Tag Archive for: Life Insurance Plan

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.

How to Maximize Your Legacy Using Life Insurance

An efficiently designed gifting program funded with life insurance can help you to transfer your wealth, limit your exposure to transfer taxes, and maximize your financial legacy.

Read on to learn how combining a gifting strategy with an irrevocable life insurance trust (ILIT) can help you to make the most of your legacy.

Transferring Wealth and Enhancing Legacies: Annual and Lifetime Gifts

One of the best ways to enhance your legacy and minimize your exposure to transfer taxes is by combining:

  • A gifting strategy, and
  • An irrevocable life insurance trust (ILIT)

An ILIT is an effective estate tax reduction technique. Gifting, combined with an ILIT, allows you to meet other planning goals such as avoiding probate and increasing creditor protection. Additionally, an ILIT gives you greater control and flexibility over how your assets will be distributed.

Moreover, a lifetime gifting strategy, in conjunction with life insurance, may also increase the total amount passed on to your heirs.

Let’s discuss how U.S. transfer taxes can affect these life insurance strategies. 

Understanding U.S. Transfer Taxes

The U.S. federal government imposes a tax on the transfer of wealth above certain amounts. There are three distinct types of “transfer taxes” that may apply: 

Estate Tax

On the transfer of property at death.

Gift Tax

On the transfer of property during life.

Generation-Skipping Transfer (GST) Tax

On the transfer of property (during life or at death) to individuals who are more than one generation removed from the donor, commonly referred to as “skip persons” (e.g., a grandchild).

In addition to federal taxes, several states impose a state-level estate tax or inheritance tax, depending on where you live or own property.*

Maximizing Your Legacy Using Life Insurance

So, this considered, what can you do? What tools are available to you to maximize your legacy? Life insurance can be a perfect fit.

Implementing a gifting plan to fully utilize your available exemptions can help to significantly minimize or eliminate exposure to estate taxes.

One very efficient strategy is to make gifts to an ILIT using annual exclusion gifts and/or some of your lifetime exemption and have the ILIT trustee use the gifted funds to purchase life insurance. The steps are as follows:

  1. Your attorney drafts an ILIT.
  2. You fund the ILIT with annual exclusion gifts of $16,000 (in 2022) for each beneficiary of the trust, which can include children and grandchildren. You may use your lifetime exemption to gift larger amounts to the trust. 
  3. The ILIT trustee purchases an insurance policy on your life (or the joint lives of you and your spouse). The ILIT is the policy owner and beneficiary, with premiums paid from the gifted funds.
  4. At your death, the ILIT receives the death benefit free from income, estate, and GST taxes. By funding the ILIT with life insurance, you not only remove the gifted assets from your estate, but the policy’s death benefit creates an income tax-free pool of money, potentially increasing the overall benefit you pass on.

How Life Insurance Can Help

Life insurance can offer a variety of benefits. Some include the following:

  • Income tax-free death benefit: Death benefit is received income tax-free and can be used to help pay estate taxes (if any) and secure a legacy for your beneficiaries.1
  • Access to tax-free income: Cash value that accumulates inside a permanent life insurance policy can be accessed tax-free and distributed to beneficiaries.2
  • Competitive rate of return: Life insurance death benefit can provide a higher net rate of return compared to other options through life expectancy.3

Gifts may be made directly to beneficiaries or to a trust. When gifted to an ILIT, the assets will be excluded from estate tax for multiple generations (in many jurisdictions), and the trust structure provides additional benefits4,  including:

  1. Enhanced inheritance protection
  2. Flexibility and access
  3. Easy funding
  4. Increased creditor protection
Infographic of How to Maximize Your Legacy Using Life Insurance

What We Do

At Acumen Insurance Solutions, we know that a properly designed gifting program funded with life insurance can help you transfer wealth and enhance your legacy. Interested in learning more? Read on to learn the difference between term life insurance and permanent life insurance.

*Check your state’s regulations to verify what state-level estate tax or inheritance taxes are imposed.


1 Life insurance death benefit proceeds are generally excludable from income tax, with a few exceptions including transfer for value.

2 Loans and withdrawals will reduce the death benefit and cash surrender value and may cause the policy to lapse, which may cause recognition of taxable income. Policies classified as MECs may be subject to tax when a loan or withdrawal is made plus a 10% federal tax penalty if taken prior to age 59 1⁄2.

3 IRR on death benefit is equivalent to an interest rate at which an amount equal to the illustrated premiums could have been invested outside the policy to arrive at the net death benefit of the policy.

4 Acumen Insurance Solutions is not a law firm and does not provide tax or legal advice. Please consult your tax and legal professionals.

Employee working on a tablet and reviewing data

Auditing Existing COLI Plans for Credit Unions

At Acumen Insurance Solutions, we like to say that we “put life insurance to work.” One way that we do this is by auditing existing COLI plans for credit unions. Here, Scott B. Hinkle, J.D., CFP, and Principal at Acumen Insurance Solutions, talks about:

  • The benefits and popularity of COLI within credit unions
  • The importance of reviewing these policies regularly

Let’s dive in.

Credit Unions Using COLI

Many credit unions currently use credit union-owned life insurance as a mechanism to offset benefit expenses under Section 20. This asset class is a tried and true way in which credit unions can achieve several objectives.

These assets are safe, liquid, and they’re producing a meaningful rate of return. However, many credit unions do not review these contracts regularly, meaning that they are likely leaving money on the table. This is where we come in at Acumen.

Infographic for "Auditing Existing COLI Plans for Credit Unions"

Improving Credit Union-Owned Life Insurance (COLI) Performance

So, why do you need to audit existing COLI plans? Improving an existing COLI portfolio can mean:

  • Reducing risk, and
  • Significantly improving earnings over time

It’s important to recognize that over the years, life insurance contracts have evolved, become more efficient, and offer different features and benefits.

In fact, innovation, automation, negotiation, and increased life expectancies have improved the competitiveness of many life insurance contracts. Today’s policies are vastly different even compared to those purchased by credit unions just a few years ago.

This considered, it makes sense for every institution to periodically take a look at their existing credit union-owned life insurance contracts.

How We Help at Acumen

At Acumen Insurance Solutions, we help credit unions analyze and update their existing COLI portfolios to maximize efficiencies and yields.

As your credit union grows in size, so does the opportunity for you to invest in new credit union-owned life insurance. We can help you curate new life insurance contracts that are far more efficient than others available in the marketplace today.

Read on to learn more about why CUOLI is the best “otherwise impermissible investment” for your credit union.