Generally speaking, Roth conversions usually take place between ages 55-65. Cash value life insurance carries as expense charge called the cost of insurance which is predicated on age and health. The cost of insurance begins to increase geometrically during those years by age. Usually clients at that age have some health issues so quoting the top preferred rates on a proposal to boost the internal rate of return is inappropriate most of the time. The cost of insurance is an expensive component and may not be able to overcome an indexed funds internal expense loads.
The distribution of withdrawals to basis and policy loans of gains must be reviewed every year. The tax issues are a major item during distributions to maintain its tax-free income status. The distribution term “withdrawals” is not the same for cash value life insurance versus a qualified plan. Case in point. The agent letter explained that the client could withdraw tax free annual distributions from their cash value life insurance. The client did just that by requesting in writing taking annual withdrawals. Withdrawals of basis are tax free, but in year five there was very little basis left and so the policy administration treated the annual request for withdrawal according to the client’s letter. At the beginning of the following year, the client received a 1099 for the gain that was withdrawn. This triggered a lawsuit to recover taxes due. The intent of tax-free distributions was not the issue, but how the distribution language was interpreted.