A federal law passed at the end of 2020 has made permanent life insurance more attractive to some people.
The law essentially tweaks the tax code to allow owners of permanent policies to put more money into the savings portion of their policy.
As we have explained previously, permanent policies, also known as whole life policies, are a combination insurance-and-savings vehicle. Part of your monthly premiums pay for a death benefit, and another part goes into an internal savings account.
The Wall Street Journal describes the key law change — which went into effect on Jan. 1 for new policy sales — as follows:
“The law lowers a minimum interest rate used to determine whether combination savings and death-benefit policies known as permanent life insurance are too much like investments to qualify for tax advantages granted to insurance. The interest-rate floor was put in place in 1984 to weed out policies that were mostly investment vehicles with a thin layer of insurance.”
The WSJ adds that the change will make it more attractive for insurers to sell permanent life policies. In recent years, interest rates have fallen so low that the old standard minimum interest rate — which was established in the 1980s — was actually higher than the yield on long-term government-bond yields.
That reality had forced many insurers to consider ending sales of permanent life insurance policies. Life insurance companies typically make profits by investing customers’ insurance premium money in bonds until a claim is made on the policy.
Permanent life insurance allows policyholders to defer paying taxes on any money they make on investment and savings income within the policy. In addition, upon the policyholder’s death, beneficiaries usually do not have to pay taxes on the death benefit they receive.
That combination of perks makes whole life insurance more attractive to some people than term life insurance.
Now, the WSJ notes, that the recent tax-code change may make permanent life policies especially appealing to the wealthy:
“This change applies to buyers of all income levels, though wealthier people would typically be better able to afford extra payments into a policy.”
Additionally, President-elect Joseph R. Biden Jr. has said he intends to raise taxes on the wealthiest Americans, so those in higher income tax brackets may look to life insurance as a way to reduce taxes.
Is permanent life insurance right for you? Before putting down money on a life insurance policy, read “Which Is Better: Term or Whole Life Insurance?“