This month’s newsletter is a little later than normal, but we are going to explore a recent change to a familiar financial planning tool in the February edition. Life insurance experienced a significant positive development tucked inside of December’s COVID Relief 2.0. The current low-rate environment and a rule change to IRC Section 7702 (in the relief bill) gave a very big boost to life insurance as an alternative to other traditional investment options.
Essentially, life insurance has and continues to provide very attractive tax benefits. The rule change lowered the amount of actual life insurance or death benefit needed for a policy to qualify as…life insurance. This means that more of the insured’s premium dollars go to the investment bucket vs. toward the cost of life insurance coverage. The life insurance contract has a lower overall expense due to lower death benefit requirements. This creates a higher rate of return with respect to the policy’s cash value. The knock-on effect is greater accumulation inside the policy’s cash value.
The Federal Reserve has lowered rates in an attempt to spur spending and investment to create economic growth. Unfortunately, this has not been good for savers and bond investors. The search for higher rates may also unknowingly expose investors to higher risk in search of the aforementioned higher rates. Permanent life insurance (vs. bonds) may provide a more stable and attractive counterbalance to stocks in a portfolio.
The cash value can be used in retirement to supplement a 401(k), other retirement & investment accounts, and Social Security. The cash value is accessed via a loan, which is tax free and repaid at death via a reduced death benefit.
The rule change to IRC 7702 did not make permanent life insurance any easier to understand, but it does make it worth a second look.
Life insurance has always been there to provide security to a family, but can also assist with tax efficient retirement income, pay estate taxes, fund a business succession plan, and more. Please let us know if you would like to have a more in-depth conversation about this recent rule change and its potential impact on your financial plan.
Hat tip to Bob Sansone of iTrust Advisors for helping us edit this edition of the Firethorn newsletter. Next month, we will dig into digital currency and blockchain as the currencies begin to gain institutional acceptance.