In this article we will go into a little more detail on what is called permanent insurance. But just to give you a heads up; this will be a somewhat lengthy series because it is so often misunderstood and misused. It is also a very powerful concept in the right application. Permanent life insurance includes whole life, universal life and variable life and any version of each. Such as indexed universal life. The common denominator is that the policy is for life. It’s permanent.
But, before we get started it may be good to ask a few questions.
Let’s start with asking why do many high net worth (HNW) and ultra high net worth (UHNW) people use them? Why are they getting policies with a $10 million, $20 million or $50 million and up face value? Why do many have multiple policies like this? Why are they using premium financing and premium funding when the rates make sense? What do they know that we don’t know? Why don’t we know? Is it some deep dark secret only the rich know? Why aren’t more people using it? Is it a scam? A tax loophole? Unfortunately, the most common reaction is to get out the pitchforks and torches and hunt those “monsters” down.
It’s All About the Tax Code
The truth, however is that it’s all built on the tax code. There have been many cases where the IRS and congress have confirmed the tax code regarding life insurance. There have been many clarifications and adjustments but the basic code remains intact. You can go to your local library and read the tax code for yourself. But you will be asleep in ten minutes. These concepts and policies with all the tax advantages are available to anyone and everyone. Rich or poor. So called “loopholes” included.
Each State Examines Each Product
Starting with some foundational concepts, we will examine some of the basics as to how they actually work. To begin, every carrier has to submit every product they offer to every state insurance commissioner for approval. Not all states approve every product that is submitted. Some are approved in particular states with modifications that the state wanted. This does not mean that the state is endorsing the product. It is only an indication that the state feels the product meets the state’s guidelines for that specific kind of product. Any state that does not approve a product that carrier cannot and will not offer that product in that state.
The question may come up, “What if I want a product and it’s not approved in my state? Can I buy it in a different state?” No. To be sure, there are those who will offer to find “a way around that.” Be very careful here. Certain states do offer exceptions with certain criteria but you need to make sure you follow the criteria. Not your agent, your attorney, or your CPA, but you. You will be the one in court. Am I over doing it here? Probably. Until you find yourself in court.
Tales from the Commissioner
Let me share an example with you. I have some clients in California but I live in Indiana. I have applied for my California non resident license and so I had to go to my police station and get finger printed. Then I had to send that in to Los Angeles. They scan it in and do an FBI background check followed by a Department of Justice background check. Then all that is sent to Sacramento. The Insurance Commissioner’s office is there. I was just informed there was a problem and I have to do it over. At this point, it has cost me nearly $400. Now this client owns a rental property in Chicago, IL. I am licensed in Illinois.
A “way around” all this would have been to use the address of the rental property as the home address. The problem though is that they are not actually a resident of Illinois. This “way around” would have saved a lot of time, money and grief. The truth is that “tactic” would not have made it past the first step. But I would be in big trouble. The carrier would drop me and probably turn me in to the state. The client might get all their money back or might not. The state or the carrier could want to bring charges or seek penalties from the client. But not likely in this case because it’s a relatively small policy. Would it have been worth it? Of course not. The bottom line to all these laws and rules is that the state is protecting you, the policyholder client.
Find an Architect
I will briefly touch on this next point then save the rest until next time. When you purchase a policy it is not just a transaction. This type of policy is something you build. Your agent should be an architect, so to speak, or know of one or more. Then ask, exactly what are you trying to accomplish? Then it should be determined what type of policy is best. Would universal life work best? What about variable? Or whole life? These types of policies can provide more than just a death benefit. Because of that, it is important to understand the difference between the cash value and the death benefit. Do you want the death benefit to grow over time or do you want the cash value to grow more?
This decision can make all the difference in the world. If you decide on one aspect but it’s structured for the other, you will be disappointed. so it is important to understand how this works. We will go into more detail in our next article.
Please note: All charts and numbers are for illustration purposes only. Accuracy is neither warrantied nor implied. We are not attorneys or tax advisors. This information is educational only. Not to be considered as advice or recommendations. It is imperative that you consult with a tax advisor and/or attorney when considering any of these concepts. In addition, it is critical that the attorney, tax advisor, and financial advisor are knowledgeable and practiced in these areas.
If you would like help finding such an advisor, we will be glad to introduce you to an experienced planner with your best interest in mind. Please give us a call at 1-800-522-4324.