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Permanent Life Insurance Cash Value Accounts Get a Boost
A revision of the federal tax code will make it easier for permanent life insurance policy holders to contribute more money to their cash-value accounts.
Permanent life insurance policies feature both a death benefit and a savings component, but lawmakers in 1984 were concerned that investors were treating permanent life insurance policies too much like investments. So, to regulate that they implemented an interest-rate floor to determine whether permanent life insurance policies are too much like investments to qualify for tax advantages granted to insurance policies.
However, during the last decade, rates have dropped so low, the 1984's four percent minimum limit was well above long-term government-bond yields.
The new law, which took effect Jan. 1 for new life insurance sales will allow policy owners to put more in the savings portion.
One of the benefits of a permanent-life policy is that the owner can defer taxes on their investment gains, and their beneficiaries receive the death benefit tax-free. Policy holders also can use money from the policy savings account to help fund the policy’s future costs or for other uses. The 1984 rule, Section 7702, effectively stopped policyholders from putting huge sums of money into policies to avoid tax bills.
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