Investing Through Insurance

As part of the exit planning process, the owner should evaluate how they will invest the proceeds from the sale.  There are several insurance programs that allow the owner to take portions of the proceeds and purchase insurance policies that grow in value over time.  This includes the following:

  1. Variable Universal Life
    The cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice is entirely up to the contract owner. The 'variable' component in the name refers to this ability to invest in separate accounts whose values vary—they vary because they are invested in stock and/or bond markets. The 'universal' component in the name refers to the flexibility the owner has in making premium payments. The premiums can vary from nothing in a given month up to maximums defined by the Internal Revenue Code for life insurance.

  2. Life Annuity Policies
    A life annuity is a financial contract in the form of an insurance product according to which a seller (issuer) makes a series of future payments to a buyer (annuitant) in exchange for the immediate payment of a lump sum (single-payment annuity) or a series of regular payments (regular-payment annuity), prior to the onset of the annuity.

    The payment stream from the issuer to the annuitant has an unknown duration based principally upon the date of death of the annuitant. At this point the contract will terminate and the remainder of the fund accumulated is forfeited unless there are other annuitants or beneficiaries in the contract. Thus a life annuity is a form of longevity insurance, where the uncertainty of an individual's lifespan is transferred from the individual to the insurer, which reduces its own uncertainty by pooling many clients. Annuities are often used to provide income during retirement.

  3. Guaranteed Return Investment Insurance Policies
    With interest rates being so low, one may consider investing through insurance polices that offer a fixed rate of return.  These should be carefully evaluated by an insurance professional, because the terms and condition of how this guarantee is implemented can be quite complex.

Tax Benefits of Investing in Life Insurance

Each year's earnings on the investment portion are not taxes, and the taxable gains on policies that are later cashed out can be reduced by the amount of the insurance protection the plan provided.  And if the policy holder dies, the gains are not usually taxed.

Flexibility of Investing in Life Insurance

The death benefit on a variable universal plan may be increased with a lump-sum payment, or borrowed against in the event of a pressing financial need. The ability to skip payments is also an advantage.  In certain types of insurance plans, the insured can control whether the money is invested in conservative or more aggressive options.  Life insurance can also be used to pass estates to multiple generations, without paying any generation-skipping taxes.