A life insurance policy can offer unique benefits to its policy holder. Life insurance not only helps individuals be prepared for the unexpected in life, it can ensure the financial security of their loved ones or a favored charity. The proper life insurance policy can protect a policy holder’s legacy for years to come.
But times, policy holders may need to look to their life insurance policy as a source of income, a situation and an opportunity many potential customers are completely unaware of. How can the average life insurance plan be used this way? What can be offered to policy holders if they would like to use their life insurance policy to help offset the costs of uncertain times? How do we best inform customers of this opportunity and its value?
Withdrawal of Basis
Depending on the life insurance policy and how long it has been held by a policy holder, making a simple withdrawal on the cash value of the policy is possible. This option can help at times when a policy holder may need to make a large purchase. This should be done carefully, however, as it can seriously affect the value of a policy holder’s death benefit.
A policy loan can be a good option for needed income in a number of situations. For example, it may be the loan with the lowest interest rate which a policy holder can find. It can also be used to keep a policy from lapsing if the policy holder cannot cover the premium cost of the policy. However, policy holders need to understand that any loan taken against the policy that remains unpaid at the time of their death may adversely affect the payout that their loved ones receive through the death benefit. Walk them through the risks and potential that their loan holds and take the time to understand their situation and particular needs and concerns.
Policy holders should be sure to speak with their policy issuer early on about the best options for using life insurance as income. Not only are there implications to the death benefit, but there may be income tax ramifications, as well. Being proactive and making this information available and known will help your customers make educated decisions about the wisest and most effective way to use the flexibility of their life insurance for the benefit of their present as well as their future.
Policy withdrawals are not subject to taxation up to the amount paid into the policy. Withdrawals or partial surrenders are subject to income tax to the extent that the cash value in the policy immediately before the distribution exceeds the owner’s tax basis in the policy. If taken prior to age 59½, a 10% federal tax penalty may apply. Policy loans and/or withdrawals will be taxable to the extent of gainfor the portion that exceed cost basis if the policy is a modified endowment contract. Policy loans and/or withdrawals also reduce the cash surrender value and policy death benefit, can affect guarantees against lapse and increase the chance that a policy will lapse. Taking a policy loan could have adverse tax consequences if the policy terminates before the insured's death. Unpaid loans are subject to ordinary income tax and, if taken before age 59 1/2, may result in a federal tax penalty.
Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the marketing of the subject matter addressed and the reader should seek advice based on their particular circumstances from an independent tax professional.