NEW LIFE FOR WHOLE LIFE
How would your affluent clients like to be their own bank? They might be able to through the use of whole life insurance with a paid-up additions rider (PUAR).
Over the years, whole life sales have gone down dramatically. It has been mostly relegated to sophisticated executive bonus plans, non-qualified deferred comp plans, and insurance on grandchildren.
However, with the innovation of the PUAR a few years back, a few financial advisors recognized that a whole life plan of insurance could be used almost like a personally-owned bank. Because of the virtual unlimited and income-tax-free access to the cash values in the contract, the policyowner does not have to battle with credit worthiness, slow processing of bank loans, or having to deal with excessive interest rates and/or penalties on short repayment schedules. Briefly, here’s how it works:
The PUAR allows the policyowner to overfund the whole life contract by paying more than the carrier-calculated premium, thus producing faster buildup of tax-deferred cash values. The higher cash values theoretically will increase the amount of cash-value due to more dividends being credited annually. (Dividends are not guaranteed.) Because more premium is being paid, there is also a higher-than-usual increase in the amount of insurance coverage (face amount of the policy) as dividends purchase paid up additions.
If the insured dies before using any of the cash values, the beneficiary receives the death benefit income-tax-free. If the insured lives to create a larger-than-normal cash buildup due to overfunding, there will be income-tax-free opportunities to access the cash value for whatever purpose the policyowner may want.
This is not a perfect set up. The usual consequences of taking cash value out of an insurance policy still apply. One major consideration is to avoid any carrier that still practices “direct recognition”, which reduces the dividend paid on loaned-out cash value. The PUAR comes at a modest extra cost and cannot be added after issue with most carriers. But, having full control of virtually tax-free money that can be paid back on one’s own schedule is a very attractive use for this plan of insurance and is a great sales idea.
Call me for an illustration. For more detailed information, go to amazon.com and search for “Becoming Your Own Banker” which will bring up a list of books that have been written on this subject.
Nothing in this piece constitutes tax or legal advice. Always consult a qualified tax advisor or attorney before making financial decisions.
