IRS Ruling Could Help Fee-Only Advisors Use Life Insurance

News October 24, 2023 at 01:47 PM
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The Internal Revenue Service has issued two new private letter rulings that could help life insurers create a new generation of life insurance policies aimed at fee-based and fee-only advisors.

The IRS sent the letters to Protective Life.

The letters would affect a variable universal life insurance policy that's registered with the Securities and Exchange Commission as a security, as well as being registered with state insurance regulators as a life insurance policy.

Protective told the IRS it wants to use the policy's cash value to pay fees to a policy owner's investment advisor, without the fee payments counting as "amounts received," or potentially taxable income, for the owner. The policy could pay investment advisory fees equal to up to 1.5% of the policy's cash surrender value per year.

The fee payments will not "constitute compensation to the advisor for services related to any assets of the owner other than the advisor life contract," according to Protective.

What it means: The new rulings could simplify operations for advisors who want to use permanent life insurance as a vehicle for helping clients plan for long-range expenses or fund estate plans.

Permanent life: Term life policies provide death benefit protection for a specified term, or number of years. Some term policies may include provisions that give the owners an automatic or nearly automatic right to buy permanent life insurance, but the underlying policy provides no cash value.

A permanent life insurance policy provides death benefit protection and also builds up cash value. The policy owner can borrow against the cash value and may be able to withdraw part or all of the cash value.

A variable universal life policy lets the owner tie the growth of the cash value to the performance of one or more investment funds.

Traditionally, the tax rules have made rolling retirement account assets into annuities more attractive for middle-income clients interested in retirement income planning but have made buying permanent life insurance more attractive for high-net-worth clients who are interested in estate planning and who may have concerns about estate taxes.

The fee-based product market: Life insurers have been working to build fee-based annuity sales for years, but commission-based sales continue to be much more common.

Wink, a Des Moines, Iowa-based firm that conducts quarterly U.S. annuity market surveys, reported in August that 35 companies offered fee-based annuities in the second quarter. Fee-based annuities accounted for only 2.35% of all Wink survey participants' second-quarter annuity sales.

Letter rulings: The IRS uses letter rulings to give taxpayers advice about specific tax questions about how to interpret tax rulings.

Only the taxpayer that receives a private letter ruling can rely on the ruling.

But now that other life insurers have seen the Protective letter rulings, they can send the IRS similar letters and are likely to receive similar or identical rulings.

The new letters: Both of the letters are dated July 17. They were posted by the IRS in public on Oct. 13.

One is Public Letter Ruling 101076-23, and the other is Public Letter Ruling 101077-23.

Protective announced Tuesday that it received the life fee letter rulings in July.

One of the letters is for Protective's New York life subsidiary and the second is for a subsidiary that sells life insurance in the rest of the country, a company representative said.

It applied for the ruling for its Investors Benefit Advisory variable universal life policy.

Kathryn Cox, a Protective senior vice president, welcomed the ruling and said it will help the company strengthen its variable universal life efforts.

Chad Nulty, a vice president with the company's RIA Insurance unit, said getting the ruling shows Protective's commitment to providing products for RIAs.

"Fee-based RIAs focused on holistic financial planning now have a solution to meet their needs as an advisor as well as the needs of their clients," Nulty said.

Chad Nulty. Credit: Protective

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