Three Reasons to Consider Cash Value Life Insurance

Cash value options merit discussion in terms of the potential for asset accumulation and flexibility that contributes to estate planning.

Life insurance protection is a key part of any estate or financial plan. For many clients, term insurance provides foundational protection for a limited period of time and may be the main choice for young clients who seek to maximize the amount of insurance they can buy for their money. For advisors and clients, protecting against the risk of dying too young—and leaving beneficiaries financially strapped—is the paramount reason to buy life insurance.

As clients grow in age, experience and as their budget grows, more of them may turn to permanent insurance. In many cases, permanent insurance offering long guarantees or lifetime guarantees may be appropriate. In other cases, clients seeking a policy with more flexibility might want a policy that accumulates cash value.

A case for cash value insurance

There are three reasons that build a strong case for cash value:

• Client needs often evolve, from a need for pure protection to supplemental cash value accumulation for retirement. For these clients, advisors should consider implementing some cash value insurance. Factors to consider include whether the clients have adult children, whether they’ve paid off a mortgage, and whether they have any outstanding debt or are contributing to other savings. Advisors may discover that, in these situations, the clients may still need a death benefit but may need an additional financial vehicle that offers the potential to accumulate cash value to supplement their other sources of retirement income.

In general, life insurance provides an income tax-free death benefit. In addition, the cash value inside policies grows tax-deferred and, as long as the policy remains in force, the cash values may be accessed through withdrawals and loans generally without incurring taxes¹. Of course, if clients access policy values, this will reduce the amount of death benefit to the beneficiaries and advisors should monitor the policy to ensure it remains current and avoid an unintentional surrender or lapse2. Such a lapse or surrender may result in taxation to the extent of gain in the policy. Additionally, for policies that are modified endowment contracts, distributions (including loans) are taxable to the extent of income in the policy, and an additional 10 percent federal income tax penalty may apply. Clients should, of course, always consult a tax advisor for advice on their particular situation. Through careful selection of the right policy, appropriate design and premium payments and thoughtful monitoring of withdrawals and/or loans from a policy, advisors can help ensure that the cash value product provides the intended benefits for the policyholder.

• Clients need flexibility, even in traditional estate planning, where policies are often purchased to fund trusts. Because of the increase in the federal estate tax exemption ($5.45 million for single taxpayers and $10.9 million for married couples in 2016), many advisors focus on nontax reasons for trust planning. Some may still use life insurance in an irrevocable trust to provide the income tax-free death benefit to provide liquidity at the death of the client grantor of the trust. And yet, some attorneys may draft some flexibility into the trust to provide that distributions may be made to beneficiaries during lifetime, as well as after death of the client grantor. In these situations, cash value life insurance would be critical to providing the cash, which may be needed for distributions before the client grantor dies.

• Advisors and clients have more choice than ever with respect to policy design and policy features of cash value life insurance contracts. Whole life, universal life with fixed crediting rates, and variable universal life policies with cash value allocated to equity subaccounts are some of the choices. Innovations in product design also include indexed universal life, which vary from company to company and usually provide an interest crediting rate based upon the performance of a certain stock index (e.g., S&P 500) over a certain period, subject to certain caps and perhaps a floor crediting rate. Advisors should evaluate each policy to align with the client’s overall planning goals and risk tolerances and then determine the product design best suited to meet the client’s goals.

As advisors talk with clients about life insurance today, they can take them well beyond discussions about protection, and truly help them not only to manage future risk, but also to meet life’s current challenges. So, along with traditional conversations about the need for death benefits and cash-in life insurance, cash value options always merit discussion in terms of the potential for asset accumulation and flexibility that contributes to estate planning.

1. In general, loans are not taxable; however, withdrawls are taxable to the extent they exceed basis in the policy.

2. Unpaid loans and withdrawals may also negate any guarantee against lapse.

Brett W. Berg serves as Vice President of Advanced Marketing for Prudential in its Individual Life Insurance Division. He can be reached at brett.berg@prudential.com .