Understanding the Tax Implications of Life Insurance, Part II

In this month’s discussion, I posed questions to three top producers regarding some of the practicalities and issues surrounding the use of life insurance in tax planning. (In Part I, we discussed how agents can get up to speed on the tax implications of life insurance and why that knowledge is relevant. To read it, click here.)

Q. What do you view as today’s best opportunities in the area of life insurance in tax planning and what practical steps are you using to maximize those opportunities?

William H. Black Jr., CLU, Winter Park, Fla., president of W.H. Black and Company and PensionSite.org: The best opportunities for life insurance in tax planning today, in my opinion, are within defined benefit plans. First, the life insurance in a DB plan allows the client to deduct the cost of the premium. Second, the death benefit remains income tax-free to the beneficiary. Third, spousal beneficiaries receive the insured benefit estate tax-free. And fourth, irrespective of the beneficiary, the life insurance proceeds are outside of probate.

Of course, this is considered an advanced planning tool, and not all advisors deal with business clients. Outside of the DB plan, other opportunities abound. For example, consider these four opportunities: first, fixed annuities as an alternative to CDs. Second, income annuities to guarantee a client an income he or she cannot outlive. Third, term life insurance can be a means of providing affordable coverage when a client’s cash flow may be impaired in these times of economic turmoil. And fourth, use life insurance as a separate asset class. When the client wishes to provide a certain benefit to an heir, charity, etc., show the IRR — the internal rate of return — report generated by most carrier software. These IRRs are almost impossible to beat in an alternative investment. That’s a strong selling point.