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Life Insurance Trends in 2017

| February 16, 2017
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The election of President Trump, indications of increased interest rates, rising political populism in Europe, and a general air of uncertainty has created challenges – along with opportunities – for advisors and their clients. As we survey the marketplace and try to anticipate the potential impacts of tax reform, market volatility, economic expansion and geopolitical shifts, these are themes, trends and insurance solutions we anticipate in 2017. 

Death and Taxes

While they are the only certainties in life, exactly what those taxes will be … in life or at death … are a bit up in the air. For the life insurance industry, the specter of a full federal estate tax repeal has left many advisors, attorneys and individuals question what advanced gift and estate tax planning decisions should be made with the unknown of what rules to play by. While no one can predict the legislative actions of this or any future Congress, the notion that some form of wealth transfer tax will forever be eliminated is highly unlikely; the Estate Tax, in some form, will come back – and when it does, there’s no guarantee we’ll enjoy the current exemption level, portability and coupling between estate and gift tax regimes. 

Where clients and their advisors may want to pause for more clarity before engaging in significant, and perhaps irrevocable, gifting and planning, the need to protect insurability is still paramount. The use of large, short duration term insurance, particularly from those carriers who offer a robust conversion platform, provides the opportunity to “warehouse” death benefit in an inexpensive form until more is known about immediate and intermediate death benefit planning. As insurance carriers move to the 2017 Mortality Table, we anticipate term pricing will continue to be extremely attractive.   

The use of permanent insurance will continue to be a meaningful tool in estate planning, even in a situation where the death benefit isn’t used to “pay the tax”. Death benefit proceeds are cash at the exact time it is needed, removing the need to liquidate other holdings should the need arrive. From a diversification standpoint, those products featuring a contractual guarantee (e.g., Guaranteed* Universal Life, or “GUL”) deliver a tax-free internal rate of return at normal mortality that is attractively comparable to the return on fixed income instruments.

Accumulation and Distribution 

Of the three essential tax properties of life insurance – an income tax free death benefit, the ability to move death benefit proceeds from a taxable estate and the tax deferred inside build up – the last item is one we find least understood, and therefore underutilized as technique. Even in the event of overall tax reform, those individuals in the higher income tax brackets will always have a need to find vehicles to defer or eliminate current taxation.   

While the life insurance provides death benefit protection (particularly in the early years), the policy design and framing of the solution is to create an additional source of supplemental income. Unlike in traditional insurance designs, the “cost” of the solution isn’t the insurance premium – the dollars going into the policy are characterized more as contributions - but instead the insurance charges deducted from the cash value. By properly designing the insurance policy to have the lowest available net death benefit, we can reduce these charges to a minimum.

Funded with after-tax dollars, the cash value component of life insurance grows income tax deferred and can be distributed tax-free in the form of a withdrawal (return of premium) and loan (gain); in this sense, the life insurance “wrapper” is similar to creating a ROTH IRA account. However, unlike a ROTH, there are no contribution limits (subject to policy limitations) nor timing restrictions on taking withdrawals, but be sure to not run afoul of a modified endowment contract. 

Creating various “buckets” of money with different tax properties, market correlations and liquidity provides flexibility as part of the overall wealth portfolio. 

Questions and uncertainty around taxes aren’t new to 2017, nor will this be the last time we’re faced with a potential change. The fundamentals properties of life insurance will continue to make these products important assets within an asset plan, independent of short term changes to tax law.

Michael DeFillipo
Financial Advisor
610-784-3488
mdefillipo@1847financial.com 

 

All guarantees are subject to the issuing company’s claims paying ability. For informational purposes only not meant to be specific advice regarding your specific situation.*Registered Representative of, and Securities and Investment Advisory services offered through Hornor, Townsend & Kent, Inc. (HTK), Registered Investment Advisor, Member FINRA/SIPC - Eight Tower Bridge, 161 Washington Street, Suite 700 - Conshohocken, PA 19428. 610-771-0800. 1847Financial is not affiliated with Hornor, Townsend & Kent, Inc.1699269RM-Feb19

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