Often retirement experts address portfolio holdings as short, mid and long-term positions. The retirement model dictates the time horizon, but in the case of cash value life insurance for tax free income, it’s a lifetime hold position. TAMRA compliant cash value life insurance can distribute tax free income via the withdrawals to basis and policy loans of gain AS LONG AS THE CONTRACT IS KEPT INFORCE FOR THE LIFE OF THE INSURED.
If the contract is surrendered, lapses or matures all gain in the contract whether it was taken as a policy loan or in the remaining accumulated values, triggers a phantom income tax event at ordinary income tax rates in the year of the contracts surrender and/or lapse. Contractual maturity dates are extremely important as is the family history when it comes to longevity. Every year the contract needs to be reassessed for distributions and the sustainability of the contract to remain in force. In force ledgers can indicate the monetary value of the contract, the proposed distributions that can be taken while keeping the contract in force. Many in force ledgers that display policy withdrawals or loans also display lapses in the future. It’s a real heads up call to educate yourself and insulate your practice by knowing the rules. This is a big one.