Many think that life insurance is only for the dead.  In fact, that could not be further from the truth. There is no doubt that it offers a peace of mind for your loved ones, but it can also provide many options in regards to living benefits.

Permanent Insurance

Whole Life
Universal Insurance
Indexed Universal Life
Variable Universal Life

These policies are designed for individuals who want guarantees and who are focused on providing death benefit protection over cash value accumulation.

Offers

  • Guaranteed death benefit
  • Guaranteed cash value
  • Potential additional cash value by the receipt of any dividends declared by the company. Although not guaranteed, dividend payments are generally declared annually by the company.
  • Level premiums that are guaranteed to never change.

These policies are  ideal for the consumer who has a need for life insurance, is somewhat conservative, and wants the guarantees of a fixed, minimum interest rate with the potential for additional interest credits. These policies can be on a guaranteed chassis with little to no cash accumulation or a current assumption with a shorter guarantee period with some upside for cash accumulation

Offers

  • Flexible death benefit
  • Flexible premium
  • Policy cash values (if any) are credited a current interest rate that is set by the insurance company, which is subject to change, but will never be lower than a guaranteed minimum interest rate.

May be ideal for those who need death benefit protection but are focused on cash value accumulation for lifetime needs such as supplementing retirement income, college education funding, etc. Indexed UL contracts range from longer guarantees with lower cash accumulation up to shorter guarantee period with more upside cash value potential.

Offers

  • Flexible death benefit
  • Flexible premium
  • Cash value grows based on an interest crediting strategy that is tied to changes in a market index.
  • Downside protection through minimum guarantees to ensure that your cash value will not decline due to decreases in the Index.
  • Tax Deferred Growth
  • Asset Protection depending on state

This policy design is for the customer who needs life insurance but would like to have the ability to choose how their cash value is invested.  Traditionally, VUL products have a certain short term guaranteed death benefit. The policy performance is tied to the performance of the sub accounts.  VUL contracts offer a bit more upside potential in cash accumulation than other permanent product, but also may have more management expenses because of the separate sub accounts that you choose.

Offers

  • Flexible death benefit
  • Flexible premium
  • Cash value grows based on the performance of the professionally managed stock, bond and money market sub-accounts that you choose. You can design a portfolio to match your comfort level and risk tolerance. Policy cash values fluctuate based on the sub accounts in which you are invested and may lose value, including principal.
  • Tax Deferred Growth
  • Asset Protection depending on state

Business Owners/Executives

Qualified Plan
Non Qualified Plan

One of the benefits of owning a business is that you have tax-favored options to save for retirement that non-business owners don’t have. Your business can sponsor a qualified plan which may be designed to drive the majority of the benefits to you. This is a classic way to shift business dollars to you for retirement.

Offers:

  • Allows for substantially larger, tax deductible contributions
  • Retirement benefit is known in advance

Adding a Life insurance component inside of a qualified plan  can help “self-complete” your retirement plan, helping to make sure that your goals for their retirement can be met.

Buying life insurance inside your qualified plan may be an affordable, tax-efficient way of meeting both your business and personal insurance needs.

The advantages of purchasing life insurance inside your qualified plan include:

  • Premiums are paid for with tax-deductible plan contribution dollars, freeing up personal dollars
  • Should death occur before you’ve had time to accumulate your retirement account, the life insurance proceeds can help complete your retirement savings for your family
  • At retirement, the policy can be transferred to you to personally own, providing continuous personal protection for you and your beneficiaries

How does life insurance in your plan free up money for you?

If you were to purchase the same amount of life insurance outside your qualified plan, you would need to gross up your income in order to net the same premium paid from qualified plan dollars.

For example, assuming you’re in a 34% personal income tax bracket:

 

Qualified Plan:

Out of Pocket:

Gross Amount to Pay Premium:

$12,500

$18,939

Taxes Due:

$0

$6,439

Net Amount to Pay Premium:

$12,500

$12,500

How it works:

  • The policy is applied for and owned by your pension trust, however, you name who the beneficiary will be of the insurance proceeds
  • A portion of your deductible plan contribution is used to pay the insurance premium
  • The life insurance cash value is attributed to your retirement savings, and because it is accumulated using pre-tax dollars, is subject to income taxes when received either through distribution at retirement or upon death
  • The death benefit in excess of the cash value is received by your beneficiary income-tax free
  • Because your pension is providing a tax-free benefit to your beneficiary, you will need to pay a small annual tax on this “economic benefit” which may be recovered at retirement
  • At retirement, the insurance policy can be transferred to you as part of your retirement distribution
  • Once you personally own the life insurance policy, you may choose to access the policy cash value, through loans and withdrawals, to help supplement your retirement income**

If you have a need for life insurance, you may want to consider purchasing it through your qualified plan.

Part of sound business practice is to assure that your key people are compensated in a way that rewards their past performance and encourages future performance. There are several tools available to help you provide targeted benefits to you and your key people. It is not unusual for a business to use more than one of these concepts – building a program that helps meet your unique needs.

Non-qualified plans are plans that you can use to provide additional benefits to yourself and your key employees and executives. A non-qualified plan is often used along with a qualified plan as an additional benefit to attract and retain key employees. They also offer greater flexibility in who can be covered under the program and are generally easy to establish and administer.

Types of  Non Qualified Plans:

  • Key Person – Key person insurance can be used to:
  • Keep lines of credit open.
  • Train another employee for the same specialized skills.
  • Assure the completion of ongoing project initiatives.
  • Provide access to policy cash value through loans and withdrawals, which your business can use to meet unexpected business expenses.

While you can never replace your key people, you can help protect your business from experiencing financial loss at their death.

  • Executive Bonus Plan– If the benefit is for a non-owner employee, an executive bonus plan is appropriate for all business forms, including professional corporations, partnerships and LLC’s. However, this type of plan does not offer any tax benefit for business owners if the business is an S-Corp, partnership or LLC taxed as a partnership.

The advantages of an Executive Bonus Plan:

  • Employer decides who participates and how much of a bonus each employee will receive.
  • Bonus dollars are tax-deductible to the company as compensation to the key employee.
  • Simple to adopt with No IRS approval required.
  • Premiums are reported as “other compensation” on W-2 and are subject to FICA and FUTA taxes.
  • The key employee will own and control the policy and will have access to the riders, potential cash value growth and death benefit that make up the permanent life insurance policy.
  • The employee’s out-of-pocket cost is the tax due on the premiums paid by the employer that have been treated as compensation. You may choose to add a cash bonus to the arrangement (a double bonus) to offset the tax amount due.
  • Policy cash value grows tax-deferred and may be accessed through withdrawals or policy loans*.
  • Death benefit is paid to the insured’s beneficiaries income tax-free.
  • Split Dollar Plan – Split dollar is a term that covers two different executive benefit arrangements.
  • The Split Dollar Economic Benefit arrangement provides an income tax-free death benefit to the key employee while providing the business with key person protection.
  • The Split Dollar Loan arrangement provides the key employee with the ownership of a permanent life insurance policy, the business with cost recovery all at a cost to the employee of the interest on the premium paid by the business.

The Advantages of a Split Dollar Plan:

  • Allows your business to provide select benefits to key employees.
  • Key employee receives valuable life insurance protection and potentially the benefits of owning a permanent life insurance policy.
  • Business will either be the owner of the policy (the economic benefit arrangement) or will recover the costs of the arrangement (the loan arrangement).
  • Non Qualified Deferred Comp – Your business may enter into an arrangement with your highly compensated or select group of management and provide them with a supplemental retirement arrangement that is tailored to both the business and executive’s needs. 

This arrangement is appropriate where the business entity will continue to operate for a long period, at least long enough to pay the benefits promised under the arrangement. Essentially, the business promises to pay a benefit to the executive at some time in the future (often at retirement age).

The Advantages of a Non-Qualified Deferred Comp Arrangement:

  • The executive will only pay tax on the benefit when received, allowing the executive to benefit from tax deferred growth.
  • The business may informally fund the arrangement with permanent life insurance, providing a source of the funds from both the potential cash value build up and the income tax free death benefit.
  • The business will receive a tax deduction on the benefit amounts when they are paid to the executive.
  • The business may be highly selective as to who will receive the benefits and how the benefit amounts are defined.
Four Main Benefits Of

Personally Owned Life Insurance

Death Benefit Protection

In a time of grief, a life insurance policy can help with medical bills, funeral costs and other immediate expenses, ensuring a family has financial support when it’s needed most. It can also help replace lost income for the future, providing loved ones with a better chance of continuing their current lifestyle.

Cash Accumulation

Life insurance can help one diversify their investment portfolio. In some products (universal and whole life) a certain portion of your premium earns interest. The gain is tax-deferred until withdrawn and can help fund supplemental retirement income, college expenses, or other financial obligations. If the contract is structured properly, the withdraws may be able to be taken out income tax free.

Income Tax Benefits

There are a couple of ways that life insurance policies can transfer benefits free of federal income taxes. One way, is the death benefit is traditionally paid to the stated beneficiary tax free. Additionally, earnings from accumulated value are not taxed until withdrawn. If the contract is structured properly, the withdraws may be able to be taken out income tax free.

Estate Planning

Regardless of the size of an estate, this can be a major consideration. Integrating life insurance into an estate plan can offer a number of benefits, including avoiding family conflict, protecting other assets or providing trusts for beneficiaries.

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