Life Insurance As Its Own Asset Class
January 2017 Edition
Knox Capital Advisors, LLC (“Knox”) specializes in Business Succession and Exit Planning, which we define as the deliberate, thoughtful, and systematic process that integrates planning for the business with the personal planning of the owners so as to: (1) Maximize the enterprise value of the business in anticipation of a sale or transfer, and (2) Optimize after-tax proceeds in fulfillment of the owners’ objectives and legacy.
Life Insurance As Its Own Asset Class Insurance properly structured is a significant tool in income and estate tax planning, retirement planning, and in the optimization of overall asset management. Insurance as an income tax planning tool: • The inside build-up of cash value in the insurance policy is tax deferred.1 • Death benefits paid on a policy generally are tax free.2 • The cash value of the policy may be accessed tax free3 through withdrawals and loans during the insured’s lifetime. This assumes that the insurance policy is designed as “pure insurance” and would not be considered a so called “modified endowment contract”. • In situations where, through planning, appreciated assets are moved out of the estate, such assets typically do not get a step up in basis upon the death of the decedent. Consequently, assets that pass to the heirs carry with them a built-in gain and tax that will be incurred once such assets are sold (which oftentimes is soon after the death of the insured). Insurance, properly structured, is usually the most cost efficient way of covering the built-in tax of such assets. Insurance as an estate tax planning vehicle: Although death benefit proceeds from insurance are typically income tax free, if such proceeds flow to the estate, they are taxable for estate tax purposes. Through proper planning, the ownership of a life insurance policy can be structured in a vehicle such as any one of the several types of trusts that will keep insurance proceeds outside of the taxable estate and therefore free of estate tax. Insurance as an asset class in asset management: Due in part to the tax benefits of insurance as described above, insurance can be a very effective tool for asset management. Additional considerations for insurance as an asset class include the following: • In our current, low interest rate environment, capital account build up and tax-free access compares very favorably to taxable investment alternatives when comparing after-tax returns. 1
IRC Section 7702(g)(1)(A). IRC Section 101(a)(1). 3 IRC Section 72(e)(3) withdrawal to basis IRC Section 72(e)(5) loans provide income tax free access to accumulated investment income – policy must be a Non-MEC (Modified Endowment Contract). 2
13961 S. Minuteman Drive, Suite 300 Salt Lake City, UT 84020 Tel: 801.984.8000
Fax: 801.984.8008
Investment Advisory Services provided through Knox Capital Advisors LLC. Insurance services provided by Knox Capital Insurance LLC.
• Insurance can be designed in the early years (generally during the peak earning years of the insured) with a higher death benefit to cover the risk to an individual/family of premature death. In later years, the death benefit coverage may be reduced to lower insurance costs and increase tax-advantaged build-up in the policy with the ability to draw upon the cash value of the policy tax free through withdrawals and loans. • Generally, the “investment” in the insurance policy should be managed in light of other investments of the insured so as to optimize overall returns to the individual/family. This requires a comprehensive asset management plan that takes into account the character of income (ordinary or capital gain) from traditional investments, investments in qualified plans, investments in insurance, and other assets. In many planning scenarios, insurance serves as a “universal tool” in the overall planning for high net worth or high income individuals/families and should be considered and optimized in the overall plan design. Product Selection: Given the importance of insurance coverage, especially for high-net-worth individuals that find themselves or family with the prospect of significant estate and/or income taxes, and for those that desire to use the insurance as part of their retirement planning design, it is important to be able to procure such insurance at the most cost-efficient price possible. Knox is a member firm of M Financial, a consortium of planning companies specializing in insurance, wealth transfer, and providing tax-favored planning for key executives of major companies. This affiliation enables Knox to provide the most cost-effective insurance and wealth transfer solutions in the market through M Financial proprietary products available from some of the most prominent insurance carriers in the industry.
The information contained in this article is general in nature and is not legal, tax or financial advice. Investment Services offered through Knox Capital Advisors LLC. Insurance Services offered through Knox Capital Insurance LLC. Investing in equities can result in loss of principle. Past performance does not guarantee future results. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
13961 S. Minuteman Drive, Suite 300 Salt Lake City, UT 84020 Tel: 801.984.8000
Fax: 801.984.8008
Investment Advisory Services provided through Knox Capital Advisors LLC. Insurance services provided by Knox Capital Insurance LLC.
Knox Capital Advisors, LLC (“Knox”) specializes in Business Succession and Exit Planning, which we define as the deliberate, thoughtful, and systematic process that integrates planning for the business with the personal planning of the owners so as to: (1) Maximize the enterprise value of the business in anticipation of a sale or transfer, and (2) Optimize after-tax proceeds in fulfillment of the owners’ objectives and legacy.
Life Insurance As Its Own Asset Class Insurance properly structured is a significant tool in income and estate tax planning, retirement planning, and in the optimization of overall asset management. Insurance as an income tax planning tool: • The inside build-up of cash value in the insurance policy is tax deferred.1 • Death benefits paid on a policy generally are tax free.2 • The cash value of the policy may be accessed tax free3 through withdrawals and loans during the insured’s lifetime. This assumes that the insurance policy is designed as “pure insurance” and would not be considered a so called “modified endowment contract”. • In situations where, through planning, appreciated assets are moved out of the estate, such assets typically do not get a step up in basis upon the death of the decedent. Consequently, assets that pass to the heirs carry with them a built-in gain and tax that will be incurred once such assets are sold (which oftentimes is soon after the death of the insured). Insurance, properly structured, is usually the most cost efficient way of covering the built-in tax of such assets. Insurance as an estate tax planning vehicle: Although death benefit proceeds from insurance are typically income tax free, if such proceeds flow to the estate, they are taxable for estate tax purposes. Through proper planning, the ownership of a life insurance policy can be structured in a vehicle such as any one of the several types of trusts that will keep insurance proceeds outside of the taxable estate and therefore free of estate tax. Insurance as an asset class in asset management: Due in part to the tax benefits of insurance as described above, insurance can be a very effective tool for asset management. Additional considerations for insurance as an asset class include the following: • In our current, low interest rate environment, capital account build up and tax-free access compares very favorably to taxable investment alternatives when comparing after-tax returns. 1
IRC Section 7702(g)(1)(A). IRC Section 101(a)(1). 3 IRC Section 72(e)(3) withdrawal to basis IRC Section 72(e)(5) loans provide income tax free access to accumulated investment income – policy must be a Non-MEC (Modified Endowment Contract). 2
13961 S. Minuteman Drive, Suite 300 Salt Lake City, UT 84020 Tel: 801.984.8000
Fax: 801.984.8008
Investment Advisory Services provided through Knox Capital Advisors LLC. Insurance services provided by Knox Capital Insurance LLC.
• Insurance can be designed in the early years (generally during the peak earning years of the insured) with a higher death benefit to cover the risk to an individual/family of premature death. In later years, the death benefit coverage may be reduced to lower insurance costs and increase tax-advantaged build-up in the policy with the ability to draw upon the cash value of the policy tax free through withdrawals and loans. • Generally, the “investment” in the insurance policy should be managed in light of other investments of the insured so as to optimize overall returns to the individual/family. This requires a comprehensive asset management plan that takes into account the character of income (ordinary or capital gain) from traditional investments, investments in qualified plans, investments in insurance, and other assets. In many planning scenarios, insurance serves as a “universal tool” in the overall planning for high net worth or high income individuals/families and should be considered and optimized in the overall plan design. Product Selection: Given the importance of insurance coverage, especially for high-net-worth individuals that find themselves or family with the prospect of significant estate and/or income taxes, and for those that desire to use the insurance as part of their retirement planning design, it is important to be able to procure such insurance at the most cost-efficient price possible. Knox is a member firm of M Financial, a consortium of planning companies specializing in insurance, wealth transfer, and providing tax-favored planning for key executives of major companies. This affiliation enables Knox to provide the most cost-effective insurance and wealth transfer solutions in the market through M Financial proprietary products available from some of the most prominent insurance carriers in the industry.
The information contained in this article is general in nature and is not legal, tax or financial advice. Investment Services offered through Knox Capital Advisors LLC. Insurance Services offered through Knox Capital Insurance LLC. Investing in equities can result in loss of principle. Past performance does not guarantee future results. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
13961 S. Minuteman Drive, Suite 300 Salt Lake City, UT 84020 Tel: 801.984.8000
Fax: 801.984.8008
Investment Advisory Services provided through Knox Capital Advisors LLC. Insurance services provided by Knox Capital Insurance LLC.
