"Whole Life Policy As Tax Advantage "

Published in InsuranceNewsNet by ProQuest Information and Learning Company

MAKING CENTS

One of the most controversial topics in the financial planning world is the use of life insurance

as a way to accumulate cash savings. Whole life insurance has been sold by agents for

decades as the lowest long-term cost of insurance along with a forced savings account. The

other side of this argument is to buy term insurance, and invest the difference.

I once favored the "buy term and invest the difference" approach. But I have seen very few

people who have stuck with the program and actually built that robust investment account.

Life insurance is primarily a tool to have a lump sum of cash at someone's death to provide for

loved ones. For most, the death benefit is the primary motivator. But for many wealthy

investors, accumulating cash inside a whole life policy has great appeal.

Wealthy, for purposes of this discussion, means that someone has more money than they

need. Their basic needs, fun activities and legacy plans are amply funded by their nest egg and

overall net worth. Their cash flow is stable and consistently well in excess of their cost of living.

If this profile does not fit you, then using life insurance as a savings vehicle should be a very

low priority for you.

Why is accumulating cash with life insurance so popular with the wealthy? First is the reality

that their next dollar of savings is not likely ever to be needed. It is frequently excess savings

that is likely to end up in the hands of the next generation.

Next is taxation. Traditional cash savings generate annual interest that is taxable. The interest

accumulating inside a whole life insurance policy is not taxed while accumulating. If the owner

of the contract dies and never gets to the cash accumulation, it all passes income-tax free to

the next generation.

Net returns are also a factor. Today's traditional savings vehicles have a very low rate of

return. The cash buildup inside a whole life policy may be higher than what you may get from

a CD. The potential returns from the life policy are twofold. One is the eventual death benefit,

which a CD doesn't offer. The second is the actual interest rate on the cash value buildup.

To properly take this approach, the owner should maximize contributions to the contract. Cash

accumulations inside whole life policies were such a great deal for tax planning that the IRS

actually limits just how much you can invest inside these contracts. To make it work best as an

accumulation tool, you need to contribute right up to the limit imposed by Uncle Sam.