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A Gift from the IRS

A Gift from the IRS

August 26, 2021

Thanks to a new law, the IRS has made it even more compelling to use cash value life insurance to save for the future.  In December 2020, Congress passed the Consolidated Appropriations Act, 2021 that changed the way the IRS defines life insurance and, in most situations, permits you to contribute more premium – sometimes twice as much or more - to a cash value life insurance policy for the same amount of required death benefit.  This means a greater percentage of money contributed to a policy can grow tax efficiently since there are lower insurance costs.

Your Qualified Plan Doesn’t Cut It

If you are relying solely on a qualified plan, you know how difficult it is to save enough for retirement.  In 2021, qualified plans, like 401(k)s, are limited to contributions of $19,500 or, for those over age 50, $26,000, and participants cannot access their accounts without a penalty until they are nearly 60.  For many high-income earners, discrimination testing results in even lower limits, impairing their ability to put money aside for retirement, children’s education, a second home or unexpected expenses. 

Those looking for additional ways to save for the future have long turned to cash value life insurance as a tax-efficient source of supplemental income.  Thanks to the new legislation, this strategy has been super-charged.

An Easy Way to Save Tax-efficiently

By putting aside after-tax dollars into a life insurance policy with the minimum amount of death benefit required, you benefit in three ways:

  1. Ability to grow the money inside the policy tax-deferred,
  2. Ability to access the policy’s cash value tax free via a loan or withdrawal without an age restriction1 ; and,
  3. Ability to provide an inheritance as part of an income tax-free death benefit.2

Flexibility and Freedom

Unlike qualified plans, cash value life insurance policies are not intended solely for retirement.  Since there isn’t a before age 59½ penalty for tapping a properly structured policy and since a policyowner is not required to take required minimum distributions (RMDs), you can access your cash surrender value when you need it for:

  • Retirement;
  • Children’s education;
  • A second home;
  • Long-term care;
  • Unexpected expenses; or
  • Whatever you want!

Put Your Policy to Work for You and Your Family

The benefits extend beyond access to future cash surrender value.  As a savings vehicle, cash value life insurance can be positioned in an investment portfolio as a contingent asset class.   Whether the policy type is whole life, universal life, or indexed universal, the income tax-free death benefit has a very stable expected return and, in many cases, offers guarantees.  This makes it ideal to use as a hedge against riskier asset classes such as private equity and alternative investments that are highly taxed--leading to significant amount of capital erosion.  In effect, the positioning of stable death benefit in a balanced portfolio mitigates risk and also contributes to tax diversification.

Peace of Mind

Many policies in the market today include guarantees which can protect policy benefits, including defending against any downside risk.  When the stock market drops, imagine the peace of mind that comes with knowing your cash value life insurance policy’s exposure to such volatility is limited.  If passing along the policy and its accumulated cash value at your death is key, a guaranteed death benefit feature will ensure your children or grandchildren will receive income tax-free proceeds.

An Employee Benefit

A number of business owners are offering key employees cash value life insurance policies and contributing to them via bonuses to supplement existing retirement plans.  As an executive benefit not falling under ERISA rules and regulations, an employer can pick and choose who participates and at what amount by class.  Provisions restricting access to touching a policy’s cash values can also be established by an employer in order to retain and encourage performance from participating employees.

Cedar Point Financial Services LLC can design a cash value life insurance policy to meet your unique future income needs.  Stop worrying about how you can save more and start dreaming about what meeting your savings goals will mean for the road ahead!

1Access to cash value through withdrawals and loans is income tax free pursuant to IRC §7702(A) and §72 as long as the policy never becomes a Modified Endowment Contract (“MEC”) and the policy remains in force until death.

2 IRC §101(a)