12 - 1 Limited-Pay Whole Life Insurance Characteristics Provides protection for the entire lifetime Level or fixed periodic premiums payable for

12 - 1

Limited-Pay Whole Life Insurance

Characteristics Provides protection for the entire lifetime

Level or fixed periodic premiums payable for a specified number of years

Level and fixed death benefit

Fixed schedule of cash surrender values that increase of a period of time

Commonly offered with 10, 15, 20, 30 years or longer premium payment periods Most common form is life paid-up at age 65

Policy is paid-up at the insured age 65

In all other respects, contract features and characteristics are the same as for level premium whole life

Chapter 12Tools & Techniques of Life

Insurance Planning

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When the use of this tool is indicated To acquire insurance protection for juveniles

To assure protection after age 65 without any further premium requirements

Business life insurance applications Key employee

Supplemental retirement income plans

Buy-sell funding

When the clients working lifetime or high income period is limited


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Advantages Easier to forecast the total dollar outlay than for ordinary level premium whole life

Cash values build more quickly than ordinary level premium whole life policies

Less risk of policy lapsing if policyowner faces financial difficulties in the future

Disadvantages Similar to those of ordinary level premium whole life

Premiums are higher than ordinary level premium whole life


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Tax Implications General tax rules

Death benefits income tax free

Death benefits subject to same income, estate, gift and generation skipping transfer taxation rules as all other types of life insurance

Taxation of living proceeds Governed by IRC section 72

Payments separated into 3 categories Annuity payments

Payments of interest only

Amounts not received as an annuity


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Tax Implications (cont'd) General tax rules

Death benefits income tax free Death benefits subject to same income, estate, gift and generation skipping transfer

taxation rules as all other types of life insurance

Taxation of living proceeds Governed by IRC section 72

Payments separated into 3 categories Annuity payments Payments of interest only Amounts not received as an annuity

Annuity payments Periodic payments received in a systematic liquidation of cash value


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Tax Implications (cont'd) Annuity payments

Periodic payments received in a systematic liquidation of cash value

Each payment is treated partially as recovery of investment and partially as taxable interest

Once entire investment has been recovered, any further payments are treated entirely as taxable income

Payments of interest only Taxable income whether distributed or credited to account


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Tax Implications (cont'd) Amounts not received as an annuity

Taxed under the “cost recovery rule”

Included in gross income only to the extent they exceed the investment in the contract

Exceptions Modified Endowment Contracts

Cash distributions taxed under the interest first rule

Loan Proceeds If a loan is outstanding when a policy is surrendered, gains in the contract are

immediately recognized


Insurance Planning

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Alternatives Combination of level premium deferred annuity and decreasing term insurance

Distributions from annuity taxed under the interest first rule

Term portion may require increasing premium contributions to cover the increasing mortality risk

Combination of investments in tax free municipal bonds and decreasing term insurance

Interest paid on debt secured by municipal bonds is not tax deductible

A universal life policy configured as a level premium policy Mortality costs and expenses could be increased


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What ledger statements do not tell Rate of return the insurance company earns to warrant the dividend it projects

The investment strategy employed by the insurance company

The conditions in which dividends will be reduced is a loan is taken out against the reserve of the policy

Rate of return On the death proceeds

On the cash surrender value


Insurance Planning

Documents

12 - 1 Limited-Pay Whole Life Insurance Characteristics Provides protection for the entire lifetime Level or fixed periodic premiums payable for