Participating Whole Life For Senior Clients? Its Worth Considering

Some clients may be concerned about the projected cash values in a life insurance contract, especially compared with the sorts of return rates often projected for traditional retirement accounts. That is where it is important to point out the beneficial income tax treatment for properly utilized cash values in a life insurance contract.

For instance, policy dividends paid as cash and surrenders of paid-up additions from a par WL life contract (one that is not a modified endowment contract) are considered return of premium basis for aggregate cash amounts equal to the premium paid into the contract. With the availability of policy loans after reaching premium basis, the ability to access the value created by the life insurance contract on a tax-free basis is realized (of course, policy loan interest is applicable).

As long as the remaining policy death benefit always exceeds the created policy loan and loan interest, the death benefit will pay off the loan at the insureds death, without creating adverse tax consequences for beneficiaries. This favorable tax treatment of accessed life insurance contract value makes the cash value available inside the contract after-tax, which then can be compared only to returns on traditional retirement accounts after those are tax-adjusted as well.

Another favorable feature of par WL contract is that there are no age-driven tax penalties on dividends and other values (policy loan interest is applied to cash-value policy loans and surrender fees may still apply). Qualified retirement plans such as IRAs and 401(k)s require owners to be 59 to access funds without tax penalty.

Dividend payments provide additional flexibility. Most par WL contracts have several dividend options, like allowing dividends to buy paid-up additions, to be paid in cash, accumulate with interest, to buy one-year term insurance, to repay policy loans, to reduce required premiums and more. These dividend options can be changed upon request. (See the box for ways this can be done.)

Some companies even provide limited pay par WL contracts, guaranteed paid up after a certain number of years, instead of requiring future dividends to reduce or eliminate the policy premium. For a client fast approaching the senior years, this feature may provide substantial peace of mind to know exactly when the premium outlay for the contract will end.

Ownership of par WL and other permanent life insurance can provide other flexibility for the senior as well. It can be used as collateral should the need or desire arise to obtain a loan. It can allow more aggressive utilization of other assets in retirement, which is key for a client needing to access funds but still desiring to have wealth to pass along to heirs. The "permanent" part of this type of life insurance is central to these features.

To anyone who has been onboard with par WL for a long time, these items barely scratch the surface. These certainly are not new concepts, just like par WL is not a new product. But if you or your clients are new to par WL, perhaps it is worth reviewing what has made it stand the test of time.

Robert P. Stone is assistant vice president and associate actuary with American United Life Insurance Company, a OneAmerica Financial Partner Company, Indianapolis, Ind. His e-mail address is [email protected].

Reproduced from National Underwriter Edition, July 29, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.