Why cash value life insurance may be the estate planning tool your clients need

After consulting with her financial advisor, Cathy decides to liquidate the CD over a period of five years. She purchases a cash accumulation life insurance policy with five annual payments of $40,000 for a total of $200,000 of premium payments. Assuming Cathy is very healthy and assuming a 4.10 percent crediting amount to the cash value portion of the policy, the five payments of $40,000 can purchase $585,000 of death benefit and include a chronic illness rider. 

The chronic illness rider will permit her to access cash from her policy, if she is deemed to be chronically ill under the terms of the rider, by accelerating the death benefit.  Benefits which would be received under a chronic illness rider are generally received income-tax free. This means Cathy would have an additional pool of money in the amount of $585,000 to offset expenses if she is deemed to be chronically ill under the terms of the applicable rider. 

In addition, the cash value inside the life insurance policy will have the potential to grow at a higher rate than was possible in the CD. Crediting rates and methods vary from policy to policy and are subject to changes by insurance companies. That said, in many cases, even conservative crediting rates exceed the 1 percent Cathy was receiving in her CD. In this hypothetical, the crediting rate of 4.10 percent is far better than the 1 percent she is yielding in the CD. If her needs change over time, Cathy may access the policy cash values through loans and/or withdrawals if her needs change and she decides to use cash values to supplement those needs. Of course, any loans or withdrawals taken from her policy will lessen the remaining amount of the death benefit meant for Mary.

When she passes away, Mary will receive her life insurance policy income-tax free. Upon Cathy's death at age 86, the death benefit would be $585,000 for Mary, significantly more than under Cathy's original approach of leaving the CD to Mary.

It is important to note that if Cathy or anyone needs the CD or other low yielding cash asset for short-term cash needs or for retirement purposes, then this strategy does not make sense and some other strategy would need to be considered.  However, if the assets are not needed for retirement and are earmarked for heirs, then exploring this strategy makes sense and should be considered.

By repositioning the assets not needed into life insurance, people can increase what their heirs receive, can have the potential for more growth inside the cash value policy and, through chronic illness riders, have access to the entire death benefit to offset expenses during a period of chronic illness. These benefits may be significant reasons for many people to re-evaluate their low yielding assets, and to work with their advisors to activate those assets to better accomplish their financial goals.