The insurance team is working with a client who purchased a whole life policy from a quality insurance company when he was 45 years old. The face value at purchase was slightly less than $1,300,000. Nineteen years later, the client has a little more than $562,000 in tax cost basis in the contract. He also has an accrued death benefit of $2,650,000 and a cash value of more than $1,317,000.

If the client were to simply cash in the plan and forego having life insurance, he would be left with ordinary income tax on the gain of $755,000 (cash surrender value of $1,317,000 – cost basis of $562,000 = $755,000 x tax bracket). Not a good solution, to say the least. 

Many people in this situation would withdraw their basis and loan out the gains. The problem with that is the current policy has a loan rate of 8%. Our solution is to transfer the cost basis and cash surrender value to a PPVUL (Private Placement Variable Universal Life) policy, where the loan rate is 2% or less. In addition, the PPVUL:

1. Has no surrender penalties 
2. Has cash values that are held in separately indexed accounts for professional money management
   1. Not subject to the creditors of the general account of the insurance company
   2. An assortment of alternative investments
3. Is not commission-based like traditional life insurance; instead, a fee is wrapped around the cash value for money management just as we would manage any other account
   1. Fees for management are deducted from the cash value without trigging 1099s or tax consequences
   2. The cost of insurance for the risk portion of the death benefit is deducted from cash value without triggering taxes

In the end, we were able to greatly enhance the client’s tax-free cash flows with better choices for a higher potential rate of return.

This material is intended for informational and educational purposes only. No representations or warranties, either express or implied, are made regarding the accuracy or completeness of the information contained herein. Reliance upon information in this material is at the reader’s sole discretion. Case studies are not to be construed as an endorsement or testimonial of any of its past or current clients, nor any assurance that we may be able to help any client achieve the same results. Results may not be representative of the experience of others and are not a guarantee of future success.

Private Placement Life Insurance is an unregistered securities product and is not subject to the same regulatory requirements as registered products. As such, Private Placement Life Insurance is only available to accredited investors or qualified purchasers as described by the Securities Act of 1933.  Investing in securities involves risk and the potential to lose principal. 

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