Regardless of what type of life insurance you choose it continues to be the first and foremost estate planning tool. Benefits are for loved ones and other individuals who have a financial dependency on the insured. But tax-exempt life insurance policies offer growth opportunities along with traditional coverage. There are 2 types of Insurance policies that provide this option.
- PAR – Participating Whole-Life Insurance
- UL – Universal Life Insurance
Two fundamental truths about financial plans are:
- The purpose of the investment is to generate income, and growth to help the loved ones (Designated beneficiaries)
- Tax is a single major factor that erodes the performance and ultimately the size of the estate.
Participating Whole Life Insurance
Apart from the insurance cost, extra funds can be contributed which goes to the PAR fund and grows tax-free. The assets in which insurance companies invest the PAR funds are:
- Bonds
- Equities
- Real Estate
- Mortgages
PAR Insurance distributes income, as dividends, which can be taken as cash, accumulated in the policy at a fixed interest rate, offset future premiums, and paid-up addition (PUA).
Premiums and PAR funds can’t be identified individually but the insurance company issues a statement that states the premiums individuals must pay, current cash value, and dividend rate.
The issue is that although growth is tax-exempt, any possible changes allowed to the policy unfortunately have tax consequences.
Universal Life Insurance
Due to bundled nature of the PAR policy, and demand for the unbundled policy, insurance companies introduced a Universal Life Insurance policy, in which premiums and Investment parts can easily be tracked.
In this policy there is a minimum and maximum premium that can be paid, minimum premium covers the cost of insurance, admin fee, and premium taxes, any amount above the minimum premium paid will go to the investment part of the policy, with which individual can invest in a wide variety of the investment vehicles available (Unlike PAR policy, in which company decides how to invest and where to invest) at their own risk.
Note, if only a minimum premium is made there will not be any tax-exempt growth, but policy coverage will stay active.
Full policy coverage and fund value is distributed to heirs’ tax fee.
Final words
Financial plans can be enhanced by UL and PAR policies, which can accumulate wealth and enhance estate. The choice between UL and PAR comes down to the individual’s risk and investment style.
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