In times of economic uncertainty, new trends always seem to emerge. A recent one that has come to light is the shift toward cash value life insurance for wealthy individuals. One variable that could be attributed to this trend is the perception of a future hike in taxes, which makes this tax-free investment increasingly more attractive to the top tax bracket. Here are some recent facts that I came across that illustrate this new trend:
• In 2007, a striking 55 percent of tax-free investment gains inside universal life and whole life policies belonged to the wealthiest 10 percent of U.S. families. In fact, 22 percent of these assets belonged to the richest one percent of American families. (That data comes from the Federal Reserve.)
• Also in 2007, the life insurance industry research group LIMRA conducted a survey for The Wall Street Journal. It found that policies for $2 million and more comprised almost 40 percent of the face value of whole life and universal life policies sold that year. In 1997, large policies made up just 10 percent of the life insurance market; in 1987, they made up one percent of it.
• Prudential Financial Inc. says 31 percent of its life insurance policy sales in 2009 were made to households with investable assets of more than $250,000. In 1999, that demographic accounted for just 19 percent of its life insurance policies in force.
When you consider that households with adjusted gross incomes above $250,000 face a 0.9 percent income tax increase and a new 3.8 percent investment income tax in 2013, you have yet another factor that may contribute to the trend.
With the recent volatility in the global market, our firm has really looked hard at alternative assets to minimize fluctuations. Cash value life insurance can be a great alternative if implemented correctly. It has been my experience that wealthier individuals tend to prefer cash value life insurance as one of their main alternative asset classes. If your advisor is not recommending cash value life insurance as part of your portfolio, you might want to ask his or her rationale. The trend points to the fact that wealthy individuals are placing more and more of their assets in these types of investments and maybe they know something your advisor doesn’t. FBN
Written by Bill Babb, President of Babb Financial Group, LLC. www.babbfinancialgroup.com