Term life insurance is the most cost-effective form of life insurance and is generally used to provide basic protection for a specified period of time. While cost-effective, owners of term insurance accumulate no cash value in their policies.
If premiums are paid on time, these policies generally provide coverage for the insured’s entire life. The policy never expires or needs to be renewed. The death benefit goes to the beneficiaries upon death of the insured. Policies have cash value or a savings feature. Whole life, universal, and variable insurance are types of permanent life insurance.
In this type of permanent life insurance, the premium, death benefit, and cash value amounts quoted at the time of purchase remain the same throughout the policy’s life. The benefit: the cash value always stays intact and earns interest, and the death benefit will never decrease. The disadvantage: the carrier invests the premiums conservatively, typically generating less-than-competitive returns.
This product is a flexible version of whole life insurance in which premiums can be adjusted within predetermined boundaries. As a consequence, the death benefit can vary. The flexibility of premiums also means that the policy’s cash value, which is interest-sensitive, cannot be guaranteed. However, many new Universal Life products on the market offer a minimum guaranteed rate of return and death benefit guarantees.
Irrevocable Life Insurance Trust (ILIT)
An ILIT is a trust that owns a life insurance policy or policies and whose terms cannot be changed once created. The trust pays the policy premiums, collects the death benefits, and distributes the proceeds according to the trust’s terms. It is used to lower assets in an estate so as to minimize taxation.
Section 1035 of the Internal Revenue Code provides that certain exchanges of life insurance contracts, annuity contracts, and modified endowment contracts generally will not trigger a taxable gain as long as the owner is the same person under both contracts.
Please consult a tax advisor to discuss your specific tax issues. Guarantees are based on the claims paying ability of the issuing company.
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