LIFE INSURANCE AS AN ALTERNATIVE ASSET CLASS

While we don’t know for sure, it’s entirely possible that the tax code may be changed in response to changing demographic realities. This could mean that tax rates may increase, assets which currently provide tax-deferred growth may be limited, or entitlement benefits may be reduced. These potential changes contribute to tax risk. Because we can’t predict the future, it’s best for planning to include a variety of different asset types, with different tax treatments.

Having an asset whose growth is not directly related to the equity markets and whose profits can be accessed tax-free may provide the tax diversification missing in some client’s portfolio. Strategies that reduce your clients’ taxes now and during retirement can make the difference between a reduction in their standard of living and financial security. In addition, diversification offers the flexibility to choose different products which allow options for how the premium can be allocated, and the growth accumulates tax deferred. This means that as your client’ money grows within the policy, they pay no taxes on the gains.

What clients would best benefit from this strategy? If you have a client who fulfills these conditions, they’re a perfect fit:  

• 10 year or longer time frame before income is desired (regardless of age) 
  • Alternative funding from existing life policy may shorten time frame 
• Ability to fund life insurance contract at maximum levels using a minimum death benefit/maximum cash value design 
• Other saving vehicles being used appropriately 
  • Full match on company 401(k) 
  • Roth IRA or Roth 401(k) options explored 
• Generally good health status 
• Net worth positive 

• If retirement income is going to be a taxable event, does it make sense to tax diversify some of the income stream?
• If you cannot contribute to a Roth IRA, is there another vehicle with similar attributes?
• Should you consider tax-free income streams that do not impact social security premiums?