Cash Value Life Insurance – The Gift that Keeps Giving

I regularly read financial articles before I start my workday, or late at night when I can’t sleep, which occurs more and more as I grow older. And why not? Is there a better remedy for insomnia than a boring financial advice article?

What is disappointing is when I see an article that I feel that I absolutely must call out, not as much for the inaccuracy, but for the oversight. The most recent example of this is an article titled “6 Types of Retirement Income That Aren’t Taxable” by John Csiszar which appeared on GOBankingRates.com on December 10, 2022. Mr. Csiszar is both a Certified Financial Planner (CFP) and a Registered Investment Advisor (RIA), and according to his bio in the article, is also a licensed life agent with experience in a Wall Street wire house and has his own investment advisory firm. He manages over $100 million of client assets “while providing individualized investment plans for hundreds of clients”.

The author’s intentions and, frankly his guidance, are great as he spells out and discusses his list of tax-free retirement income options as follows:

Roth Withdrawals;
Inheritances;
Municipal Bond Income;
HSA Withdrawals;
Social Security Payments, with explanation; and
Life Insurance proceeds.

In item number 6, Mr. Csiszar states that “like an inheritance, waiting for a life insurance [death benefit] payout isn’t an ideal strategy for funding a retirement plan” and I could not agree with him more. HOWEVER, using tax-free distributions from life insurance policy account values is NOT even mentioned as an option in the above list!

Why is it so hard for financial advisors to recognize:

That cash values in a life insurance policy can be allocated to equities, bonds, cash, and alternative investment asset classes inside of the tax-deferred wrapper that is life insurance (assuming that the policy is a variable life solution).
That cash values in a life insurance policy can be bought and sold without capital gains or taxation thereof.
That dividends from the equities and interest payments from the bonds and other fixed-income assets are NOT taxable as ordinary income.
That the sum of all contributions made to life insurance (the basis) can be withdrawn income tax-free BEFORE any gains.
That ALL gains can be borrowed against at a ZERO or very low-interest rate.
That distributions from life insurance are NOT considered earnings toward the income test for the taxation of Social Security Benefits (as Mr. Csiszar mentions in point number 5).
That ALL or MOST of the Death Benefit can be accessed, income tax-free, as a living benefit through a Long-Term Care or Chronic Illness Rider, if elected, in the event the need arises.
That, in many states, cash value of life insurance is protected from creditors.
That cash value of life insurance is not considered for Federal Student Aid in the FAFSA forms.
That death benefits are income tax-free to the beneficiaries and are 100% liquid exactly when needed by the beneficiaries, regardless of financial market cycles.

There is no other asset like life insurance as part of a well-thought-out financial plan and yet, many financial advisors, such as the author of the aforementioned article are loath to mention it. Why?!

I could pontificate and make a whole list of objections such as:

That life insurance is too expensive – it’s not;
That life insurance agents get paid a BIG commission – they don’t;
That, as a result of the alleged BIG commission, life insurance agents don’t have the client’s best interest in mind – disagree, you need to work with the right insurance agent\ agency;
That insurance policies are rarely managed correctly – historically true, but there are many technology solutions for that today, so let’s get past that;
That life insurance is hard to qualify for – not true; and
That life insurance underwriting is an onerous task – again, historically true, but if you work with the right agent\ agency, it doesn’t have to be that way.

Let’s get over these objections, because at the end of the day, as highlighted in the Ernst and Young (EY) study from October 2022, life insurance, as part of a holistic financial plan can provide meaningful benefits to young families, mid-career men and women, pre-retirees and retirees. The earlier that individuals start with their planning to include life insurance, the more effective their plans will be.