Life insurance is more than just a way to pay for outstanding debts and end-of-life expenses. You can recommend a life policy for its wealth transfer tax benefits!
These days, individuals can transfer their assets to their heirs through several different means: annuities, 401(k)s, IRAs, trust funds, cash accounts, and more. However, if your client has the money and is in relatively good health, they may want to purchase life insurance, specifically single premium whole life, to forward their wealth to the next generation.
Let’s explore a few different situations when you should promote the tax advantages of life insurance to your clients.
1. Your Client Has Large Lump Sums in Savings Accounts
To use life insurance as a wealth transfer tool, your client needs to have wealth. We generally recommend they have liquid assets equal to at least $5,000, since this is usually the minimum premium for a single premium whole life product.
Single premium whole life (SPWL) can be a great product for individuals who want to capitalize on the wealth transfer tax benefits of life insurance. Here’s why:
- The policy is paid for and the death benefit is guaranteed after one premium payment.
- The single premium payment can lead to potential savings over an annual premium payment.
- The policy accumulates cash value, which is accessible to the policyowner and may grow tax-free.
In particular, tax-advantaged life insurance can help when a wealthy client:
- Tells you they’re maxing out their contributions to their IRAs or 401(k)s
- Reaches the age at which they must take required minimum distributions (RMDs) from their retirement plan
Your client can use their “overflow” or RMD money to purchase an SPWL policy. Similar to 401(k)s and IRAs, an SPWL policy could allow your clients to build cash value on their money tax-free. It could also allow them to shift any “extra” wealth they may have to their heirs more easily.
2. Your Client Wants to Pass Money on to Heirs or Charity
Investment accounts IRAs, 401(k)s, and annuities can be a great way to save for one’s golden years — but a “taxing” way to leave money to family, friends, or charity. Transferred funds may be subject to delays, as well as dues to good old Uncle Sam.
If an individual places funds into a bank account, IRA, 401(k), or annuity:
- The account or plan may have to go through probate when they pass (can take six months to a year to complete).
- The estate and any other assets for which the deceased did not name an heir will likely be subject to the federal estate tax and maybe even a state inheritance tax.
- All named or unnamed-but-legal beneficiaries will usually have to pay federal and state income taxes for some, if not all, of the money.
Here’s what is a major tax advantage of life insurance: its proceeds are generally income-tax friendly!
- SPWL policies may pass the death benefit to beneficiaries completely tax-free.
- On some policies, interest building inside the policy increases the original death benefit and that interest is taxable, but the original death benefit is not.
- As long as your client names a designated beneficiary other than their estate, then the beneficiary of any life policy should not have to pay taxes on their inheritance.
The only snag could be if your client establishes an incident of ownership on their life policy. In this situation, the life policy may be considered part of your client’s estate (even if they have named a beneficiary) and liable to estate and inheritance taxes.
3. Your Client Can Maximize Their Legacy and Minimize Tax Burden
Let’s say you have a client named Sue who has $50K in a savings account that she is planning to bequeath to her daughter.
If that money remains in Sue’s bank account, upon her death, it will be made a part of her estate and taxed, rather than go directly to her daughter. However, if you help Sue take that money and purchase an SPWL policy, her $50K will likely purchase a $75K death benefit (or higher depending on her age at purchase).
The tax benefits of life insurance here would include:
- A larger amount of money to heirs than the money alone could have provided
- The ability to pass her funds directly to a named beneficiary tax free
- Depending on the policy, some of the death benefit could help pay for long-term or critical illness-related care she may need in the future tax free
With a little fact-finding, you can uncover “hidden” funds and let clients like Sue know that they can use life insurance to better plan for the future.
Is Life Insurance Tax Deductible?
Keep in mind, the taxation of life insurance benefits is likely new to your clients. A lot people tend to have questions around life insurance and tax deduction.
Primarily, we hear that people ask, “Are life insurance premiums tax deductible?” If you receive that question from an individual, the answer is generally “No.” Exceptions may apply, such as for businesses that pay life insurance premiums.
Life insurance’s favorable tax treatment makes it one of the safest products in which individuals can stash their extra cash. Do your clients know everything a policy can guarantee?
Want life insurance sales support? Parter with Ritter for free today!
Not affiliated with or endorsed by Medicare or any government agency.
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