as accelerated death benefits allow terminally or chronically ill policyholders to get cash value out faster.
“There is a lot more you can do because you have the policy in place,” Eaton says. Whole life is generally more expensive, so young professionals who can’t afford the premium can purchase smaller amounts of life insurance. At Guardian, with guaranteed purchase options, policyholders can purchase additional insurance every three years between the ages of 25 and 46, or when they marry or have children, without taking additional medical tests, Eaton explains. Or they can choose lower initial payments that gradually increase.
Both variable universal and whole life options offer tax-deferred features. As long as the policy is in force, notes Williams, you can borrow against either type of policy and not pay back the loan unless you want to avoid the reduction in death benefits. Although you will be charged interest, the loans are not taxable, unlike funds withdrawn from other investment vehicles, such as 401 (k) plans. Both options can also leave income-tax-free money to beneficiaries as an “intergenerational wealth transfer,” Raiford says.
Both also offer asset protection from creditors. In the U. S., 44 states have laws protecting the policies from creditors’ claims, such as lawsuits, that can wipe out bank accounts, mutual funds,
and brokerage accounts. Doctors and other professionals who are more likely to f
ace lawsuits generally appreciate this protection.
Both types of policies also provide an accessible financial layer as an alternative to liquidating other, taxable, assets.
The tax implications are considerable. Williams notes that if you put away $10,000 a year for 20 years in a mutual fund at a 7.5% rate of return, you would have $433,000; the same amount in a life insurance product would yield $348,000. But funds borrowed from the life insurance will not be taxed, allowing you to keep more of your money.
“You’ve lost nothing, recovered the initial investment, had a substantial amount of growth, and didn’t have to pay taxes,” he says. “If properly designed, the right insurance can be a powerful wealth-building tool.”
Snapshot No. 1: Overfunding
For example, if a 30-year-old woman bought a $1 million policy with an expected return of 7.5% and a required annual premium of $5,750, but she overfunds the policy by paying $8,500 until age 55, she could borrow $65,000 a year against the policy from age 65 to 85, says Williams. If she dies at age 85, there would still be $505,000 left for her beneficiaries; at age 90, the amount would be $654,000.
There is a caveat, however. The amount of money that can be borrowed from the policy could change substantially if investments don’t perform as expected, says Williams. Both Tigner and Waynick overfund their policies.
Snapshot No. 2: Variable Life
Raiford priced a $1 million variable life insurance policy for a healthy 40-year-old man in New York. Death benefits for such policies depend on age stipulations decided on beforehand by the consumer and the insurer. Using age 65 in this example, the policy would cost $12,400 a year