jar of coins with green plant sprouting out of it sitting on a table

Using Life Insurance as an Investment Tool

Life insurance is more than what meets the eye. Forbes writes that life insurance is primarily purchased for risk management. How so? Life insurance helps families manage the risk of financial survival after the loss of a breadwinner. 

The death benefit from a life insurance policy can be used by the beneficiaries in many different ways, including to help:

  • Fund day-to-day living expenses, such as food, gas, and medicines
  • Pay off debts, like mortgages, credit cards, and car loans
  • Provide income to surviving relatives for health care or education needs, or
  • Pay federal and state estate taxes

While life insurance is great at managing the economic risk of death and can provide a rate of return on premiums paid over the years in exchange for a  death benefit, it also can be an effective investment tool for the policy owner while the insured is still alive.

Let’s discuss this further.

Life Insurance as an Investment Tool

As you look to diversify your investment portfolio, life insurance can be a dependable, lower-risk option to funnel money into because of its growth potential and tax benefits. 

There are two types of life insurance categories: term life insurance and permanent life insurance. Here, we are focusing only on permanent life insurance because it includes a cash value account in addition to a death benefit. The cash value component is used by the policy owner to protect, grow, and access wealth on a tax-favored basis while the insured is still alive. 

Let’s discuss how permanent life insurance can act as an investment tool.

Permanent Life Insurance

Permanent life insurance is designed to last your lifetime and is composed of three components:

  • Premiums
  • Cash value, and
  • A death benefit

The cash value is a tax-advantaged savings account. It serves as a living benefit that the policy owner can access for any reason before the insured has died.

When you make a premium payment, what happens? A portion goes to pay for the cost to insure a life for the death benefit amount, as well as for policy fees, state premium taxes, and commissions.

The remainder of their premium goes into your cash value account, which can grow and be accessed without paying tax, for you to use for any purpose at a later time.

There are a few different types of permanent life insurance contracts to note—and the main differences between the types of permanent policies have to do with what mechanism grows that cash value account.

Types of Permanent Life Insurance

  • Whole Life Insurance
  • Universal Life Insurance
  • Index Life Insurance
  • Variable Universal Life Insurance

Visit our article “Permanent Life Insurance: What Options Are Available to You?” for more details on each permanent policy.

Life Insurance as an Investment: Cash Value Life Insurance

All four aforementioned permanent life insurance policies include a cash value component which, when structured properly, can serve as a tax-favored investment vehicle that the policyholder can use while the insured is still alive. 

With all life insurance policies, a permanent policy still includes a large tax-free death benefit paid to the beneficiaries when the insured passes away. 

But the cash value component can have tremendous value as well. It’s available to the policyholder while the insured is alive, and grows tax-deferred.

The cash value can be used to offset future premiums and/or accessed tax-free, for any reason, using either policy loans or a withdrawal of principal. This component adds flexibility and provides a tax-favored source of income for retirement, travel, healthcare needs, or emergencies.

A Final Word

Life insurance, when structured properly, can be a low-risk option to stabilize and grow an investment portfolio on a tax-advantaged basis. In order to ensure your life insurance policy is acting as an investment tool, however, you need proper guidance and insight into selecting the right policy.

This is where our team at Acumen Insurance Solutions comes in.

Contact us today to learn more, then read on to find out what permanent life insurance options are available to you.

family on a hike carrying two children by piggyback

How to Protect Your Family Using Life Insurance

Do you need life insurance? Chances are yes.

Life insurance is designed to protect your family and loved ones after you’ve passed away. Investing in life insurance is especially important if you’re financially responsible for a child, partner, aging parent, or disabled loved one.

Why? Life insurance helps to provide financial security for your family and loved ones following your departure. Let’s discuss how to protect your family and loved ones with life insurance.

What is Life Insurance?

Life insurance is a contract between a policy owner and a life insurance company. In this contract, the life insurance company promises to pay a designated beneficiary a death benefit upon the passing of the insured.

Most of the time, that death benefit is paid income tax-free to the beneficiary.

Life Insurance Options

There are two main categories of life insurance available:

  • Term life insurance, and
  • Permanent life insurance

Simply put, term life insurance is less expensive and lasts for a period of years whereas permanent life insurance lasts for an insured’s lifetime, and is, therefore, more expensive. Permanent insurance also has a tax-advantaged cash value component that can be accessed by the policy owner during the insured’s life.

Interested in learning more about the differences between each? Check out our article “Term Life Insurance vs. Permanent Life Insurance.”

The Benefits of Having Life Insurance

Life insurance coverage can help in the following ways:

Provide Financial Security

Life insurance can help replace lost income after one passes away. The death benefit of a life insurance policy can be used for any number of reasons, including to:

  • Pay monthly bills and day-to-day expenses
  • Pay off debt (i.e. mortgage, car loan, or credit card)
  • Pay federal and/or state estate taxes
  • Provide an inheritance

Cover End of Life Expenses

Death is expensive—and often is a cost most families don’t want to be troubled with, especially following the death of a loved one. Life insurance can help a family pay for end-of-life expenses like burial and funeral services, cremation, burial plots, caskets, etc. 

Pay for Medical Bills

Life insurance can help a family pay for hefty medical bills if the insured passes away from health-related issues. There are also policies with optional benefits that can help pay for ongoing chronic or terminal illness care expenses.

Supplement Educational Expenses

If the deceased loved one has children or grandchildren, life insurance can help pay for educational expenses (i.e. college or private school).

Consider Cash Value Life Insurance

Cash value life insurance is permanent coverage—insurance that is designed to last for the insured’s lifetime—that includes a tax-favored investment account that the policyholder can use while the insured is still alive.

(Yes, cash value life insurance allows you to financially help your family and loved ones while you’re still living – and it grows tax-deferred!)

The cash value can be used to offset future premiums and/or accessed tax-free, for any reason, using either policy loans or withdrawals. This component adds flexibility and provides an immediate tax-favored source of income for retirement, travel, healthcare needs, or emergencies.

Read on to learn more about cash value life insurance.

Infographic of "How to Protect Your Family Using Life Insurance"

Partner with Acumen Insurance Solutions to Protect Your Family

There are many other benefits to owning life insurance. Life insurance could help keep a family business running or provide a charitable legacy—the options are endless.

Remember, it’s better to buy life insurance sooner than later. Why? Life insurance is less expensive the younger and healthier you are.

Moreover, your life insurance needs will evolve over time – so best to get familiar with your options now. Interested in learning more? Read on to see how your life insurance needs might change in our article “Can I Change My Life Insurance?

Businessman on the phone sitting at the laptop in his office. Male business professional in office talking on cell phone.

Top Six Reasons Why Smart Business Owners Use Life Insurance

Life insurance is a crucial component of maintaining and growing a successful company

Most smart business owners recognize the importance of using life insurance to protect themselves, their families, and their companies. They use life insurance as a financial tool to solve problems associated with maintaining and growing a successful company, as well as to meet retirement, succession, and estate planning goals.

Succession Planning for Business Owners

Protecting the entity and deciding when and whom to eventually transfer it to, is a critical aspect of succession planning for business owners.

The particular tools and techniques used in a business succession plan will depend on the goals and objectives of the four groups most impacted:

  • The senior generation business owner
  • The junior generation family member involved in the business
  • Key non-family employees, and
  • Family members not involved in the business

Below are the top six reasons why smart business owners use life insurance as a key component in their strategic business succession, retirement, and estate planning.

Infographic for "Why Smart Business Owners Use Life Insurance"

#1: Protect the Business at the Death of an Owner or Key Person

In many small businesses, the owner is also the key person in the company.

Key-person life insurance is purchased on the business owner’s life to protect the company if they unexpectedly die. In fact, the death of a key person in a small company without key-person insurance often results in the immediate shuttering of the company.

With key-person insurance, the company:

  1. Purchases a life insurance policy on the key employee
  2. Pays the premiums, and
  3. Is the beneficiary of the policy

If that key person unexpectedly dies, the company receives the insurance proceeds.

The Benefits of Key-Person Life Insurance

Key-person life insurance for the business owner can provide much-needed stability. If the business owner dies, the business receives the policy proceeds and can use the funds to:

  • Pay expenses while searching for and hiring a capable replacement
  • Retire debts
  • Distribute money to investors
  • Pay severances to employees
  • Explore options other than immediately going out of business, and/or
  • Buy time until the business can be closed, and the assets liquidated

In addition, many family-owned businesses depend on non-family employees for the company’s continued success.

To guard against financial loss due to the death of a key employee and to ensure that the business stays in the family, many privately-held companies acquire key-person life insurance for their key employees.

#2: Protect the Owner’s Family and Ensure the Survival of the Business

A buy-sell agreement is a legally binding contract that states that in the event of an owner’s death, disability, retirement, or separation from the company, the owner’s interest in the company must be sold back to the business or to the remaining owners at agreed-upon terms.

Buy-sell agreements are crucial for small and closely-held companies where, as in many cases, the death or disability of a business owner creates a significant financial burden on the family, the business, and the remaining owners.

A buy-sell agreement guarantees a market and a fair price for the business interests, ensures control over the business by the remaining owners, and can set the value of the business interest for estate tax purposes.

Life insurance for each owner is the best way to provide the cash necessary for the business or the surviving owners to purchase the deceased owner’s share of the business. Death benefits are typically paid as a tax-free lump sum to the entity or surviving owners.

In many instances, the cash surrender value in a permanent life insurance policy can also be accessed tax-free via policy loans and withdrawals to help pay for a lifetime purchase of a business owner’s interest, such as due to retirement or disability.

Depending on the type of buy-sell agreement, the business itself or the individual owners acquire a policy on each owner so that at death or disability, the funds needed to “buy out” the deceased owner’s interest are readily available.

#3: Accumulate Assets for Retirement

In addition to protecting the company, many business owners use cash value life insurance as a diversified vehicle, separate from the performance of the company, to accumulate assets and build future retirement income for themselves and their key employees.

Permanent life insurance policies include a cash value account that grows tax-deferred and can be accessed tax-free via withdrawals and policy loans while the insured is living. The type of life insurance policy depends on the desired objectives and other factors.

In many cases, business owners and key employees earn levels of income that exceed the contribution limits under a 401(k), profit sharing, or other qualified retirement plans. There are no contribution limits on non-qualified, private life insurance-based plans that provide additional retirement income.

Read on to learn more about the difference between term life insurance vs. permanent life insurance.

The Benefits of Properly Structured Life Insurance

Properly structured life insurance in a non-qualified plan is a legitimate option to grow wealth. It can provide members of the senior generation with death, disability, and retirement benefits, especially when the senior members have transitioned the business to the junior members and are no longer receiving compensation.

This combination of tax-advantaged death benefits and cash values makes life insurance the best way to accumulate and grow funds for retirement while simultaneously providing the cash necessary for the business or the surviving owners to purchase a deceased owner’s interest. 

Often referred to as “golden handcuffs,” the same concept is often used as a way to attract and incentivize key employees to remain with the business and perform with the promise of future retirement income from policy cash values. The business is simultaneously protected against the loss of a key person.

#4: Protect Assets from Liabilities and Future Creditors

Businesses assuming the risk of potential environmental contamination (i.e., waste hauling, landfills, chemicals, etc.) are subject to liability under federal and state pollution laws.

Service firms, including the following examples, are often exposed to professional liability claims:

  • Law and accounting firms
  • Physicians’ groups, and
  • Engineering and architectural firms

Moreover, such liability is not limited to the business itself, as the business owners also may be personally liable under such laws. As the business passes to the next generation, so does the potential liability.

Life insurance is ideal in this situation. The business owner can establish an irrevocable life insurance trust (ILIT) to last for the maximum period permitted by state law (in perpetuity for some states).

The ILIT would provide the business owner’s heirs with income and principal as needed for health, education, maintenance, and support.

If properly structured, the assets in the ILIT cannot be reached by the beneficiaries’ creditors. Additionally, in many states, life insurance cash value is protected from creditors making it an especially effective tool for business owners to use to grow their assets.

#5: Prevent a Family Feud

A senior generation business owner can use life insurance and a common legal agreement to transfer assets to other family members with “equitable” treatment.

Leaving the ownership and control of the business to the children who are active and the life insurance proceeds to the children who are inactive equalizes the inheritances among them and creates a family “bank.”

This can prevent arguments about money when the senior generation is no longer there to serve as the peacemaker and allow the family business to continue operations smoothly.

In addition, it avoids the need for active children to purchase the business interests of inactive children, perhaps when the business may not be able to afford it.

Depending on the particular circumstances, the insurance may be owned by an ILIT for the benefit of the inactive children, and the insured may be the business owner, the business owner, and his or her spouse.

#6: Say “Goodbye” to Uncle Sam

Some senior generation business owners wait until death to transfer all or most of their business interests to the junior generation.

If the business owner has a taxable estate, life insurance can provide the recipients of the business with the cash necessary to pay estate taxes. With estate tax exemptions likely decreasing in coming years, many business owners and their families will face increased transfer tax liabilities.

Using life insurance to pay estate taxes is particularly useful for business owners because their equity interests cannot be readily liquidated. The junior generation receiving the business may also need life insurance to pay estate taxes.

Usually, the insurance policy will be owned by an ILIT, as discussed above, so that beneficiaries will receive the death proceeds both income and estate tax-free.

In many cases, most of the business owner’s estate is tied up in the value of the business. Without an effective estate plan, including a business succession plan, the business may have to close or be liquidated to afford estate taxes.

With the proper use of life insurance, a business owner can provide the liquidity needed to pay any estate taxes due at death.

For example, an ILIT can be established for the purposes of owning a life insurance policy on the life of the business owner (or business owners, if married). The trustee of the trust is usually the intended beneficiary. At the owner’s death, the policy proceeds are payable to the trust which can then, at the trustee’s direction, be used to pay any applicable estate taxes.

Read on to learn more about maximizing your legacy using life insurance.

A Final Word

At Acumen Insurance Solutions, we recognize that formulating the perfect succession, estate, and life insurance plans can prove difficult. Contact us today to review such plans.

Then, read on for more information on succession planning amidst the Great Resignation.

*Acumen Insurance Solutions does not provide legal or tax advice, and the information contained herein should not be construed as such; consult your legal and tax professional before making important financial decisions. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. Withdrawals and loans can reduce death benefits and may cause the policy to lapse. See policy illustration for details.

The following federal tax code sections apply to life insurance:

  • IRC §101 (a): Death benefits are income tax-free.
  • IRC §7702 (a), (g): Cash value growth is tax-free.
  • IRC §72(e): Withdrawals of cash value to basis are tax-free.
  • IRC §72 (e)(5): Investment gains in cash value can be borrowed tax-free.
  • IRC §7202 (a): Modified Endowment Contracts (MECs) retain tax-free growth and tax-free death benefit, but gains are taxed first when taking loans and withdrawals.
hundred dollar bills

Using Cash Value Life Insurance to Retain Top Talent

There are a lot of questions when it comes to cash value life insurance … What is cash value life insurance? What are its benefits? How can it help your organization retain top talent?

Let’s answer all of these questions below, starting with what cash value life insurance is.

Infographic for "Using Cash Value Life Insurance to Retain Top Talent"

What is Cash Value Life Insurance?

Cash value life insurance is permanent coverage—insurance that is designed to last for the insured’s lifetime—that includes a tax-favored investment account that the policyholder can use while the insured is still alive. 

With all life insurance policies, there is still a large benefit paid to the beneficiaries when the insured dies. 

But the cash value component can have tremendous value as well. It’s available to the policyholder while the insured is alive, and grows tax-deferred.

The cash value can be used to offset future premiums and/or accessed tax-free, for any reason, using either policy loans or a withdrawal of the principal. This component adds flexibility and provides a tax-favored source of income for retirement, travel, healthcare needs, or emergencies.  

Which Life Insurance Plans Offer Cash Value Components?

The following types of permanent life insurance policies may include a cash value feature:

  • Whole life insurance
  • Universal life insurance
  • Indexed universal life insurance
  • Variable universal life insurance

Term life insurance—which is life insurance for a period of years—does not offer the cash value feature. Rather term life insurance only has two components: the premium that’s due and the death benefit.

Read on to learn more about the differences between term life insurance and permanent life insurance.

How Does Cash Value Life Insurance Help Retain Top Talent?

So, how does cash value life insurance help retain top talent?

Legal Agreement

First, a plan needs to be created using a legal agreement, then “funded” with permanent life insurance. Whether the policy is owned by the employer or the key employee depends on the situation.

The agreement outlines the employee’s obligations, typically tied to longevity and performance, that will trigger the payment of a meaningful retirement income over a period of years (for example, 75% of average salary paid each year from age 66 to 80).

This can help incentivize top talent to stay for a longer period of time and perform. If they do, they’ll receive a retirement benefit and if they don’t, they typically won’t receive anything.

Using Cash Value During Life

Cash value life insurance is the preferred method of funding these agreements. First, the cash value grows tax-deferred and serves as the source of the retirement income that is eventually paid to the key employee. Many policies offer competitive cash value yields without risk of loss or direct market exposure. 

Death Benefits

If the executive passes away unexpectedly, the death benefit is used to replace the projected income stream for his/her family that the executive would have received in retirement. The organization may also be entitled to a portion of the death benefit to compensate for the cost of losing and replacing the key person.

Offering a stream of income in retirement is a powerful retention tool, but the “self-completing” feature that life insurance death benefit provides can be so meaningful to the executive’s family that it can make it almost impossible for the executive to leave. 

It’s important to note that the organization could fund the plan with something other than life insurance, such as mutual funds, stocks, and/or bonds. However, these investments are taxable every year whereas the growth of the life insurance cash value is tax-deferred.

In addition, there is typically a risk of loss with these investments and they do not offer a self-completing feature like the life insurance death benefit. Lastly, life insurance carriers are some of the oldest and strongest companies in the world and can be trusted with these important assets.  

Funding Executive Retention and Executive Retirement Programs

Funding these plans isn’t free, so having a mechanism in place to offset costs can make approval by the organization’s decision-makers easier. 

In contrast to the policy used to fund the executive retention and retirement plan, above, our firm also uses a special life insurance-based program that allows organizations to earn 2.5-to-6.0% currently on their cash assets, without sacrificing safety or liquidity. 

If these funds are currently earning 1.0-to-2.0% in the bank, CDs, or short-term bonds, the organization can shift them to the life insurance-based program and use the “found” earnings to fund the executive retention plan. 

Using life insurance as a mechanism to fund executive retention and retirement plans, and as a way to offset the costs of such plans, can make these arrangements truly a win-win for the executives, their families, and the organization.

Learn More on Our Blog

Interested in learning more? Read on to learn about the benefits of credit union-owned life insurance, why a credit union should invest in credit union-owned life insurance, or what permanent life insurance options are available to you, including information on how cash value grows in each plan type.

*Important Notes: Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Policy performance is based on current rates as charges, and some values are not guaranteed. Medical and financial underwriting is required. Withdrawals and loans from life insurance policies classified as Modified Endowment Contracts (MEC) may be subject to income tax and a federal tax penalty, if taken prior to age 59½. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. See policy illustration for details. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.

executive's desk overlooking a city

How to Retain Top Talent Using Executive Compensation

The effects of poor employee retention and high turnover within a business are catastrophic. In fact, poor employee retention can lead to:

  • Decreased team morale
  • Reduced employee productivity
  • Expensive recruitment efforts, and
  • Time wasted

So, how can you retain top talent within your business?

Today, employee retention goes beyond offering company-wide happy hours and snacks in the office (those strategies will only get you so far!).

Powerful compensation programs — particularly those that include executive compensation — will set you apart in the hiring and retention game.

But how can you fund these benefits? Let’s talk about how to retain top talent using executive compensation; but first, an overview of executive comp plans.

Executive Compensation Plans: The Basics

Like a snowflake, no two compensation plans are the same. There are a variety of benefits with varying degrees of attractiveness that can be bundled together in compensation design.

(Secret’s out: It’s not all about the cash!)

Executive compensation plans typically consist of the following elements:

  • Base salary (cash compensation)
  • Short-term incentive or incentive compensation (i.e. an annual bonus)
  • Long-term incentive (deferred compensation)
  • Additional benefits and perquisites

Corporate-Owned Life Insurance (COLI)

Of course, corporate-owned life insurance (COLI) can play a crucial part in many deferred compensation plans for executives. Let’s discuss what this might look like and its benefits.

What is Corporate-Owned Life Insurance?

Life insurance is a contract between a policy owner and an insurer, whereby the insurer promises to pay a designated beneficiary a sum of money, called a “death benefit,” upon the passing of the insured person, in exchange for a premium, paid as a lump sum or over time. 

With corporate-owned life insurance (COLI), the insured person is a key employee. The beneficiary may be the organization, the key employee’s heirs, or a combination. Similar policies, called bank-owned life insurance (BOLI), have been used by commercial banks for nearly 40 years.

Death benefits can be used by the organization to protect against the economic loss caused by the passing of a key person. They can also be directed to the executive’s beneficiaries to reward and incentivize performance and longevity, serving as a valuable retention and family protection tool.  

COLI designs also include a substantial cash value account, which grows tax-deferred and can be accessed tax-free via policy loans and withdrawals of principal to eventually support the agreed-upon retirement benefit, generally paid out over a period of years. 

Why Corporate-Owned Life Insurance?

There are various benefits when it comes to corporate-owned life insurance. This particular investment vehicle:

  1. Is Safe: COLI policies are issued by some of the world’s strongest insurance carriers, some of which have been around for over 150 years.
  2. Is Liquid: In the event that you choose to redeploy all or a portion of your capital elsewhere, you have the ability to do so without penalty for exit with many of the policy designs.
  3. Provides Meaningful Rates of Return: These cash values of these policies are currently earning very meaningful current rates of return. In fact, they sit somewhere between 2.5-and-6.0%, depending upon the class of policy selected, with guarantees against loss and without direct market exposure.*

Moreover, given these benefits, COLI allows organizations to balance the cost of employee benefit programs while potentially enjoying higher yields than the typical “safe” investments.

Finally, one of the most attractive features of properly-designed executive compensation plans is that they’re highly customized and tailored to an individual executive or organization. The benefits from both the death benefit and cash value components can be allocated differently depending on the situation.   

A Final Word

At Acumen Insurance Solutions, we focus on ways that we can leverage tools like COLI to make your organization’s investments support executive compensation programs that inspire growth and ensure employee retention.

Interested in learning more about COLI? Read on in our article “Why CUOLI is the Best “Otherwise Impermissible Investment” for Your Credit Union.”

Or, contact us today to learn more.

*Disclaimer: Policy performance is based on current rates as charges, and some values are not guaranteed. These policies are not considered securities. Guarantees are based on the claims-paying ability of the underlying insurance carrier. Policies are not FDIC-insured. Pricing can be based on many factors, including the insured’s age, gender, and health. Please refer to a current policy illustration for details. Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Medical and financial underwriting is required. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.

couple reviewing their life insurance with broker in front of home

Exit Strategies for Life Insurance Policies

There are many reasons why you may no longer want or need your life insurance policy.

Perhaps your beneficiaries will no longer need the life insurance proceeds after you are gone. Maybe premiums for the coverage have become unaffordable. Perhaps you need to use all of the policy’s cash value to bolster retirement income or fund a healthcare need.

Maybe the original need for insurance protection—to pay off a mortgage, fund an educational expense, or provide income replacement for your spouse—has changed. You might have an expiring term policy that is that you are not planning to renew. The list of reasons goes on.

So, what do you do if you don’t need your life insurance policy anymore? Luckily, there are ways to get out of these policies.

Let’s sit down with David Jacobs, J.D., Principal at Acumen Insurance Solutions to talk about understanding life insurance settlements: What is a life insurance settlement? How does it work? What are some exit strategies for life insurance policies?

Let’s find out.

What is a Life Insurance Settlement?

A life insurance settlement refers to the sale of an existing insurance policy on someone’s life to a third party.

There are two types of settlements. Either where:

  1. A lump sum is given to the policy owner. The policy is surrendered to the new buyer and the new buyer takes over those premium payments and collects the death benefit; or,
  2. You can sell a portion of your life insurance policy to reduce or eliminate premiums and retain a portion at the same time. This is known as a hybrid settlement.

How Did Life Insurance Settlements Begin?

So, how did life insurance settlements come to be? Well, we’re glad you asked because there’s quite an interesting story behind it.

In 1911, Dr. Grisby and his patient, John Buchard, enacted one of the first documented private sales of life insurance.

Here’s how it happened.

“Grigsby offered Buchard $100 and a medical procedure for his life insurance policy. In exchange Grisby would be fully responsible for the premiums, while receiving Buchard’s death benefit when he passed.”

What happened next? The case was taken to the Supreme Court! “After an appeal, Supreme Court justices ruled in Grisby’s favor, setting the precedent that life insurance policies are property and can be bought and sold freely and legally.”

This case set the stage and is the foundation for allowing third parties to purchase existing life insurance policies today.

Exit Strategies for Life Insurance Policies

So, what do you do if you just don’t want your insurance policy anymore? There are a few options:

  • Allow your policy to lapse
  • Surrender your policy
  • Give the policy to charity
  • Have beneficiaries continue the policy  
  • Use a life insurance settlement 

Let’s talk about each of these options in a bit more detail.

Allow Your Policy to Lapse

You can stop paying premiums and just let your policy lapse. Your policy will just eventually die on the vine; however, you don’t get any benefit from this option unless you pass away while the policy is still in force.

500,000 seniors a year lapse their life insurance policies, leaving behind $100 billion in benefits and walking away with little or nothing. Policies that lapse can be a significant source of revenue for the life insurance carriers, since they have collected premiums for years on them yet never paid out a death claim. 

Surrender Your Policy

On the other hand, you can return a permanent life insurance policy to the life insurance carrier for its cash surrender value. This value may be less than what you’ve paid in premiums over the years. Cash value gains are subject to income tax when the policy is surrendered. 

Give the Policy to Charity

Next, you could donate your life insurance policy to charity. There are, however, some additional factors to consider in this option. You must:

  • Have some charitable intent
  • Be comfortable with theoretically taking the money “away” from your heirs and instead diverting it to a charitable organization
  • Find a charity that will accept donations of life insurance policy
  • Calculate the charitable deduction you’ll receive by giving the policy away

Have Beneficiaries Continue the Policy 

If you cannot afford the premiums any longer, you could offer your beneficiaries the option to take over the policy and pay the required premiums. This might be particularly attractive if you have had a decline in health since you originally purchased the policy. This option may require making some administrative changes to the policy with the carrier.   

Use a Life Insurance Settlement Option

The final exit strategy is to use a life insurance settlement option. Life insurance settlements are available for both term and permanent life policies when the insured is age 65 and over.

(Note: If you have a term policy, it has to be convertible to a permanent policy for this to work.)

A third-party investor who wants to take over the policy will analyze your contract and your current health to estimate how much the premium is and how long they expect to pay it. The older and less healthy you are, especially compared to when you purchased the policy, the higher the settlement value can be. 

This estimate will determine how much they’re willing to write a lump sum check to you for, today, in order to take over the policy. The settlement amount is often much higher than the cash surrender value option, mentioned above. 

When the policy changes hands, the third-party purchaser becomes the owner and beneficiary of the policy and assumes payment of its premiums. The buyer also then receives the death benefit when the insured passes away. 

The insured and current policy owner need to be comfortable with this arrangement. However, the purchaser is not an individual investor; rather, it is typically a large pension fund or institution that can afford to buy policies at scale to take advantage of the law of large numbers.

In addition, the purchaser may use its estimates to make a hybrid offer, where you agree to take a smaller lump sum amount today in exchange for retaining a portion of the death benefit for your beneficiaries when you are gone. 

Why People Choose Life Insurance Settlements

Again, the benefits of a life settlement for the seller of the policy are obvious. The seller has the opportunity to benefit from their policy while they are still alive and receive a far higher amount than using the policy surrender option. The proceeds from the sale can be used for anything, including funding long-term care, medical treatments, travel, or family activities.

When an individual sells their policy, they’re essentially trading long-term benefits for short-term gain. The investor, on the other hand, is paying in the present day to receive a larger payout down the road.

Additional Considerations 

Most states highly regulate life settlement transactions and require that agents hold a specialized license. The settlement paperwork can be significant and requires notarized signatures from current policy owners, beneficiaries, and insureds. The insured’s current medical records are typically required by the purchaser in order to calculate its settlement offer. The buyer also has the right to periodically obtain updates on the insured’s future health through a designated representative and physicians’ records. 

Also, remember that settlement proceeds can be subject to tax. In general:
 

  1. Proceeds received up to the tax basis (total premiums paid) are free of income tax. 
  2. Proceeds received that are greater than the tax basis up to the amount of the cash surrender value are taxed at ordinary income rates. 
  3. Proceeds received that are in excess of the amount from Tier 2, above, get taxed as capital gains. 

Please consult your legal and tax advisor before moving ahead with a life settlement.

Life Insurance Settlement Calculator

Do you want to find out the value of your life insurance policy? Use our life insurance settlement calculator below.

Still have questions? What are the tax consequences of completing a life settlement transaction? What will happen to my policy after I sell?
Get in touch with our team at Acumen Insurance Solutions today. We will help you learn the true value of your policy today.

Permanent Life Insurance: What Options Are Available to You?

When it comes to life insurance, there are two main categories: Term life insurance and permanent life insurance. Today, David Jacobs, J.D., Principal at Acumen Insurance Solutions will be discussing permanent life insurance; more specifically, what options are available to you?

Let’s dive in.

What is Life Insurance?

First things first, what is life insurance?

Life insurance is a contract between a policy owner and a life insurance company. In this contract, the life insurance company promises to pay a designated beneficiary a death benefit upon the passing of the insured.

As we mentioned, when it comes to life insurance, there are two main categories: term life insurance and permanent life insurance. Remember that, no matter which type you own, the death benefit is generally paid income tax-free to the beneficiaries. 

Now, let’s focus on the different types of permanent life insurance options available.

Permanent Life Insurance: The Basics

Permanent life insurance, sometimes also referred to as whole life insurance, is designed to last for your lifetime, not just for a period of years. Since it’s designed to last for your entire lifetime, permanent life insurance is more expensive than term.

Permanent life insurance has the benefit of lasting longer than term, with premium flexibility and a cash value. The cash value is tax-advantaged and serves as a living benefit that the policy owner can access for any reason before the insured has died.

Three components make up permanent life insurance:

  • Premiums
  • Cash value, and
  • Death benefit

When you make a premium payment, what happens? Well, part of that premium goes to pay for the cost of insurance, or rather the cost to insure your life for the death benefit amount, as well as for policy fees, state premium taxes, and commissions.

The remainder of their premium goes into your cash value account, which can grow for you to use for any purpose at a later time.

Some of the main differences between the types of permanent policies have to do with what mechanism grows that cash value account.

Let’s discuss.

Types of Permanent Life Insurance

There are a few different types of permanent life insurance contracts to note. Again, the main difference between them is how the cash value (the living benefit account) grows.

Remember that, no matter which type of permanent insurance you own, the cash value grows tax-deferred and can be accessed tax-free using policy loans and withdrawals.  

Whole Life Insurance

A whole life policy cash value grows based on a guaranteed interest rate plus a non guaranteed dividend that the insurance carrier declares every year. Dividends are positively-correlated to interest rates and move slowly over time.

Universal Life Insurance

With a universal life insurance policy, the cash value grows based on a crediting interest rate that the insurance company declares annually, and is also positively-correlated to interest rates. 

Index Life Insurance

With an index universal life policy, the cash value grows based on the performance of a specific stock or bond index; typically it’s the S&P 500, however, other index accounts are available.

Index life policies are not directly invested in the market but instead track the movement of the chosen index.

Typically, index policies have a floor and a cap mechanism. For example, if the index declines over a policy year, the cash value is credited at a 0% gross rate to protect against downside risk; but, if the index increases, the cash value is credited at that rate, up to the cap. It’s like investing with guardrails. Caps can vary among carriers and usually float on an annual basis.

Variable Universal Life Insurance

The last type of policy is called a variable universal life policy. Variable life policyholders use mutual-fund-like sub-accounts to grow the cash value. Policy owners are accepting market volatility in exchange for the opportunity to potentially earn higher returns.

These types of policies are considered securities by the Securities and Exchange Commission (SEC), whereas whole, universal, and index are considered general account policies.

Infographic of Permanent Life Insurance What Options Are Available to You

Learn About Term Life Insurance Next!

We hope this discussion delineated the differences between term life insurance and permanent life insurance, and that you learned more about the types of permanent life insurance that are available on the market today.

Interested in learning more about the second category of life insurance, term life insurance? Read on in our article “Insurance 101: Term Life Insurance vs. Permanent Life Insurance.”

Important Notes: Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Policy performance is based on current rates as charges, and some values are not guaranteed. Medical and financial underwriting is required. Withdrawals and loans from life insurance policies classified as Modified Endowment Contracts (MEC) may be subject to income tax and a federal tax penalty, if taken prior to age 59½. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. See policy illustration for details. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.

Life Insurance 101: Difference Between Buy-Sell and Key-Person

Welcome to Life Insurance 101. We’re here to make things simple for you. Today, we have ​​David A. Jacobs, J.D., Principal at Acumen Insurance Solutions on camera to discuss the difference between buy-sell and key-person insurance.

Let’s dive in.

What is Buy-Sell Life Insurance?

Buy-sell life insurance is different from key-person (or key-man in the old days) life insurance. Buy-sell life insurance is used to protect a departing owner and his/her heirs, as well as the business and its remaining owners.

An Example of Buy-Sell Life Insurance

Let’s say Bob and Rick are in business together; they are 50-50 owners. Bob happens to pass away unexpectedly. In this case, Rick would then be in business with Bob’s beneficiaries, which is likely not an ideal situation for any party.

Therefore, the payout from a life insurance policy on Bob’s life is used as a way for Rick (or the business) to immediately obtain the financial resources necessary to buy out Bob’s beneficiaries, and vice versa. This way, Bob’s beneficiaries walk away with cash, and Rick with the shares of the business.

Make sense?

What is Key-Person Life Insurance?

Key-person life insurance, on the other hand, provides money to the business that’s lost a key employee which can be used to help replace lost revenue and offset costs to identify and train a replacement.

When Do You Use Buy-Sell Life Insurance?

There’s often a legal agreement between partners in a business—a shareholders’ agreement. The buy-sell portion of this agreement dictates what happens when a triggering event occurs and ownership needs to change hands.

These triggering events, to name a few, might include:

  • Death
  • Disability
  • Divorce of a partner, or
  • Retirement

Regardless of the triggering event, the organization and/or the partners need to have the funding available in order to buy out the departing partner or the departing partner’s heirs, if necessary.

Life insurance is a great way to do that. 

Infographic of Life Insurance 101: Difference Between Buy-Sell and Key-Person

Using Permanent Life Insurance to Fund Buy-Sell

Permanent life insurance (whole, universal, index, and variable) with cash value can help you handle all of those triggering events, whether the departing owner leaves due to death or another reason.

If an owner happens to pass away, the life insurance death benefit is used. However, if another triggering event occurs, the life insurance cash value can be tapped in order to meet that obligation and prevent using company cash flow or having to borrow at high interest rates.

The Importance of Life Insurance

Even if you don’t have a business partner, it’s important to make sure you protect your family by having insurance on your life for the current value or projected value of your business. If you pass away unexpectedly, your family will lose the income you generated and the value of your business will likely decline or perhaps disappear. It would be a shame for your family to not be able to reap the rewards of your hard work if you’re no longer there.

Interested in learning more? Check out another one of our Life Insurance 101 topics: Term Life Insurance vs. Permanent Life Insurance.

Term Life Insurance vs. Permanent Life Insurance

An Insurance 101 Series

Welcome to Life Insurance 101. We’re here to make things simple for you. Today, we’ve got ​​David A. Jacobs, J.D., Principal at Acumen Insurance Solutions on camera to discuss the difference between term life insurance and permanent life insurance in a way you can understand.

Let’s dive in.

What is Life Insurance?

Life insurance is a contract between a policy owner and a life insurance company. In this contract, the life insurance company promises to pay a designated beneficiary a death benefit upon the passing of the insured.

Most of the time, that death benefit is paid income tax-free to the beneficiary.

Term Life Insurance vs. Permanent Life Insurance

Interestingly enough, life insurance comes in a couple of different flavors. There are two main categories of life insurance: the first is called “term” life insurance, and the second is known as “permanent” life insurance.

The main difference between permanent and term insurance is that permanent insurance is designed to last for the insured’s lifetime and permanent insurance has a tax-advantaged cash value component.

But more on this later! Let’s discuss each individually.

Term Life Insurance

Term life insurance is exactly what it sounds like. It is life insurance that’s for a period of years; typically 10, 15, 20, or 30 years.

When it comes to term life insurance, there are only two components:

  1. The premium that’s due either every year, quarter, or month, and
  2. The death benefit, which is paid when the insurer dies within that term

Generally, premiums are level and the death benefit is guaranteed for that period. At the end of the term, the insurance policy stops, and the benefit is gone.

Lastly, some term life insurance policies have a special benefit that allows you to “convert” the term insurance to a permanent insurance policy without medical underwriting.

This can be a tremendously beneficial feature if the insured experiences a health issue that would prevent them from being able to qualify for new insurance after the term policy ends. These convertible term policies tend to cost more and require more effort to find than traditional term policies, but can be worth it depending on your unique circumstances and desires.

Permanent Life Insurance

The second type of insurance category is permanent insurance. The terms “permanent” and “whole life” insurance are sometimes used interchangeably.

Just as the name implies, permanent life insurance is designed to last for the insured’s lifetime, not just for a period of years. Since it’s designed to last longer, permanent life insurance is more expensive than term.

Permanent life insurance, however, has the benefit of a) lasting longer and b) having a cash value component. The cash value can be accessed for a variety of reasons and grows without tax.*

A Permanent Life Insurance Policy’s Cash Value Component

Let’s discuss more about the cash value component that is unique to permanent life insurance.

The cash value component of a permanent life insurance policy is available to the policy owner while the insured is alive, and grows tax-deferred. This cash value component can be accessed tax-free using either policy loans or a withdrawal of the principal.

This cash value component allows the policy to last as long as the policyholder wants it to. Permanent insurance is similar to a car; the more gas you put in, the longer it will drive. The same thing goes for permanent life insurance: the more premium you put into the policy, the longer the policy will last and the more cash value it will build.

Now, let’s briefly discuss the different types of permanent life insurance.

Types of Permanent Life Insurance

There are a couple of different types of permanent life insurance contracts to note, including:

  • Universal life
  • Index life
  • Whole life
  • Variable universal life

The difference between them all is how the cash value (the living benefit account) grows. For example:

  • Does it grow based on a dividend? That’s a whole life policy.
  • Does it grow based on an interest rate calculation or declaration? That would be a universal life policy.
  • Does it follow an index, for example, the S&P 500, but with a “floor” and a “cap” mechanism? That would be an index policy.
  • Or, does it involve the market (i.e. mutual fund-like accounts)? That would be a variable universal life policy.

Regardless, all of these policies have the same feature; as long as you continue to pay premiums and cash value remains in the policy, it will last until the death of the insured.

In the meantime, however, the policy owner can reach in and use the cash value for a variety of purposes. For example, it can be used to help pay premiums in certain years, fund education needs, supplement retirement, and/or support healthcare costs, all without triggering tax.

These are all things that the policy owner can use the cash value for while the insured is still alive.

Read on to learn more about the specific permanent life insurance policies available to you.

Infographic for Term Life Insurance vs. Permanent Life Insurance

A Recap on Term Life Insurance vs. Permanent Life Insurance

To review, the differences between term and permanent are:

  • Term life insurance lasts for a period of years and has two components: a premium and a death benefit.
  • Permanent life insurance lasts as long as you want it to (typically a lifetime) and has three components: a premium, a death benefit, and a cash value.

No matter what type of life insurance you own, however, it is an asset. Moreover, it is an asset class that needs to be reviewed, monitored, and serviced regularly. Why? To make sure that the policy is keeping up with your goals as well as to make sure that the industry and the policy are still performing as anticipated.

Read on to learn about the question, “Can I Change My Life Insurance?


Important Notes: Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Policy performance is based on current rates as charges, and some values are not guaranteed. Medical and financial underwriting is required. Withdrawals and loans from life insurance policies classified as Modified Endowment Contracts (MEC) may be subject to income tax and a federal tax penalty, if taken prior to age 59½. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. See policy illustration for details. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.

Knowing Your Life Insurance Options

Life insurance can be a crucial tool for:

  • Tax planning
  • Spousal protection planning
  • Wealth transfer planning, and
  • Business planning

However, as your personal and financial situation changes over time, so could your need for coverage. It is important that you know all your options regarding your life insurance, as well as when to audit your life insurance, so you can make informed decisions as to how to handle this valuable asset. You may have just one policy, or several life insurance contracts of varying types and designs. 

Let’s discuss your life insurance options.

Life Insurance Options

Below are the four primary options available regarding your life insurance.

Option #1: Continue Your Coverage

If you still need life insurance to meet your planning goals or if your health has deteriorated, you may wish to retain your coverage. Some policies allow for premium flexibility and reduction in policy size. 

Option #2: Stop Paying Premiums and Let Your Coverage Lapse

Seniors over the age of 65 lapse over $100 billion of life insurance coverage every year. Your premiums will end but so will your life insurance coverage when it eventually lapses. 

Option #3: Surrender Your Policy

You can surrender your policy to the insurer and cancel your coverage in exchange for the cash surrender value (permanent policies only).

Option #4: Sell Your Policy via a Life Settlement

If your permanent (whole, universal, index, or variable life) policy qualifies, you can sell it to an investor group who will pay you an amount in excess—sometimes four to five times—of the cash surrender value, in exchange for paying future premiums and eventually collecting the death benefit. Some convertible term policies can also qualify so it could be worthwhile checking before you let it lapse.

Make sure you fully understand the potential tax consequences of lapsing, surrendering, or selling your life insurance policy before moving ahead. 

The Importance of Auditing Your Life Insurance Policy

In addition to knowing your options, it’s just as important to regularly audit your life insurance coverage.

Why? Taking the time to review and understand your existing policies can help you:

  • Reduce carrier and contract risk
  • Check that you are carrying the right amount and type of coverage
  • Ensure the policies are owned by the correct person or entity
  • Consider new policy features, such as critical illness coverage, and
  • Improve overall policy earnings over time

Remember, over the years, life insurance contracts have changed, become more efficient, and regularly offer different features and benefits. Today’s policies are different even compared to those purchased just a few years ago.

This considered it makes sense for every policy owner to periodically take a look at their existing life insurance contracts and make adjustments accordingly.

Infographic of Knowing Your Life Insurance Options

Let’s Develop a Plan – Together

Knowing your options is key. At Acumen Insurance Solutions, our trusted advisors have decades of experience to help you develop a customized plan. Please contact us for a complimentary policy review so we can help you reach your goals.

Interested in learning more? Read on for more about auditing existing life insurance plans for credit unions or the difference between term life insurance and permanent life insurance.