Banks And Whole Life Insurance: A Complex Relationship

Banks do use life insurance, but not in the way you might think. Bank-owned life insurance (BOLI) is a type of insurance where the bank is the policy beneficiary and owner. This type of insurance is used as a tax shelter and funding mechanism for employee benefits. Banks take out these policies on key employees, usually high-earners or board members, whose deaths could cause financial loss for the bank. BOLI is not available to rank-and-file employees.

Another way banks are linked to life insurance is through the infinite banking concept, where permanent life insurance policyholders treat their policies as a personal line of credit. Policyholders borrow against the cash value of their policies instead of taking out loans from traditional lenders. This strategy is promoted as a way to avoid paying interest to financial institutions, but it's complex and risky.

Banks use whole life insurance for tax-free savings and to fund employee benefits

Banks use bank-owned life insurance (BOLI) as a tax shelter and to fund employee benefits. BOLI is a permanent life insurance policy that a bank takes out on its high-earning or key employees, such as board members, whose death could cause a financial loss for the bank. The bank pays the premiums and is the beneficiary of the policy.

BOLI provides tax-free savings for banks. The cash value of the policy grows tax-free, and the bank does not pay taxes on the benefits paid out after the death of the insured person. This allows banks to use BOLI to fund employee benefits at a lower cost.

BOLI is different from traditional life insurance in that it benefits the bank rather than the insured person's beneficiaries. Additionally, BOLI policies remain in place even if the employee leaves or is terminated.

BOLI is a type of whole life insurance, which provides coverage for the entire life of the insured person. Whole life insurance also has a savings component, allowing policyholders to build cash value over time. This cash value can be borrowed against or withdrawn, providing a source of liquidity.

While whole life insurance is more expensive than term life insurance, it offers guaranteed returns and tax advantages that can make it a good investment for certain individuals and businesses.

Whole life insurance can be used for estate planning

Whole life insurance is a type of permanent life insurance that offers a death benefit and an investment component. It stays in effect as long as premiums are paid and is intended to provide coverage for the lifetime of the policyholder. The cash value of a whole life insurance policy grows tax-deferred while the policy is in effect, and the policyholder can borrow against this cash value. This makes whole life insurance a useful tool for estate planning, as it can provide liquidity to heirs and help preserve the value of the estate.

One way to incorporate whole life insurance into estate planning is by creating a life insurance trust. A life insurance trust shields insurance proceeds from the insured individual's taxable estate, allowing benefits to pass directly to beneficiaries upon the policyholder's death without estate tax consequences. Life insurance trusts are irrevocable, and changes cannot be made by the insured once the policy is placed in the trust.

Whole life insurance can be particularly beneficial for estate planning in several scenarios:

• Paying estate taxes: Life insurance can help heirs address the challenge of paying estate taxes, which can pose a burden if the estate includes significant illiquid assets such as real estate or a business. A life insurance payout can provide liquidity to cover these taxes without the need to rush the sale of assets.
• Eliminating inheritance inequities: Life insurance can help offset any inheritance inequities, especially when it comes to assets that are difficult to divide among heirs, such as family businesses or real estate.
• Providing for an heir with disabilities: Life insurance can ensure that an heir with disabilities has financial security without undercutting the inheritances of other heirs.

When considering using whole life insurance for estate planning, it is important to consult with professionals such as an estate attorney and a tax professional. They can provide guidance on whether whole life insurance is suitable for your specific situation and help you navigate the complexities involved.

Whole life insurance can be used for retirement

Whole life insurance is a type of permanent life insurance that provides coverage for the entire life of the insured person. It has a savings component, known as the cash value, which the policy owner can draw on or borrow from. This makes it a useful tool for retirement planning. Here are some ways whole life insurance can be used for retirement:

Accumulating Tax-Deferred Savings

Whole life insurance policies allow investments to accumulate tax-deferred interest. The cash value of a whole life policy typically earns a fixed rate of interest, and withdrawals are tax-free up to the total premiums paid. This makes it similar to a tax-advantaged retirement savings account.

Supplementing Retirement Income

Once the cash value has grown sufficiently, policyholders can withdraw or borrow from it to supplement their income in retirement. This can be especially useful when markets are low or if other retirement accounts are insufficient. The cash value can provide a source of funds to cover expenses during retirement.

Taking Advantage of Guaranteed Returns

Whole life insurance policies offer guaranteed returns, which can be beneficial for retirement planning. The cash value grows at a fixed rate set by the insurer, providing predictable and stable growth. This can be attractive for those seeking stable returns to fund their retirement.

Estate Planning

Whole life insurance can be used as a form of "forced savings," providing funds for estate taxes upon the insured's death. The cash value component ensures that loved ones have the financial resources to pay estate taxes without dipping into other accounts. This can be particularly useful for high-net-worth individuals or those with large estates.

Diversifying Investment Portfolio

Whole life insurance can be a tool for diversifying an investment portfolio. The fixed rate of return on the cash value is not subject to market fluctuations, providing a stable element to an investment strategy. This can be beneficial for retirement planning, as it offers a predictable source of funds that is not dependent on market performance.

While whole life insurance can be a useful tool for retirement planning, it is important to consider the potential drawbacks, such as high premiums, slow growth of cash value, and limited flexibility in adjusting the death benefit. It may not be suitable for everyone, and careful consideration of one's financial goals and needs is essential before making any decisions.

Whole life insurance can be used to pay for college

Advantages of Using Whole Life Insurance for College

Whole life insurance policies will, at some point, have a cash value that can be used to pay for college expenses. This could be through withdrawing cash or taking out policy loans. It offers flexibility, as there is no requirement to pay back the loan, although not paying it back may reduce the amount of money beneficiaries receive. The cash value usually earns a better growth rate than a bank account, and any growth or lifetime distributions are tax-immune.

Disadvantages of Using Whole Life Insurance for College

It can be expensive, with high upfront and recurring fees. It can take a long time, often 10 years or more, for the cash value to surpass what has been paid in premiums, so it's not a quick way to build up assets for tuition fees. Heavy annual expenses will weigh down earnings, with most policies charging upwards of 2% per year in administrative and investment costs.

Best Practices for Using Whole Life Insurance for College

• Use a dividend-paying whole life insurance policy focused on cash value accumulation.
• Insure the parent, not the child. This avoids potential issues if the parent dies, and allows for larger premium sizes.
• Choose a policy that offers multiple payment options, including the option to stop payments once your child enters college.
• Purchase the policy at least 10 years before the first tuition payment is due, as whole life insurance needs time to build cash value.
• Avoid Modified Endowment Contracts (MECs) due to unfavourable tax implications.

Whole life insurance can be used to create a legacy for heirs

Whole life insurance can be an effective way to create a legacy for your heirs. The death benefit from a whole life insurance policy is typically tax-free and goes directly to your beneficiaries, who can use the money for any purpose. This means that your beneficiaries will receive the payout regardless of how your estate is handled, and they will not have to pay income tax on the proceeds.

Whole life insurance is a type of permanent life insurance that combines insurance protection with a savings plan. The savings component, or cash value, of a whole life insurance policy can be borrowed against at a specified interest rate or withdrawn if the policy is terminated. This cash value can be used to create a legacy for your heirs by providing them with needed funds after your death.

One way to use whole life insurance to create a legacy for your heirs is to purchase a policy that will provide income for your parents at retirement. This can be done by converting the policy to an annuity or by withdrawing the cash value. Another way to use whole life insurance to benefit your heirs is to use the death benefit to offset farm assets, allowing all family members to receive something from the estate while preserving the farm or business intact.

It is important to note that the death benefit from a whole life insurance policy will be included in the value of your estate for tax purposes if you are the owner of the policy. To avoid this, you can place the policy in an irrevocable life insurance trust (ILIT). The trust owns the policy, but you are the insured, and the death benefit is not included in the value of your estate.

Additionally, whole life insurance can be a costly and complex way to manage your wealth. The cost of whole life insurance is typically high due to the cash value component and the fact that it offers lifelong coverage. Before purchasing a whole life insurance policy, it is important to evaluate your family's needs and consider seeking advice from a qualified financial advisor or insurance agent.

Frequently asked questions