13 - 1 Characteristics Provides protection for the entire lifetime Level or fixed periodic premiums payable for the lifetime of the insured Level

13 - 1

Characteristics Provides protection for the entire lifetime

Level or fixed periodic premiums payable for the lifetime of the insured

Level and fixed death benefit

Fixed schedule of guaranteed cash surrender values that increase of a period of time These cash value can be borrowed by the policyowner at any time

Chapter 13Tools & Techniques of Life

Insurance Planning

Ordinary Level Premium Whole Life Insurance

13 - 2


When is the use of this tool indicated? Provide income for dependant family members

Liquidate consumer or business debts or mortgages

Fund college education

Cash for federal and estate tax needs

Fund a business continuation agreement

Key employee coverage

Help recruit, retain and reward key employees through a salary continuation plan


Insurance Planning

13 - 3

When is the use of this tool indicated? (cont'd) For split dollar agreement

Fund bequests of capital to children, grandchildren

Fund charitable bequests

Preserve confidentiality of financial affairs

Assure nearly instant access of cash for surviving dependants

Direct family assets to family members in a tax efficient manner

When the need is long term and there is a desire for a level fixed premium

Financing post-retirement health insurance for select executives


Insurance Planning


13 - 4

Advantages Fixed and known premium

Guaranteed ceiling on mortality and expense charges

Guaranteed floor on interest credited to cash values

Cash values grow income-tax deferred

Frequently pays a higher effective interest rate than tax free municipal bonds Through a combination of guaranteed cash values and dividends

Cash values not subject to same market risk as longer term municipal bonds and other long-term fixed investments

Cash values can be borrowed at low net cost

Proceeds not typically part of the probate estate


Insurance Planning


13 - 5

Advantages (cont'd) Proceeds not typically part of the probate estate

No public record of death benefit amount nor to whom it is paid

Proceeds are generally not subject to federal estate taxation

Life insurance policies can be used as collateral for a loan

Disadvantages Premiums may be unaffordable

Higher cost than term for the same coverage, in the early years Term may be ultimately more expensive later on


Insurance Planning


13 - 6

Disadvantages (cont'd) Significant surrender charges in the early years

Interest on policy loans is generally not tax deductible

Limited hedge against inflation with guaranteed cash value Dividends (Non-guaranteed) will help

Rate of return on cash value is not favorable as compared to other alternative investments


Insurance Planning


13 - 7

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


Insurance Planning


13 - 8

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


Insurance Planning


13 - 9

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


13 - 10

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


Insurance Planning


13 - 11

Evaluating dividend paid on par policies Compare current crediting rate and length of guarantees

Compare current mortality and expenses to guarantees levels of mortality and expenses

Look at bailout provisions that reduce or eliminate surrender charges if investment performance does not meet reasonable guidelines

Check policy loan provision for level of interest credited to borrowed versus non-borrowed cash values

Check financial soundness of carrier


Insurance Planning


Documents

13 - 1 Characteristics Provides protection for the entire lifetime Level or fixed periodic premiums payable for the lifetime of the insured Level