Decisions, Decisions. Choosing Between SPVLs Or SPVAs
Toward the mid- to late-1980s, one of the hottest life insurance products was single premium whole life insurance. SPWL, as it was called, was widely sold not only by traditional life insurance agents, but by banks and stockbrokers as well.
Thats all changed, and now the industry has single premium variable life coming to the fore.
This article explores this product evolution, and also addresses the advantages of SPVL over another single premium productthe single premium variable annuity. Well also touch on how variable life stacks up against variable annuities.
The examination should help producers understand the products merits, and assess which ones might be most suited to various needs.
First, some history. As you may recall, when SPWLs were the rage, they provided an easy method for wealth transfer, afforded life insurance protection, and were easily understood by unsophisticated purchasers and sales persons.
Then, in 1988, Congress changed the tax law applicable to the product. For the first time, loans and other distributions–other than on the death of the insured–were subject to federal (and in most cases, state) income taxes. Moreover, on distributions prior to age 59 (other than for death, disability, or annuitization for life expectancy), a 10% tax penalty was imposed.
Almost immediately, word spread throughout the SPWL market that the product had lost its favorable tax status. Sales people switched to selling annuities instead of SPWL.
To the trained eye, this sudden shift was hard to understand. All the tax law change did was make distributions from SPWL taxable in the same manner as for annuities. Therefore, switching from selling SPWL to selling annuities seemed unfathomable, considering that taxes on pre-death distributions are identical in both products.
At the time, SPVL insurance products were just beginning to come to market. The timing was such that the product, in effect, died on the vine–before the industry even had a chance to see how effective it could be as a wealth transfer mechanism.
Today, however, SPVL sales are beginning to pick up–probably in recognition of the products unique value in the financial planning process.
One of the main advantages of any life policy, variable or fixed, is that death proceeds transferred to the beneficiary free from income taxes on any amounts in excess of the owners basis in the policy. This advantage is not available for an annuity.
Without effective estate planning, both products may be includable in the gross estates of the owner on death. However, the addition of an income tax on the increase in basis of an annuity makes it compare unfavorably with VL–particularly when considering that the vast majority of life policyowners will not be subject to estate taxes on death and that probably all annuities will be subject to income tax on the contract owners death.