What You Need to Know
- The Consolidated Appropriations Act, 2021 turned fixed interest rates built into Internal Revenue Code Section 7702 into variable rates.
- The old rates were set in the 1980s and were very high, by 2021 standards.
- For agents, one effect could be a change in commission payments.
A new feederal tax law update could help high-income clients use cash-value life insurance to ease some of the sting of future tax increases.
Life insurance company executives talked about the changes last week, in a series of conversations with Patrick Bowen that were part of the NAILBA Engage online conference.. Bowen is co-founder of InsurAware, an insurance sales system company.
Jerry Blair, chief distribution officer at two Sammons Financial carriers, said the tax law update will make it much easier for clients to build up cash value in whole life policies, indexed universal life policies and other policies that can help the holders put off paying taxes on gains in value.
Eventually, Blair said, the holders also can use the policies to generate a tax-free income stream.
Because tax update helps savers build up policy cash value, “this may bring in more of the wealth managers, or the asset managers,” Blair said.
One consequence of the changes is that, if all other parameters are held equal, the new interest rate benchmarks will cause a policy’s death benefits and agent commissions to fall, said Doug Winkler, a vice president at Prudential Financial Inc.
Life insurers may move to mitigate the decrease in agent commissions by shifting to new compensation arrangements that are based on the policy cash value as well as the premiums, Winkler said.
In the long run, he added, the changes should be good for everyone involved with buying or selling cash-value life insurance. This is because the changes will make a wide range of products, including split-dollar life insurance arrangements and chronic illness planning, more attractive.
James Bowman, head of distribution strategy and operations at John Hancock, said clients’ ability to fund life insurance policies at a much higher level will lead to big, helpful changes.
Hancock already has adjusted the compensation rules for policies funded at a specified level, Bowman said.