The very first recorded life insurance policy was issued in Europe in 1583, and by 1759 the first life insurance company in the United States was founded. Today, there are over 150 million in-force life insurance policies in the U.S. providing more than $12 trillion of death benefit to policy owners and their beneficiaries. In 1911, the U.S. Supreme Court ruled that life insurance policies are assets, and the owner has the same personal property rights with a policy as they do any other asset such as a home or stocks. The owner of a policy has the right to name and change the beneficiaries, has the right to borrow from the policy or use it as collateral, and also has the right to sell the policy to a new owner while they are still alive for its “secondary-market” Life Settlement value.
Life insurance policies are one of the most affordable and valuable assets a person can ever own. But one of the big secrets of the insurance industry is that the majority of people who buy a life insurance policy will not keep it until it pays out a death benefit. Industry filings show that as much as 90% of life insurance policies people buy are in danger of being lapsed or surrendered. The shame of this fact is that so few people who buy life insurance understand that it will provide value to them throughout their life—and there are alternatives to lapsing or surrendering a policy if the owner decides to not keep it.
Here are 5 ways life insurance provides value:
- Death Benefit- The first and most important reason anyone would buy life insurance is to financially protect their family (and/or business interests) from their untimely demise. A life insurance policy is a contract that guarantees the insurance company will pay out the death benefit purchased in return for making the premium payments. The younger and healthier a person is when they buy the policy, the more they can get for lower premiums. If the policy owner passes away, the death benefit is paid in full to the named beneficiaries tax-free.
- Inside Build-up of Value and Tax Advantages- A whole life or universal life policy will build cash value inside the policy that accumulates and grows tax-free. A life insurance policy can convey a number of tax advantages beyond the tax-free payout of the death benefit such as a 1035 exchange into an annuity or qualified long-term care coverage, tax-free loans, and use of cash value. A life insurance policy can be used as another retirement planning vehicle to build value tax-free that can accessed by the owner or transfer that value to the estate tax-free.
- Estate Planning and Wealth Transfer- Life insurance policies are a vehicle to build wealth that can be transferred to the beneficiaries tax-free. Based on a person’s measurable worth and insurable interests, insurance policies can be issued providing millions of dollars in death benefit and tax-shelters. As the potential for increases in top capital gain tax rates and elimination of “step-up in basis” looms, the hit on the amount of an estate or business interests that can be passed onto heirs could increase to a 61% effective tax impact. Life insurance taken out to offset this impact is a key strategy to preserve and transfer wealth because of the tax-free build-up of value and payout of the death benefit to an estate or heirs. Use of an Irrevocable Life Insurance Trust (ILIT) is another strategy to maximize the value of life insurance in these circumstances.
- Tax-Free Exchange for Guaranteed Income and LTC- The cash value in a life insurance policy can be rolled over through a 1035 exchange into a new policy, an annuity to payout guaranteed income for life, or long-term care coverage tax-free. The Pension Protection Act of 2006 created a provision allowing for the 1035 exchange of policy value into a Long-Term Care Qualified Annuity contract that pays out tax-free to any qualified long-term care supports and services.
- Life Settlement Value- Because a life insurance policy is legally recognized as an asset, the policy owner can sell their policy through a life settlement as an alternative to lapse or surrender. Life settlements are a unique, tax-advantaged financial vehicle that will pay higher value to the policy owner the older and/or sicker the insured is, and will relieve them of any future premium obligations. There were $4.6 billion of life settlements transacted in the U.S. in 2020 as more and more people become aware of this option for policy owners. People use life settlements to obtain lump-sum cash they can spend anyway they want, tax-free funds to pay for long-term care and medical expenses, or maintain a reduced death benefit without paying any more premiums.
Life insurance is one the most widely owned financial vehicles in the world, and one of the most mis-understood. Far too few people understand the value a policy can provide them in addition to paying out a death benefit. Life insurance can help people with tax-advantages, estate planning, wealth transfer, establishing a guaranteed lifetime income stream, and can be exchanged or settled to help cover the expensive costs of medical bills and long-term care.
Chris Orestis, President of Retirement Genius, is a 25-year insurance and long-term care industry veteran and a nationally known senior care advocate. He is the author of three books, numerous white papers and hundreds of articles, and is a frequent speaker across the country about helping seniors retire like a genius.
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