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  • Writer's pictureDavid H. Kinder, RFC®, ChFC®, CLU®

There are ONLY Two Kinds of Life Insurance Policies: Protection (death benefit) and Tax Code.

Updated: Dec 10, 2023

That's a rather bold statement that no one else seems to make, so I am going to clarify (as I always do). I'm not necessarily talking about a specific type of policy, but rather the design of what the policy is designed and structured to do for the purposes of the insurance to be placed for a financial plan. Protection policies: Their objective is usually very simple: The lowest premium for a given period of time for a given death benefit. The idea of protection based policies is to leverage your premiums to buy larger dollars. Pennies per year that buy dollars.

Cash values are a distant second in priority, but they can be a part of the overall design.

  • Term policies... are ALL protection policies for the given period of guaranteed level premiums - usually 10 to 30 years. (They may be guaranteed renewable after the level term period for health underwriting, but not at the same rate you were paying, but at the new attained age.)

    • A little bit of trivia: a "Return of Premium Term" policy is a low premium cash value policy... that you cannot borrow against. It's still term insurance and they charge a higher premium for it compared to non-return of premium policy for you to get all your money back if you survive the term period... but you don't get the same benefits as other cash value policies.

  • A minimum-funded UL policy... is essentially an expensive annually renewable term policy. If there isn't anything on top of the annual costs of insurance to allocate towards policy earnings and growth, the policy cannot grow. In addition, the policy gets more expensive over time, so the policy is (unfortunately) designed from the beginning to lapse due to improper funding (and/or improper client expectations being set by the agent). Too many unfortunate stories on this.

  • Non-Lapse GUL policies (including IUL policies with non-lapse riders)... while they may have cash values for a short period of time per the illustration, they aren't designed for them (and they usually don't stay long). They are also a protection policy through a given specified age, typically age 85, 90, 95, 100, etc. The higher the age guarantee, the higher the premium. (Makes sense, doesn't it?)

  • Minimum or base whole life policies... are also a primarily protection-focused policy. Yes, these will have a cash value component, but that is again, a distant priority as opposed to having the minimum premium through the age of maturity (usually age 121).

  • 2nd to Die Survivorship life policies: These are not as well known, but they are primarily for estate planning purposes upon the death of the 2nd spouse. Again, this is an estate preservation strategy for protection purposes.

Maximum-funded cash value policies have fundamentally different objectives, and as such, are structured differently for those objectives. They could be the same NAME as another protection-based policy... but through their structure, they are for a far different purpose. They also have great tax advantages built into the policy and how the tax code treats them compared to other purposes.

  • Single-premium Life Policies (often referred to as MEC or Modified Endowment Contracts): These policies are utilizing the life insurance contract to pass on assets to named beneficiaries bypassing income taxation of those assets. These policies can also be borrowed against and used for many purposes - although their income tax treatment on interest and dividends received are taxable upon loan or withdrawal. These are great and popular contracts.

  • Maximum-funded whole life or IUL wealth contracts: You've read on my blog how I talk about these contracts as "wealth contracts". These are used for wealth transfer as well as for retirement cash flow.

  • Private Placement Life Insurance: This is a whole other animal, but is primarily used in retirement and estate planning for high net worth individuals to fund with various kinds of assets.

Why am I making this kind of differentiation? Primarily because so many people (especially financial entertainers) make the blanket assumptions that "one policy can do it all". It's not true! I even read a book written by a well known agent who made the claim that "you can do it all with the same policy." I'm sorry, but that's economically not the case. A policy that is designed for protection purposes... cannot efficiently do what "tax code wealth contracts" can do. Sure, you can do SOME, but it's not designed for that. You'd need two separate policies if you need protection AND you desire tax-code benefits.

You can learn more about maximum funded 'tax code' policies in this video here:



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