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on’t wait until April to talk about taxes. Educate your clients ahead of time so they understand how a permanent life insurance policy can build tax-free cash value while also providing protection for them and their family. Think of life insurance cash value as a financial bunker that can provide safety during difficult financial times, and if taxation is an assault your client is concerned with, show them how your policy protects them from that. Here are three ways a permanent life insurance policy can provide tax advantaged income for your clients.

1. Tax-Deferred Cash Value

Permanent life insurance policies don’t just stash away money for your beneficiaries; they reward you with cash value that grows using the same mortality credits the rest of your retirement plan uses. Don’t forget to inform your clients of the surrender charges that phase out over time though because this type of policy is meant for the long haul. To keep them interested, tell them the growth of the cash value is tax deferred like a 401(k) or IRA, but money can be withdrawn prior to age 59 ½ without a federal penalty. Then, it can be used for college tuitions, dream vacations, or even more life insurance! If that isn’t enough to ease their tax concerns, you may need to pivot to how permanent life insurance offers a completely tax-free benefit.

2. Tax-Free Withdrawals and Loans

A permanent life insurance policy can be a great vehicle for your clients to compound their saved interest as tax-deferred cash value. It’s from this interest that your client could then take out a loan or withdrawal, generally tax-free. Loans are almost always tax-free, and withdrawals are tax-free up to the basis in the contract. Some permanent life insurance can be extremely flexible which makes the assistance of a financial professional even more important.

If taxes are your client’s main concern, have them focus on using this as a tax-deferred savings account that compounds their cash while also providing peace of mind to their beneficiaries. If the transfer of wealth is their concern, there is no more efficient means to doing so than through using life insurance.

3. Tax-Free Inheritance for Your Family

If the personal tax benefits of permanent life insurance aren’t enough to convince your clients, and if the beneficiaries’ tax benefits are their primary concern, let them rest assured, their death benefit remains untouched as long as they pay back their loans. There is no income tax on this death benefit, and if you optimize their plan, their beneficiaries can even avoid estate tax. You can accomplish this by putting their life insurance policy in an irrevocable life insurance trust at least three years before their death; it will no longer be your client’s personal asset, and therefore, no longer part of their estate. The trust becomes a bulletproof vault inside their bunker, safe from depletion by taxation.

Sign the Policy

There are several different types of permanent life insurance, so it's always important to know your client’s needs. The living benefits are what will answer any concerns they have. Specifically, remind them of these three benefits. (1) A permanent life insurance policy can include tax-deferred cash value that grows and compounds over time. (2) When it comes time to withdraw the cash value or take a loan, the insurance company will not ask any questions or check credit scores, and, in less time than it would take them to apply for a loan, your client could have a their money right away like a wire transfer. (3) Lastly, the only policy that matters is the one that is in force on the day that you die, and the death benefit of permanent life insurance is guaranteed; it is the most tax-efficient manner to transfer wealth. Share this wealth of knowledge with your clients, and you’ll sign more policies than you ever imagined.

See you on the road,
Tom Hegna