Situation: Early in our insurance careers, many of us learned that life insurance enjoys many tax-favored benefits. Specifically, we learned that unlike annuities, withdrawals from a life insurance policy are not taxable to the extent they do not exceed the cost basis of the policy. Furthermore, loans of any amount permitted by the insurance carrier can be taken income tax-free. Because of the tax-favored treatment of withdrawals and loans from a life insurance policy, many strategies promote the use of taking withdrawals equal to basis then loans thereafter as a way to access policy cash values to help clients supplement retirement income. The practical effect of such a strategy is that the policy owner is able to enjoy the policy cash value without income tax consequences.
However, when considering the use of life insurance as a retirement supplement there are product features and tax aspects that should be considered. This Counselor’s Corner will provide guidance on some of considerations that should be evaluated when there is a desire to access life insurance policy cash values.
Solution: In addition to conducting periodic policy performance reviews when you find that you have a client that plans to access their policy cash values at some point in the future, there are specific policy features you will want to pay attention to at the time the policy is purchased.
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