financial Professional can help you decide which product is right for your needs.
Efficiency — Because Tom owns the life insurance policy, he is borrowing the cash value from his own policy. If Tom decides to pay back his loan, he will be paying himself back. So long as he manages the loan’s size in relation to the policy values, he has complete flexibility in how to pay back or not pay back the loan. There is also a life insurance death benefit still intact to take care of his beneficiaries. Tom will pay interest on the outstanding loan.
Independence — Tom can take loans from his policy whenever there is cash surrender value in it to borrow. Borrowing from his life insurance is his decision.
Other Considerations with a Private Reserve Strategy
Cash value in life insurance generally takes years to build. You will generally have limited access to the cash surrender values during the first several years of your contract.
There is usually a surrender charge that will vary by type of policy. These charges usually run 15 years or longer and will affect the available amount you have to withdraw or borrow from your policy at any given time. There are also cost of insurance and other policy charges that will impact your cash value. Work with your Financial Professional to understand the timing and limitations based on your overall goals and objectives.
Your own cash value build up will be determined, in part, by the performance of your policy, which is not guaranteed. When you purchase your policy, you will not know how much cash value you will have to access at any given time.
Loans and withdrawals will reduce the death benefit and cash values associated with your policy. Excessive loans and withdrawals may require future premium payments in later years to keep the policy from lapsing and triggering income taxation on any unpaid loans.
Dean & Draper
We would welcome the opportunity to talk with you about how Private Reserve Life can solve both your life insurance and cash value needs. For our expert, please call Jerry Linville, 281.794.3783 or email jlinville@deandraper.com.
Dean & Draper is a Trusted Choice insurance agency representing over 200 insurance companies. For over 35 years we have offered a trusted freedom of choice to our clients. ContactUs.
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1Under current federal tax rules, you generally may take federal income-tax-free withdrawals up to your basis (total premiums paid) in the policy or loans from a life insurance policy that is not a Modified Endowment Contract (MEC). Certain exceptions may apply for partial withdrawals during the policy’s first 15 years. If the policy is a MEC, all distributions (withdrawals or loans) are taxed as ordinary income to the extent of gain in the policy, and may also be subject to an additional 10% premature distribution penalty prior to age 59½, unless certain exceptions are applicable. Loans and partial withdrawals will decrease the death benefits and cash value of your life insurance policy and may be subject to policy limitations and income tax. In addition, loans and partial withdrawals may cause certain policy benefits and riders to become unavailable and may increase the chance your policy may lapse. If the policy lapses, is surrendered or becomes a MEC, the loan balance at the time would generally be viewed as distributed and taxable under the general rules for distribution of policy cash values.