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2021 Commentary and Looking Ahead to 2022

2021 Commentary and Looking Ahead to 2022

December 16, 2021

The life insurance marketplace continued a strong rebound following the seismic impact of COVID-19 from the previous year.

However, it was not without some challenges. With Democrats prevailing to claim Congress and the White House, tax bills introduced by Sen. Bernie Sanders and Sen. Chris Van Hollen in March set the stage for a year filled with stops-and-starts on significant proposed changes to estate, gift and income laws, culminating with the various proposals tied to the infrastructure package. Threats to grantor status, an acceleration of the lifetime exemption “sunset” and proposed increases to income and capital gains treatment dominated planning conversations in the third quarter.

Product pricing and structure also continued on the trend of increased cost “true” guaranteed products, reductions in interest crediting rates, and decreasing capped Indexed Accounts across most of the industry. From an underwriting standpoint, many carriers removed the restrictions put in place during the early stages of the pandemic, with some providers slowly bringing back crediting or table shave programs (underwriting guidelines that allow for risk class upgrades based on certain factors and products).

The lessons learned in 2021 are that while tax changes may be inevitable, the timing and scope of legislative action are always a cause for concern. Planning under today’s law for an uncertain future is the reality for clients and their advisors. Building flexible solutions with strategies that work under multiple tax scenarios will be the theme going forward.


Looking ahead to 2022

Here are some concepts, design ideas, and trends to keep an eye on as we head into the New Year.

The product marketplace will continue to move away from the No-Lapse Guarantee (NLG) / Guaranteed Universal Life (GUL) marketplace. Cash value based permanent policies that feature a secondary death benefit guarantee that can be “dialed” to various duration will be the primary solution for those looking for premium-based guarantees to and through expected mortality. Depending upon the need, these policies can be designed to have a strong guarantee underlying a policy that would respond favorably to cash accumulation, perhaps to a point where the death benefit would start to increase after reaching corridor.

Permanent life insurance policies can be incorporated as an asset class of a portfolio. Equity markets continued a strong bull run aided by the massive amounts of liquidity injected by the Federal Reserve. The risk inflation, the spread of variants, and the geopolitical landscape may cause concern in how the market will respond going forward. By including secondary guarantees discussed above, the strategy can possess little to no correlation to equity or interest-sensitive markets.

Survivorship policies with “wait-and-see” premium designs allow clients flexibility. This strategy allows clients to acquire permanent death benefit protection at current ages and insurability through a single premium illustrated to maintain coverage over a period of time. Each year, adding additional funds to the policy is evaluated based on portfolio returns, cash flow and gifting needs, and changes to estate, gift or income/capital gains taxes. This allows for a retention of assets not needed to fund insurance at this time and provides multiple options for how to maximize the policy depending upon estate growth.

Consider IRA assets as a source of life insurance premium payments which can provide a more tax-efficient legacy. With the SECURE Act essentially eliminating “stretch” IRA’s, many IRA beneficiaries will incur tax consequences. Some clients that do not need IRA assets for living needs can take IRA distributions and utilize as premium for a life insurance policy. This strategy replaces a legacy asset that is fully taxable to the beneficiaries with a tax-free death benefit. Combing the wait-and-see approach with IRA distribution planning can “lock in” a death benefit prior to retirement age with the intent to fund resumed.

Cash value accumulation designs can create a tax diversification element to a portfolio. When properly designed, the tax properties of permanent life insurance allow for cash value to accrue tax-free and be accessed tax-free. Funded with after-tax dollars, the life insurance “wrapper” provides tax advantages without income testing contribution limits associated with Roth IRAs. Independent of the type of policy issued, the policy owner pays policy charges (designed to be minimized through the life of the policy) instead of taxes.

The “sunset” of the higher lifetime gift tax exemption is still scheduled for January 1, 2026 – prefunding premiums to an Irrevocable Life Insurance Trust (ILIT) maximizes estate reduction. For individuals with taxable estates in excess of the current amounts can make significant gifts in the coming year. This gift provides liquidity for future premium payments to Trust-owned life insurance; cash within the Trust can be invested with potential to grow outside of the estate with a portion of holding used to fund insurance an annual basis. This “double barreled” approach allows for assets to continue to be invested to pursue market growth while stretching out premium payments as opposed to funding insurance with a single large premium.

Life insurance provides multiple benefits in Spousal Lifetime Access Trust (SLAT) planning. The primary feature of SLAT planning is access to have one spouse to gift assets outside of their estate while allowing the beneficiary spouse flexibility to access the trust assets during life. A major potential drawback to non-reciprocal SLATs is the loss of indirect access income to the surviving spouse after the passing of first partner. By having each SLAT purchase and own insurance the grantor, the death benefit for the passing spouse increases the assets within their SLAT to the survivor (as Trust beneficiary). This can essentially reimburse for the lack of access for the now dead beneficiary of the surviving spouse’s Trust. Taking it a step further, if permanent insurance is used as the funding mechanism, the cash value could be accessed in the future as a tax-free income source for beneficiary distributions.

Premium financing continues to be an attractive funding alternative for legacy or retirement planning. The low-interest rate environment and access to capital markets is available, clients that are experienced and willing to add the risk and complexity of leverage can pursue a premium financing strategy to pay the premium on permanent life insurance. The insurance product’s potential to outperform the low borrowing rate cost creates an arbitrage opportunity. Premium Financing can also be used as a way to fund insurance while keeping other assets invested to pursue growth and/or reduce taxable gifts needed to pay premium.

The Takeaways

Life insurance continues to be a valuable tool for tax, legacy, and estate planning; it is a product that features both favorable tax treatment (income tax-free death benefit, ability to remove the death benefit out an estate, tax-free cash value accumulation, and distribution) and risk/return characteristics unique as an asset class.

As always, existing life insurance portfolios should be reviewed and analyzed to determine if the policies continue to be the best option to fit current needs. Specific items to consider are term conversions, optimizing the mix between individual and second-to-die policies, combining death benefit and Long Term Care protection through available riders, “warehousing” death benefit through cost-effective term insurance, and measuring policy performance versus the As Sold and new alternatives in the marketplace.


For Educational Purposes Only – Not to be relied upon as financial, tax, or legal advice.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure you are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges; if a policy is surrendered prematurely, there may be surrender charges and income tax implications.