The tax-free cash build-up is another example of a use of the Whole Life Insurance in a Buy-Sell plan. Business owners may shy away from such plans because of the higher premiums. Nevertheless, it becomes a good source of funds for the business owner. Specifically, the insured and/or policy owner
can access these monies in the form of a LOAN. Even better is that the loan can be structured to be tax-free. One must be cautioned here. The cash, up to what your total premiums paid in, is completely tax-free. This is what is commonly referred to as BASIS. Monies above this BASIS, if withdrawn will be taxable. However, if this is withdrawn in the form of a LOAN, it is not deemed a taxable distribution. If you do access the cash, please keep in mind that if you do not repay the loan over a period of time, taxable distribution will result. So it is always good to start repaying the loan as soon as one possibly can. Loan repayments can be structured very low.
The trade-off to this cash rich life insurance policy is the inflexibility of the premiums. Much like Term Insurance the premiums must be paid every year, at least in the first several years of the policy. Yet because of this inflexibility there is an opportunity. With your cash value and dividend you have two options. First you can use the dividend to reduce your premium. Although the premiums are initially high, there is some degree of flexibility in that the premiums can be reduced and this may be a great benefit in ones Business Succession plan. In addition, you can always elect to have the dividends paid in cash to you. This is tax-free again up to your BASIS. You must remember that the dividends take a fair amount of time to accumulate. So this, like any other investment, is long-term.
Consequently, although many think that Life Insurance does not need servicing by a competently trained Life Insurance agent, you can begin to see that its valuable to have an agent not only do annual reviews but also show you the many and varied uses to turn the Life Insurance as a “living benefit.” It is always good to review the policy for reasons beyond the cash value. Beneficiaries may need to be change, a new owner may need to be added or removed and premiums may need to be altered.
To be completely objective, the cash value of a whole life policy may not meet the needs of some investors. This is a very conservative account. Not that this is bad but its’ conservative under which you have no control over. Approximately 75% of whole life policies are made up of Bonds, Mortgages and real estate holdings. And these investments are completely selected by the Life Insurance companies. This is another reason why care should be taken in choosing a company. Furthermore, it must be done with an independent financial consultant.
Nevertheless in some situations this could be an ideal situation for your Buy-Sell. You have many choices in selecting a policy. It is my goal to objectively present each choice to you and to emphasize that it is not just term versus whole life.