Wealthy tap life insurance as asset long before payout

Some advisors suggest whole life insurance can be viewed as separate asset

By Claude Solnik
The Daily Record Newswire
LONG ISLAND, NY — To most people, life insurance only becomes valuable when the policy pays out, providing cash for others. But some increasingly are using policies as an investment vehicle, pouring in money to see it accumulate tax free and save securely.

While nearly anyone can pour cash into their policy, the very rich are using it to squirrel away millions of dollars safely with some tax benefits.

Some advisors say whole life insurance can be viewed as a separate asset much the way mutual funds, bank accounts and stocks are.

“Low rates and the tax free benefits of these policies are attracting people to use this as an asset class,” Tom Archer, chairman of The Archer Financial Group, a life insurance advisor in Melville, said. “It’s got tremendous tax benefits. Cash grows tax free. They use it for accumulation and retirement income.”

Life insurance policies typically have a cash account into which money is deposited from premiums to pay the cost of insurance.

But additional cash also can be deposited in permanent life insurance accounts, continuing to accumulate and serving as retirement income and a sort of savings account.

“When you pay your premium, a portion of that goes to pay the insurance costs,” said Lawrence Sprung, president of Mitlin Financial, a Hauppauge-based wealth management firm and insurance brokerage. “Any excess goes into a cash value account that will accumulate over time. Some people overfund.”

The decision to use policies as an asset for the living, some say, is a big change from the days when it was all about the payout.

“A shift in focus is occurring where life insurance is no longer exclusively thought of as a gift for someone else, but also as an asset that can be used to provide a significant benefit to the living,” said Henry Montag, principal of the TOLI Center, in Huntington Station, which evaluates the performance of policies.

He said life insurance is being established “as an asset class similar to stocks, bonds and bank accounts with immediate benefits for the living.”

Cash accumulates with deferred taxes, providing benefits not afforded to standard taxable investments

Montag believes this policy is not only leading to more money in accounts, but “will allow the insurance industry to significantly increase sales.”

Federal income taxes for the wealthy have risen to 39.6 percent, in particular, making tax benefits more attractive.

“It’s really driven by tax rates,” said Mitchell Stein, a senior advisor at the private client services group at risk management and benefits consulting firm Chernoff Diamond in Uniondale. “And tax rates have been creeping up.”

Investments in an insurer’s general portfolio typically are 85 percent bonds, often not performing as well as the stock market.

Returns on universal life policy general portfolios averaged 5.2 percent a year over 30 years, while the S & P 500 averaged 12.29 percent, Stein said.

“You can invest in mutual funds, growth, international bond funds,” he added of some life insurance accounts. “We even have a private placement life insurance program where you can invest in hedge funds. You as the individual get to make those investment choices.”

That brings opportunity and the danger of losses. “You have a potential upside,” Stein said, “but you also assume a potential downside risk.”

Money withdrawn from funds isn’t viewed as being taken from a particular investment, so it’s not taxed until withdrawals exceed deposits.

“You’re withdrawing from the fund,” Stein said. “You can withdraw up to the amount you put in with no tax.”

Low interest rates have made the tax benefits even more appealing, even if money is invested in the insurer’s general fund.

“It’s becoming more prevalent, because you can’t get a return on your money,” Archer said. “People pack money into policies, overfund and build cash value.”

The money packed away into policies provides another form of security: It’s tough for others to seize.

“It’s a great asset protection strategy,” Archer said. “When you put money into these policies, if they’re structured correctly, it’s free from creditors.”

Very wealthy people who value security and tax benefits as much as investment growth are more likely to pack cash into policies.

Archer, for instance, advised one professional baseball player who has been putting $1 million annually into a guaranteed policy.

“Upon their retirement, they’ll be able to take several million dollars a year tax-free out of the plan,” Archer said.

Sprung cautioned that policies often have “surrender charges” for a decade or longer, triggering high penalties for those who seek to take out all the money early.

“You’d take a haircut,” Sprung continued. “You wouldn’t get the full amount.”

While it’s possible to overfund and withdraw money from policies, there also are traditional benefits to beneficiaries when they pay out.

Money is paid tax free to heirs and, at least for guaranteed policies, a basic amount is assured, even if money won’t grow like a traditional investment.

“There’s a guaranteed cash value,” Archer said. “It’s a good place to put money on a safe basis.”

Billionaires sometimes pack money onto policies to help pay estate taxes, which kick in after $10 million.

“You have to be really rich to buy insurance for estate taxes,” Archer continued.

He said the ultra-wealthy can use life insurance policies to provide the cash to pay estate taxes.  But others can use life insurance accounts as retirement tools.

“Those people are worth over that amount,” Archer continued of the wealthy. “For the people who were doing savings for retirement, that can be any amount of money.”

Montag said there’s another way to treat life insurance policies as an asset: They also can be “sold by the insured just like a car and a home.”