A small change to the tax code that went into effect on January 1, 2021 could have a big impact if you’re looking to buy permanent life insurance.
The year-end spending package approved by Congress and signed by the former president lowers the minimum interest rate for permanent life insurance policies. The change could potentially boost the wealth of policyholders.
According to an article in the Wall Street Journal, the interest rate floor has been in place since 1984. The purpose was to discourage policies that were mostly investment vehicles with a thin layer of insurance. But interest rates have fallen so far in the past decade that the old minimum was far above the current long-term government-bond yields. The tax code change brings the minimum down to our present reality.
What is Permanent Life Insurance?
Permanent life insurance is a combined savings and death-benefits policy. When you pay your premium, a portion can be invested in savings. This makes your policy a cash asset as well as insurance protection.
When you die, your beneficiaries receive a tax-free payout.
In addition, when you have built up enough cash value, you can take out tax-free loans against your policy.
There are four main types: whole, universal, variable, and variable universal.
Whole insurance typically has a fixed interest rate and premiums.
Universal, variable, and variable universal typically have fluctuating or variable interest rates.
What Has Changed with Permanent Life Insurance?
What is most important for policyholders to know is the new lowered rate allows you to put more money into the savings portion of the policy.
Under the change, the benchmark interest rate has dropped to 2%. It was previously 4%. After this year, it will switch to a floating interest rate.
A summary by the U.S. House staff said the revision will give consumers “access to financial security via permanent life-insurance policies.”
The reduction in the interest-rate minimum went into effect on January 1 on new sales. So if you’ve been considering permanent life insurance, this change just made it more appealing. The change could give you a greater tax advantage for your investments.
Unfortunately, the change does not affect people who already hold a policy.
Farris Insurance Can Help
If you’re looking to open a new policy, you can take advantage of the new lowered rates and the ability to put more in savings. Farris Insurance can help you decide on the type of policy that’s right for you.
We serve all of Northwest Arkansas, including Springdale, Fayetteville, Bentonville and Rogers. Contact us at 479-756-6330 to speak to one of our agents.