Inflation, rising interest rates, bank failures, and volatile stock markets, the current financial environment is more challenging than many investors anticipated. The question many are asking is whether there might be a way to protect their assets from forces that threaten to erode them. Perhaps surprisingly, one possible solution might be life insurance, specifically whole life insurance.
Benefits Beyond Protection
The death benefit offered by whole life insurance policies is guaranteed and is generally received income tax-free by beneficiaries under current federal tax law. Equally important, however, is the fact that a portion of the premiums paid toward the mortality cost of insurance is locked in and guaranteed never to increase, which is not the case for many other permanent insurance products. Much of the remainder accumulates as cash value and can increase the death benefit over the life of the policy.
In addition, whole life contracts offer annual dividends that are based on the profitability of the issuing insurance company. Dividends, when declared by the issuing insurance company, are not guaranteed. Dividends are influenced by prevailing interest rates, so while the rising rates of recent months have depressed returns and even generated losses for many investors in equities and bonds, they will also contribute to higher dividends in many whole life policies (insurance company dependent). Those higher portfolio returns are passed on as dividends to whole life policyholders.
What Else Should You Know About Whole Life Insurance?
Cash value in a traditional whole life policy is generally not directly affected by market fluctuations; however, policy values may be affected by policy loans, withdrawals, fees, and other policy provisions. Moreover, it is allowed to grow tax-free and can be assessed through policy loans, subject to the policy’s terms and conditions. The loan is also not recognized by the IRS as income; therefore, it remains free from tax as long as the policy stays active. A policy loan reduces your available cash value and death benefit, if the policy lapses or is surrendered with an outstanding loan, the loan balance may become taxable. If you pass while owing money on a life insurance loan, it will reduce the amount your beneficiaries receive, be sure to thoroughly examine the context of your situation before taking a policy loan out.
Cash value is used for cash flow needs: emergency fund in the event of loss of employment or unexpected expenses, a down payment on a home, college education costs, and/or retirement cash flow needs in a down market or high-income tax environment. In short, a carefully selected whole life policy can not only provide you with insurance protection but also provide access to cash value that may be used to help address a variety of financial needs. The key term, of course, is “carefully selected.”
At Lenox Advisors, we maintain an open architecture platform that provides access to a wide variety of insurance carriers and products. Through careful research, your Lenox Advisors team can help you identify the type of policy that offers the right combination of benefits and cost for your specific needs. Your Advisor team can also help you review your current insurance coverage and understand whether it is continuing to meet your needs in today’s challenging environment.
Equity Investing With a Safety Net
Annuities have long been favored by retirement-conscious investors as a way to generate income that is guaranteed to last as long as they live. Annuities can be fixed in that they offer a guaranteed rate of return, or they can be variable, providing you with a selection of professionally managed investment options that may generate potentially higher returns. In today’s challenging market environment, however, there is a new annuity option that has attracted considerable attention.
Registered Index Level Annuities (RILAs) track the price returns of several popular stock indexes while offering varying levels of downside protection through floors or buffers. In one version, losses you incur cannot go beyond a specified level due to specified floors. In other instances, the first 10-30% of losses are “buffered” and only index losses in excess of the stated buffer are realized by the client. In return, you sacrifice any gains achieved by your indexes should they exceed a specified cap, either annually or over a period of, say 6 or 7 years.
With RILAs, investors may also have the ability, subject to contract terms, to change the indexes being tracked as market conditions warrant, generally without creating a taxable event.
Talk to your Lenox Advisors team to determine whether this innovative strategy might have a place in your portfolio.
The decision to purchase life insurance should be based on long-term financial goals and the need for a death benefit. Life insurance is not an appropriate vehicle for short-term savings or investment strategies. While policies may allow loans, there may be little to no cash value available for loans during the policy’s early years.