To generate a tax-free income stream from cash value life insurance a few major caveats need to be in place. First any cash value policy needs to be designed as a non-modified endowment contract compliant with the TAMRA regulations or Cash Value Accumulation Test. Secondly, the policy must remain in force for the life of the policy insured.
There are four cash value life insurance policies. Each policy has a different crediting method and needs to be qualified for the policy owner for product suitability. So every prospective purchaser needs to undergo a risk tolerance test to discover which policy fits his or her profile and financial goals.
Participating Whole Life is an interest rate crediting method. Each year the board of directors declares a dividend, a return of unused premium. Guarantees are published in the illustration proposals. These types of polices are for conservative investors with long time horizons.
Universal Life is an interest rate crediting method which has been consistently low for a decade. As a result it has fallen out of favor among financial professionals for its low crediting rate. These type of polices are for conservative investors with long time horizons.
Indexed Universal Life is an indices crediting method, which can use domestic, as well as foreign indexed funds, to generate interest rate returns. Policy owners don’t participate in dividends, but they also don’t participate in the negative returns of the indices, i.e. zero is the lowest crediting rate in the crediting account. That being said, the policy expense loads in a zero year could generate a negative return. These types of polices are for conservative to moderate investors with long time horizons.
Variable Universal Life is a sub account crediting method tied directly to the market through equities and bonds similar to the construct of mutual funds. The internal expense loads can be significant as well as the returns. But potential market losses are also a characteristic of sub accounts. These types of polices are for moderate to aggressive investors with long time horizons.