The Consolidations Appropriations Act of 2021, enacted at the end of 2020, contained a noteworthy change to how life insurance contracts are defined. Specifically, U.S. Internal Revenue Service (IRS) Tax Code Section 7702 was amended to change the minimum interest rates used in calculating the premium limits under which policies can qualify for preferential tax treatment. In short, permanent life insurance contracts that incorporate the new rates enable far greater funding without increasing the death benefit amount, without adding to the underlying cost of insurance, and without exceeding the previously lower limits at which the policy would become a Modified Endowment Contract and lose the preferential tax treatment afforded to life insurance contracts. In February 2021, E&Y published the findings from their independent study that explored what benefit, if any, two products (permanent life insurance (PLI) and deferred income annuities with increasing income potential (DIA IIP) had on meeting investor savings and protection needs. They compared five strategies:
Investment strategies alone
Term insurance and investments
PLI and investments together
DIA with IIP and investments together
PLI, DIA with IIP, and investments together
Complexities aside, “strategies involving PLI and DIAs with IIP excelled overall against investment only approaches.” Combined with the 2021 changes to IRS Section 7702, the E&Y study begs investors to consider using advisors who are savvy about using a coordinated financial planning approach that includes both investments and insurance-based strategies.