Understanding the Tax Implications of Life Insurance, Part 1
Q: The tax ramifications of life insurance can be extremely complex, and, as such, it can be a fairly intimidating issue for some producers to address. Can you talk a little bit about the steps you took in your own career to become both more knowledgeable regarding life insurance in tax planning and more confident in sharing that knowledge and advice with prospects and clients?
William H. Black Jr., CLU, Winter Park, Fla., president of W.H. Black and Company and PensionSite.org: I was fortunate in that the individuals I worked with when first entering the business focused on the tax implications of life insurance. Qualified plans were the main focus of the practice, and, as such, the tax ramifications of the plan had to be communicated to the client and the client’s advisors — that is, the CPA and local counsel. How did I learn the complex income tax issues? I learned in several ways: in consultation with those I worked with, as they would explain it to me in the normal course of on-the-job training; by reading industry publications and periodicals; and by reading National Underwriter’s fantastic resource, “Tax Facts.”
As advisors, we must understand the client’s needs and the tax implications of our recommendations. The recommendations we make should be vetted by the client’s tax advisors. I insist on it. Therefore, it is imperative that I can communicate intelligently with the client’s CPA, so as to explain the reasoning for the recommendation, the tax benefits and, if necessary, the cites to back up my points.
Douglas R. Peete, CLU, ChFC, Overland Park, Kan., founder of Douglas R. Peete & Associates: I spent a great deal of time early in the morning and at night, reading and learning. I rarely used selling time for technical learning if at all possible. ChFC courses, MDRT, newsletters, CCH — Commerce Clearing House — and many publications got me up to speed technically. Also, the International Forum meetings and recordings were critical.
William M. Upson, CLU, ChFC, Walnut Creek, Calif., founder of Strategic Asset Management Group: I came into the insurance industry with a background in tax planning for high-net-worth individuals and corporations. My early interest in the industry centered on how these entities could use the tax code to their respective benefit or benefits, as well as honor charitable needs. I found upon entry, earning an insurance agent license, I was just scratching the surface of the complexity of the products offered and how to best use them for the entities I mentioned earlier. I became fascinated with seminars I could attend dealing with these types of issues and got excited about taking additional courses with The American College on the complex subjects of taxation regarding insurance products and the respective benefits they could provide if used properly.
I also found I was being brought into meetings to explain these topics for interested prospects. At first, I demurred at the request, but I quickly realized I was not willing to test my knowledge so early in my career in these areas. I was wisely advised to bring in expert talent to handle these complex meetings, so they could “win the day,” and the sale, while I could listen and absorb the information for future reference. In short order, I did not need the assistance, but did establish the counsel of these individuals with which I had shared commissions in the past. The process helped me ramp up quickly from those humble beginnings. I now train CPAs, CFPs and attorneys, as well as insurance agents, on the proper planning for long-term care coverage, as well as estate planning and IRA distribution planning.
Q: Some producers feel that the only areas where life insurance and taxes cross paths with any degree of significance are in the more advanced planning areas, like wealth transfer planning, executive benefits, pension planning and estate planning. Do you agree with that assumption, or are there other markets or other situations in which life insurance is particularly relevant to tax planning?
Peete: I would agree that the areas you mentioned account for the majority of tax planning.
Upson: I do not agree at all that tax planning with insurance products is only for the advanced planning markets. The need for proper tax planning covers all spectrums of the life planning universe. As advisors, we are constantly seeking to use our time to its highest and best purposes. If we do not educate and teach those consumers aspiring to be financially independent, then who will the next generation of agents assist? The market for our services can only expand as we reach and teach more of the working population of this country. Without our help, there will be no middle class, and the upper class will be paying far more tax than they should legally need to pay.
Black: Life insurance has tax implications whether one is aware of those implications or not. Being unaware can cause the policy owner or beneficiary to pay unnecessary income, estate or gift tax. For example, an advisor can create transfer-for-value problems to the client without the case being one of “advanced planning.” Changing a beneficiary designation improperly can create gift taxes. Improper policy ownership can create estate tax issues, as can improper ownership changes. None of these examples are necessarily involved with “advanced planning.”
By Charles K. Hirsch, CLU for LifeHealthPro.com. Charles is a contributing editor to Life Insurance Selling