The life insurance industry has unquestionably been redefining itself over time. For many years, it had been a field solely known to deliver agreed upon sums of money in the event of the insured individual’s passing. However, it has grown to be much more than that. As a matter of fact, many people looking to buy life insurance today often have living benefits — not death benefits — in mind as their primary reason for looking to buy a policy.

Predominantly, people still buy life insurance in the event of one’s demise. However, it’s not at all uncommon to hear agents today use the phrase, “life insurance in case you live.”

During the last six years I’ve been an advocate of overfunding universal life policies. Like many other licensed agents, I’ve touted the notion of using policy loans as a way to supplement a client’s retirement. When a policy is structured correctly, the policy owner can utilize policy loans to accomplish a way to create a tax-free income stream while living. That feature alone has made universal life a tremendous product. Consequently, we’ve seen its market share broaden over the course of the last decade. Until more recently, that was really the standalone living benefit provided by these policies.

As has been the tradition in the life insurance industry, a revolutionary universal life product has been newly released and is now available to the marketplace. Combining the benefits of an income tax-free death benefit and a tax-free income stream in retirement, this new product also lets the policy’s owner enjoy the death benefit without even dying. Take, for example an event of chronic, critical or terminal illness, where such an occurrence would trigger a payment to be made by the insurer. Based on the idea of discounting the death benefit, the owner would actually accelerate a percentage of the death benefit. In the past, people had to buy and pay premiums on separate policies, such is the case no more.

If the policy owner chooses to accelerate the death benefit upon a qualifying event, the amount of the accelerated benefit discount would depend upon the insured’s age. If the insured is older, the discount will be smaller.

Without a doubt, the completeness of this policy’s features demonstrates another giant step forward taken by the insurance companies. In an effort to evolve their product lines, carriers must realize the need to take strides towards offering increasingly consumer-friendly policies. I don’t think that anybody would disagree that this new line of life insurance policies is hot. Coverage that extends beyond death to critical illness, terminal illness, chronic illness and tax-free supplemental retirement income is more than I could have imagined ever representing when I first got in the business. When the carriers we represent get creative and break away from traditions, it paves the way for its agents to find success because of the marketability.

James Petrinovich works with Freedom Equity Group in Campbell, Calif.

Rediscover a powerful planning opportunity with Section 79
By Nichole A. Crawford

Section 79 plans have been around for quite some time, but have become somewhat underutilized in recent years in favor of newer, more cutting-edge strategies. However, recent rulings by the IRS have made some of these options, including deferred compensation and 419(e) plans, less attractive both from a tax and an administrative standpoint. For business owners with planning needs that can be met with life insurance, steady business profits, and the desire for a current tax advantage, Section 79 may provide the answer.

Most advisors and business owners think of Section 79 plans as primarily a vehicle to provide group term life insurance to employees. Assuming a Section 79 plan is nondiscriminatory, employees can receive up to $50,000 of group term insurance income tax free. Additional coverage may be provided, but the value of such coverage must be reported as W-2 compensation each year. Provided the employer is not the beneficiary (either directly or indirectly) of the policy and total compensation to the employee is “reasonable”, the insurance premiums should be tax deductible to the employer.

The regulations under Section 79 also allow “permanent benefits” to be provided as part of the plan. In other words, the plan can provide employees with cash value life insurance benefits. The value of these benefits for tax purposes is determined under an actuarial formula, based in part on the age of the insured and the type of contract used. While the details of this calculation are beyond the scope of this article, some contracts can produce a significant tax benefit in the form of a tax exclusion ratio for the participant. It should be noted that only certain policies produce a favorable valuation under this formula.

While Section 79 plans are considered non-qualified plans, they do have to satisfy some nondiscrimination rules as to both eligibility and benefits. The plan is for “employees” — self-employed individuals, partners and more than 2 percent owners of an S corporation are not eligible for the plan. Essentially, business owners must receive W-2 income from a C corporation in order to participate. If they do not already have a C corporation, they may find it worthwhile to consult with their tax and legal advisors to spin off one or more functions of their existing entity into a C corporation and enable the owners to participate in the plan. When determining which non-owner employees must be included in the plan, those who have less than three years of service, are part-time or seasonal or are union members covered under a collective bargaining agreement, can be excluded. Additional rules apply to business with fewer than 10 employees.

As to benefits, all employees eligible for the plan must be offered the same type and amount of benefits. In other words, if the plan offers permanent benefits, they must be offered to all employees who are otherwise eligible to participate. The value of the permanent coverage, along with the value of insurance protection in excess of $50,000, must be included in the employees W-2 income each year. Employers expect that most employees will decline this coverage to avoid increasing their income tax liability. Likewise, all employees can be offered a term benefit in the same amount (usually a multiple of salary) as was offered as a permanent benefit. Again, the value of protection over $50,000 is taxable to the employee, which typically causes most employees to opt out of this coverage as well. $50,000 of group term coverage, provided at no cost to the employee, is generally the option selected by most employees under the plan. However, should the rank and file employees elect options more costly than the “free” (to them) term insurance, the overall cost of the plan for the employer can increase significantly.

For the employees who elect permanent coverage, individual life insurance policies are issued to the insured. In addition to the income tax free death benefit, the policy values accumulate tax-deferred and can provide supplement retirement income in the form of policy loans and withdrawals. The entire premium is generally deductible to the employer, but only a portion of this amount (generally 30 to 40 percent with an appropriately designed policy) is includable in the employee’s income. Section 79 plans are generally designed, using non-guaranteed assumptions, to be fully funded within a limited time period (typically 5 years), as the income tax advantages of the plan are unavailable after that time. Once the employer stops paying premiums, the employee’s income tax liability for the contributions will cease. Ideally, the products used to fund these plans are able to sustain themselves after the funding period, although they are not be guaranteed to be paid-up at that time.

While Section 79 plans may not be appropriate for every business, a business owner with a need that can be met with life insurance and the desire for current tax benefits is an excellent prospect. The tax benefits offered are planning opportunity for your clients in the closely held business market.

Nichole A. Crawford, JD, LL.M, CLU, is director of advanced sales with National Life Insurance Company in Montpelier, Vt.