By LouAnn Schulfer,  AWMA^®, AIF^®
Accredited Wealth Management Advisor^®
Accredited Investment Fiduciary^®

Years ago, the trend was for life insurance agents to sell whole life, universal or variable life insurance policies on the potential to grow the cash value inside of the policy.  Cash value can grow by overfunding the policy, meaning you put more money into the policy than the premium required to support the death benefit, or cash value can grow by dividends, interest or investment return on the cash value exceeding the expenses inside of the policy.

Life insurance seems like one of those things that shouldn’t be complicated, but especially with cash value policies, sometimes it is.  I was attending a continuing education session recently that examined a case where a young agent offered to review an in-force policy for a retired couple.  The agent pointed out that the interest rate that applied to money borrowed from the cash value of the policy was much higher than current policies offered.  Since the couple had borrowed money from the policy and were in fact paying interest, the young agent offered to exchange their existing policy for a new one.  The insured passed underwriting and the remaining cash value from inside the old policy was transferred to the new one.  The surprise came at tax time when the couple received a tax form stating they owed income taxes on the money borrowed from the old policy, since it was no longer in force.  The young agent called both companies and asked if the transaction could be reversed.  Unfortunately, it could not and a large tax bill was unintentionally and unexpectedly the consequence.

I’ve also reviewed many policies over the years that were misleadingly sold as retirement savings vehicles.  I have yet to find one person who has retired on the proceeds of their cash value life insurance policy.  If you intend to use the cash value from your policy, understand the difference between loans and withdrawals, and how taking money out of your policy can affect your death benefit.  Ask how long the money can remain out of the policy on a guaranteed basis, without the policy lapsing.  A lapsed policy with loans will not only result in loss of your death benefit but will also likely result in a tax bill to the owner of the policy.

Life insurance seems like one of those things that should be pretty straight forward.  You should be able to buy a policy, pay the premium and know the death benefit is going to pay out when your beneficiaries need it.  Life insurance shouldn’t be complicated.  But sometimes, it is.

LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Wealth Management and can be reached at (715) 343-9600 or [email protected].  www.SchulferAndAssociates.com

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