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What Is It?

Permanent Cash Value Life Insurance With Similarities to Whole Life And Universal Life

Current assumption whole life insurance is a type of permanent, cash value life insurance that is a variation of whole life with some similarities to universal life insurance policies. This type of policy provides premiums that are fixed for specified periods and recalculated on predetermined anniversary dates. With some policies, the death benefit is also recast. Current assumption whole life mimics universal life in the manner in which interest is credited and expenses are identified and charged. Current assumption whole life (and individual insurance companies' variations) are sometimes referred to as interest-sensitive whole life, indeterminate premium whole life, or fixed premium universal life.

When Can It Be Used?

You Have a Need for Insurance and a Desire for Fixed Premiums with Potentially Higher Investment Returns

Current assumption whole life insurance is appropriate when you have a need for life insurance and want the discipline imposed by the fixed-premium feature. The fixed-premium feature forces you to make payments and therefore forces you to save, benefitting you through cash value accumulation. In addition to forced savings, current-adjustment whole life policies include the potential to participate in positive investment returns through the payment of a guaranteed return and the potential for excess interest (more about those later).

You Are Willing to Assume Some of the Risk of Adverse Investment or Mortality Experience

In exchange for a potentially higher return on your cash value, you bear some of the investment risk--the risk that the investments have unfavorable returns (and you don't get a higher return). You also bear a portion of the mortality risk--the risk that the insurance company will face a mortality rate higher than expected (which means higher death benefit payouts for the insurance company). Periodically, your policy premiums may be increased or decreased to reflect the mortality experience of the insurance company since the previous determination date.


Provides Benefits Common to All Cash Value Insurance

Like all other permanent, cash value policies, a current assumption whole life policy contains the following features:

  • Cash value grows tax deferred
  • Cash value can be borrowed against

Policy Cash Value Receives Guaranteed Interest Rate

With a current assumption whole life insurance policy, the insurance company manages your cash value and guarantees a minimum return. Even if the insurance company's investments perform poorly, you still receive the guaranteed minimum rate of interest on your cash value. This provides you with a predictable growth rate on your cash value and can be important when you have specific future financial goals, such as supplementing your retirement or paying your child's college tuition.

You Can Participate In Favorable Investment Returns Through Excess Interest Rate (Bonus Money!)

In addition to the guaranteed rate, you may also receive an excess interest rate on your cash value. The excess rate payments allow the insurance company to share favorable investment returns with policyowners and maintain a competitive position in the market. The method of determining excess interest varies by company, and most companies make adjustments to excess interest credits.

Caution: Some companies require a partial forfeiture of excess interest in the event of policy surrender.

Your Premiums Are a Fixed Amount Between Redetermination Dates

When you buy current assumption whole life, your premium payments are adjusted on specific anniversary redetermination dates. Once set, your premium remains fixed until the next redetermination date, making budgeting for your payments easy to plan for between dates. Policy redetermination dates can occur as often as annually, but two- and five-year intervals are also common.

Policy Excess Cash Value May Be Withdrawn

With a current assumption whole life policy, you may have the ability to withdraw excess cash value accumulations without affecting your policy or your death benefit. Generally, you can make tax-free withdrawals up to the amount of your policy basis.

Caution: There may be a surrender fee charged for partial or full policy surrenders.


Policy Loans Affect Cash Value

When you take a policy loan, the loan proceeds you receive come from the general fund of the insurance company. The loan amount is not actually withdrawn from your cash value account. However, an amount of your cash value equal to the loan amount is marked as collateral for the loan. The collateral amount doesn't receive credit for the actual returns of the underlying investment. Instead, this amount of your cash value receives credit equal to a specific policy loan rate during the course of the loan. Because a portion of your cash value is not participating in the actual investment return, your cash value growth is affected for the duration of the policy loan.

Caution: There is generally no requirement that your policy loan must be repaid, but for any unpaid loan balance, interest accrues on a compound basis. If the value of your outstanding policy loan plus the accrued interest equals the remaining cash value, the net cash value becomes zero, and the policy terminates.

Policy Loans Affect Death Benefit

When there is an outstanding policy loan, a portion of your cash value equivalent to the loan amount receives the special loan policy rate instead of the actual investment return. This can affect the cash value growth. In addition, if you die with an outstanding policy loan against your account, the insurance company receives the loan repayment from the death benefit first. After the loan is repaid, the balance of the death benefit is paid to the policy beneficiary.

Policy Will Lapse If Premium Isn't Paid

There is no premium flexibility with current assumption whole life. You are not allowed to change your premium amount or skip payments. If you don't pay your premium, your current assumption whole life policy will lapse.

Tip: Some people like the concept of forced payments because it results in steady cash value growth.

Policy Surrender in Early Years Can Be Expensive

If you decide to surrender (cancel) your policy during the first 5 to 10 years, you could face a substantial loss. Most current assumption whole life policies assess surrender charges instead of front-load fees to recover initial policy expenses and commissions. The surrender charges tend to decrease in amount and may not apply after 10 or 15 years into the policy.

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How to Do It

Determine Your Life Insurance Need and Overall Financial Goals

Before you buy life insurance, you need to know how much insurance you need. Insurance need is based on numerous factors, including your current age and income, marital status, number of incomes in the household, number of dependents, long-term financial goals, level of outstanding debt, and existing insurance and other assets. Your overall financial, estate, and tax-planning goals and your planning horizon should be considered as part of your insurance need evaluation.

Tip: Consult your financial advisor concerning your need for insurance. Some of the calculations can be complicated.

Complete the Insurance Application and Name Your Beneficiary

Before the insurance company can issue your policy, it must receive a completed application form. The application includes general health questions, and the process may include a physical examination, which is usually paid for by the insurance company. A critical part of the application is the beneficiary designation--the naming of the person or persons to receive the policy proceeds when you die. Unless you make an irrevocable beneficiary designation, you can change the beneficiary designation by adding or removing a beneficiary or changing the percentages of the proceeds distribution.

Buy the Policy and Pay Your Premium

It is all well and good to know how much insurance and what type of policy is appropriate for your particular situation. But if you don't actually buy the policy, you haven't accomplished your goal! Not only that, but insurance becomes more expensive with age, so you won't be doing your wallet any favors by delaying. An additional risk of delaying is that your health could change adversely. In other words, just because you are healthy and insurable today doesn't mean you will be that way later. Deterioration in your health can mean higher premiums or an insurer considering you to be uninsurable.

Review Your Insurance Need Periodically

The amount of life insurance you need may change over time and with the occurrence of lifetime events. As a result, you should periodically review your life insurance coverage. As a rule, you should review your coverage every three years. Major lifetime events (such as the purchase of a home, birth or adoption of a child, and a change in marital status) are also appropriate times to review your coverage. By routinely checking your insurance need you can prevent the mistake you can't fix after you die; not having enough life insurance.

Tax Considerations

Income Tax

Premium Payments Not Deductible

Life insurance premium payments are not tax-deductible expenses.

Policy Loan Proceeds Generally Not Taxable

When you take out a loan against your life insurance policy (except a policy classified as a modified endowment contract (MEC) ), the amount you receive is not considered taxable income. This rule applies even when the loan is larger than the amount of premiums you have paid in (except in the case of a policy classified as a MEC).

Example(s): You own a life insurance policy (non-MEC) with cash value of $20,000. Your basis in the policy is $14,000. You decide to take a policy loan to pay your daughter's college tuition. Under the terms of your policy, you are allowed to take a loan for an amount up to 90 percent of the policy cash value--in this case, $18,000 ($20,000 x.90). You are not currently subject to tax on the amount of the loan, even though the loan is larger than your basis.

Caution: If you cancel your policy while there is a loan balance outstanding, you could be subject to income tax on the amount of the loan (plus accrued but unpaid interest).

Policy Loan Interest Not Deductible

Interest you pay on a policy loan generally is not a tax-deductible expense (under certain circumstances, interest on loans used for business or investment purposes may be deductible).

Policy Cancellation May Be Taxable

If you cancel (surrender) your policy for cash, the gain on the policy is subject to federal income tax. The gain on a canceled policy is the difference between the net cash value and loan forgiveness amounts and your policy basis.

Caution: You may be subject to surrender charges. Check your policy.

Caution: Policy fees and expenses are usually charged against the policy in the first few years. As a result, policy surrenders during the first few years of the policy may provide little cash value.

Caution: If you surrender your policy while there is a loan balance outstanding, you could be subject to income tax on the amount of the loan (plus accrued but unpaid interest).

Policy Lapse May Be Taxable

If you allow your policy to lapse, you could be subject to income tax even if you don't receive any cash from the policy. A policy lapse can occur when you stop paying premiums and don't have cash values available that can be used to pay the premiums. If you have an outstanding policy loan, it is possible you could be subject to tax on the amount of the loan plus any accrued but unpaid interest.

Death Benefits Generally Not Subject to Federal Income Tax

Policy death benefits are generally not subject to federal income tax. One notable exception is when the policy has been sold or otherwise transferred for valuable consideration by one policyowner to another, subjecting it to the transfer-for-value rule.

Gift and Estate Tax

Policy Proceeds Not Considered Gift to Beneficiary

When the proceeds of your life insurance policy are paid to a beneficiary, they are not treated as a gift for gift tax purposes. However, the insurance proceeds are generally included in your gross estate and will be subject to estate tax if they are included in your estate.

Policy Premium Payments Generally Not Subject To Gift Tax

When you are the owner of a policy on your own life, with another party as the beneficiary, premium payments made by you are not considered a gift to the beneficiary for gift tax purposes. If, however, someone else pays the premiums on a policy you own, the premium payments are considered a gift to you and may be subject to gift tax. Policy premiums generally qualify for the federal annual gift tax exclusion.

Policy Proceeds Included In Estate Value in Most Cases

The proceeds of a life insurance policy are included in the value of your estate if you held any incidents of ownership at any time during the three years before your death or if the proceeds are payable to you or your estate or executor. Incidents of ownership include (but are not limited to) the right to change the beneficiary, take out policy loans, or surrender the policy for cash.

Policy Proceeds Often Exempt From State Inheritance Tax

In many states, life insurance proceeds are exempt from state inheritance taxes. Consult your state's laws regarding tax treatment of life insurance proceeds.

Questions & Answers

If You Are Covered Under A Group Life Insurance Policy Through Your Employer, Do You Still Need A Personal Policy?

Yes, you should have your own policy outside the group coverage provided by your employer. The policy through your current employer is more than likely not portable--meaning that when you leave the company, your life insurance coverage will not go with you. It is very common for people to change jobs numerous times during their career. Even if you plan to stay with your current job until retirement (assuming your job exists that long), what will you have for coverage afterward? The best way to make sure your family is provided for when you die is to have your own insurance coverage in addition to any provided by your employer. While conversion coverage may be available, it may be expensive and it may offer limited coverage. In addition, it may not meet all of your coverage needs.

Can Your Spouse Own A Policy on Your Life And Name Your Child As Beneficiary?

This can be done, but it shouldn't be. When the insured, the policyowner, and the beneficiary are three different parties (sometimes referred to as the "unholy trinity" or the "Bermuda triangle"), the death benefit may be subject to gift tax.

Can You Name Your Spouse As The Beneficiary on Your Life Insurance Policy If He Or She Is Not A U.S. Citizen?

You can, but there could be estate tax consequences. When your spouse isn't a U.S. citizen and is the beneficiary on your life insurance policy, the death benefit isn't protected by the unlimited marital deduction.

Should You Buy Life Insurance on Your Children?

In some instances it is advisable to buy life insurance on your children, but it shouldn't be done until the appropriate levels of coverage are in place on the lives of the family breadwinner(s) and a non-wage-earning spouse engaged in the care of the children.

Should You Buy Term Insurance or Cash Value Life Insurance?

It depends upon your personal circumstances. The first issue to resolve is not what type, but how much life insurance you should buy, and how long your coverage is needed. Once you can answer the quantifiable insurance question, you can move on to the financial aspect. It is possible that the amount of coverage you need is so large that the only affordable way to get the coverage is with lower-premium term insurance. If you can afford the needed coverage with either type of policy, then you should think about the financial aspect of which type of policy to buy, considering such factors as your tax bracket and the rate of return you could receive on alternative, similar risk investments.

With Cash Value Life Insurance, Does Your Beneficiary Get The Death Benefit Plus The Cash Value Amount?

Maybe. Check the policy. Many cash value policies are written in such a way that the beneficiary receives only the face amount of the policy at death. The cash value is applied to partially pay off the death benefit. There are policies that will pay the beneficiary the face amount plus the cash value, but the premiums tend to be higher. Don't just assume that your policy will pay both amounts--check the policy and/or ask your agent.

Should You "Invest" In Insurance?

It generally isn't a good idea to buy insurance unless you need it. If you want to invest money, many options are available. When you need insurance, there are policy types available that can serve the dual purpose of insurance protection and cash value investments. The bottom line is, don't buy insurance because you are looking for an investment; buy insurance because you need the protection.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of  The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


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