Thought for the day:

If you will read no further:

If you are not just an investment advisor (or wealth manager) to your clients it is quickly becoming clear that you must become more knowledgeable about insurance and annuity products; when they are appropriate and how they work. Unless you have been specializing in insurance for years, it is wise to affiliate with a quality marketing organization (I have one in mind) that understands the business and the tax laws to be sure your client is properly served and taking appropriate advantage of the benefits available through the innovative products emanating from the insurance industry.

For example, no one should own life insurance that doesn’t provide access to the death benefit for terminal or critical illness. Start with your own insurance policies. Call Nancy Woo or Randy Masciarelli at (800)238-8144 for more information and assistance. You will be surprised at how simple it is to provide increased value for yourself and your clients.

Thought for the week:
As more and more of our planners are coming to us for insurance evaluations and fine tuning of their clients’ life insurance policies, we are noticing how often the tax implications are being ignored when policies are lapsed….especially when there is a large loan outstanding that is causing the policy to lapse without value.

When a policy lapses with loans against the cash value, it is not uncommon to see the owner incur an income tax as a result of “phantom income”. Any time a policy lapses or is terminated, the possible taxable gain is calculated by totaling the premiums paid, subtracting the dividends received (if any; as they are a refund of excess premiums) to ascertain the cost basis. Then find the difference between the cost basis and the cash value to determine if there is a taxable gain. It is not unusual to see policy loans ignored as they reduce or eliminate completely any net cash available; but this is where some glaring errors can be made. This is because interest has been accruing and added to the loan. So even if there is no net cash value to be received from the policy upon termination, the total loan actually represents the total cash value in the policy that is often in excess of the cost basis. For example, a $100,000 loan minus $80,000 in net premiums paid equates to $20,000 of ordinary income; yet the owner will receive no proceeds when the policy terminates. This is the “phantom income” and will sometimes represent significant gains and the carrier will issue a Form 1099R reflecting the taxable amount.

Before considering terminating a policy with a cash value loan or exchanging it for a new more efficient one, it is important to receive a statement of cost basis from the insurer so that any taxable income is known in advance; such information can then be used in the process of determining a strategy going forward….with no surprises.

Contact Randy or Nancy before allowing any client’s policy to terminate.