The Year of Living Permanently

2020 has provided some of the best examples of the power of permanent life insurance. Here are a few of these examples.

By David Szeremet, JD, CLU, ChFC

Want to know the verdict on 2020? Check your social media accounts. I am willing to bet that if given the choice, the vast majority of your family, friends, contacts and followers would prefer to delete this year. A word to the wise: Keep 2020 fresh in your memory.

2020 has provided some of the best examples of the power of permanent life insurance I have witnessed in 20 years as an advanced planning attorney.

Pandemic Financial Safety Net

Clients who planned ahead were able to access life insurance cash value on a moment’s notice without current taxation and without navigating the COVID-19 acronym obstacle course (CARES, NOL, SSA, PPP, EIDL, SBA and on and on). Whether it was a furloughed corporate attorney taking a loan against their policy to support their family or the owner of a website-development firm using cash value to keep their (virtual) doors open, life insurance cash value shined. We often position life insurance cash value as a financial safety net. 2020 has reminded us why.

COVID-19 SPEND-DOWN PREVENTION FUND

The CARES Act created a partial lifeline to retirement savers. Under the Act in 2020, for individuals adversely impacted by COVID-19, up to $100,000 can be accessed from a retirement plan by way of a loan and/or distribution, penalty-free. However, the Act did not waive applicable taxes, and the fact remains that it is generally a bad idea to spend down (even partially) savings if those funds are earmarked for retirement.

Life insurance cash value accessed tax and penalty-free is an alternative to spending down a 401k or an IRA. It also serves as a reminder of the power of having multiple savings buckets from which to pull.

Life Insurance As A Stretch Ira Alternative

January 1 ushered in one of the most significant retirement and estate-planning changes of the last generation. Under the SECURE Act, the Stretch IRA “died.” For account owner deaths in 2020 and thereafter, IRA and defined contribution plan beneficiaries generally may no longer stretch out distributions over their lifetime. With some limited exceptions (spouses, disabled beneficiaries, etc.), an inherited retirement account must be distributed by the end of the tenth year following the account owner’s death.

For clients interested in passing a retirement account as a legacy, the ten-year force-out rule may erode the legacy. It potentially accelerates income to heirs and runs the risk of pushing them into higher income tax brackets (a tax “double whammy”).

Elections come and go, but life insurance cash value never goes out of style.

Life insurance may be an excellent alternative to the Stretch IRA. Not only is the death benefit generally incometax-free, but it is not subject to the ten-year force-out rule. I have consulted on multiple cases where clients are pivoting from their IRA to a trust-owned (or trust-payable) life insurance policy, where the trustee is either authorized (or instructed) to stretch the death benefit over the trust beneficiaries’ lifetimes. And from a practical, trustadministration perspective, it is a lot more simplified than stretching an IRA.

This strategy is appropriate for clients who can afford to reposition the IRA and understand the income-tax ramifications of distributing the account during their lifetime. It is also a good fit for heirs who are in a higher income tax bracket relative to the account owner.

Election Insurance

As if we didn’t need more drama, 2020 is a presidential election year. Life insurance cash value helps smooth some of the volatility that can result from an election cycle. Having a safe, non-correlated protection and savings asset may help clients sleep better at night, regardless of who wins. Elections come and go, but life insurance cash value never goes out of style. Election cycles also remind us of a fundamental principle of life insurance planning: Never bet your insurability on politics.

Protection From Creditors

With economic, political and societal instability dominating headlines, the search for safety and protection took center stage. This year, I have fielded more calls concerning life insurance and creditor protection than in any other year of my career. Some days, it seems like protection from creditors is on everyone’s mind. Laws vary by state, but every state offers some level of protection from creditors. It is generally the strongest for personally owned and trustowned life insurance. Do yourself a favor and find out how your state laws stack up.

Truth be told, every year is a year for permanent life insurance. 2020 just happens to have a slew of textbookplanning examples we can carry forward in our practices for the rest of our careers. I’m sure you have your own examples, but feel free to “steal” mine.

Cheers to a better 2021! But remember to keep one eye on the future and one eye on the past.

David Szeremet, JD, CLU, ChFC, is Vice President, Advanced Planning, at Ohio National Financial Services. Szeremet is responsible for the advanced planning team that provides general education and marketing support, including estate planning, executive benefits, business insurance and life insurance planning. He can be reached at david_szeremet@ohionational.com, linkedin.com/in/davidszeremet or 513.794.6389.

Life insurance and disability income insurance products issued by The Ohio National Life Insurance Company and Ohio National Life Assurance Corporation. Issuers not licensed to conduct business in New York. Life insurance policies have exclusions, limitations, reductions of benefits, and terms under which the policies may be continued in force or discontinued. Contact the issuing company for additional information.