Will Higher Taxes and Inflation Drive Life Insurance Sales?
There has been a flurry of strange economic news in the past year. Higher tax rates have been promised by the current administration. Job vacancies with no one to fill them have slowed what should have been blockbuster post-pandemic employment numbers. Interest rates, at historic lows for years, are threatening to creep back up. Supply chain breakdowns have increased the cost of everything from lumber to gasoline while the threat of inflation looms in the wake of unprecedented government spending.
Frankly, none of the news on the economic front bears easy tidings for most businesses in the United States at the moment. For us in the life insurance industry, however, these challenges present a unique opportunity to help our clients hedge against the future while protecting their finances today. Once again, the creativity of life insurance and annuity products, unique to our industry, will allow our clients’ portfolios a respite in the eye of the storm.
Changes to Section 7702 Could Help Clients Put More Money Into Tax-Friendly Policies
New changes to Rule 7702 effectively lowers the assumed interest rate of cash gains on a life insurance vehicle from 4% to 2%. This is the assumed minimum interest rate used in the CVAT and GPT tests that must be passed in order for a life policy to retain its tax-friendly status and not be viewed as an investment by the IRS.
Lowering the interest rate to better reflect current interest rates (as opposed to those of 1984!) it allows more premium dollars to flow into the policy without risking a failure of either test. Essentially, this means that your clients will be able to protect more money in their tax-deferred policies. This is an enormous change that will impact our industry and our ability to better serve our clients as they seek safe harbor for their hard-earned dollars.
Corporate and Income Tax Increases Makes Deductible Policies More Attractive
For your high net worth clients and business accounts, the proposed Federal Government’s increase in both the corporate and income tax rates creates a vacuum for tax security. Life insurance can fill that vacuum through tax-deferred growth and deductible income opportunities.
There are many tools at our disposal to help our business-owning clients offset these higher taxes. By offering life insurance to their employees, they can deduct it from their corporate tax burden while retaining top talent and creating a competitive hiring atmosphere.
Split-dollar, life insurance in a qualified plan, and executive bonus plan can be excellent tools to lower the tax burden for businesses. Anytime that major changes come to the tax table presents an opportunity to assist business clients with planning and investment management. Life insurance and advanced planning provide a platform for those discussions. Doing right by our business clients means knowing their options and setting them up for success regardless of the tax environment of the day.
Waiting Out the Storm For Sunnier Times
As the cost of goods begins to climb, our clients will see their dollars devalued. What once bought a gallon of gas, will now buy ¾ of a gallon. Food, materials both raw and manufactured, and products we use every day combined with a devalued dollar will see our clients looking for ways to protect their finances while they wait for better news. While a tax-free death benefit is still one of the best deals in any portfolio, the real value-add in times of increased taxes and inflation is the ability to grow and borrow cash, tax-deferred while waiting out the storm.
It is often said that death and taxes are the only guarantees in life. While this would make a horrible slogan for selling life insurance policies, the fact that we can offer our clients the ability to avoid the higher tax rates of the present moment and kick the burden down the road to a hopefully more tax-friendly time is a huge win.
The reality is that even though it appears that high-income earners will be hardest hit by some of the news coming from D.C., every one of our clients is going to experience a strain on their finances in one way or another. We may begin to see a seismic shift in perception for clients who previously steered away from more complex permanent policies. Many clients may not realize that with increases in taxation, accessing funds in their 401Ks or mutual funds is not nearly as attractive as borrowing from their life insurance policy. It is our job to help educate them on the benefits these tools can provide for their long-term financial well-being.
The Future Is Ours to Create
We have a responsibility to our clients to provide them with the options, products, and expertise that helps secure their financial legacies. The certainty of life insurance is a perfect antidote for uncertain markets. At Trust Financial, we want to keep you at the forefront of developments in the industry and how to apply best practices in serving your clients towards their financial and life goals. We have abundant resources to assist you in navigating today’s challenges on behalf of your clients. Combined with our network, tools, and experience, our aim is to see every one of your clients’ portfolios thrive even during adverse economic conditions. Let us know how we can best serve you.
