Fraternity-Testvériség, 1988 (66. évfolyam, 1-4. szám)
1988-04-01 / 2. szám
FRATERNITY Page 13 TREASURER’S CORNER SINGLE PREMIUM/ SPWL—THE LAST OF THE TAX SHELTERS? William B. Puskas Life insurance is divided into two basic categories: TERM & WHOLE LIFE. With TERM INSURANCE, the insured person is covered for a specific period of time, and premiums cover only the company's overhead and profit plus the cost of providing the benefit should the insured person die. Since the risk of death increases with age, premiums rise as the insured grows older, so such policies often become impractical as the insured person ages. WHOLE LIFE POLICIES, as the name implies, cover the whole life of the insured. Premiums are paid either in equal amounts through the lifetime of the insured — an ordinary life contract — or for a set period — limited payment contract, i.e. 20- payment life, life paid up at age 65 etc. In either case, the early premiums cover more than the cost that would be involved in providing an equal amount of term insurance. The excess forms which is known as the "cash value" of the policy. In the case of an ordinary life contract, this cash value forms a growing part of the policy's value, reducing the company's risk in later years and thus allowing the payments to remain level. With a limited payment contract, it is assumed that the earnings on the cash value will be sufficient to cover all cost of the insurance element of the policy in the later years after premium payments have ceased. Premiums under a limited payment contract are substantially higher than they would be over the same period for an ordinary contract so the company can carry the contract without further payments. Thus, whole life policies and limited payment life policies have an investment element as well as a pure insurance element. Over the years, the U.S. Congress has allowed this investment element, known as the "inside build up", to go untaxed. Although this has cost the government money, Congress has deemed it worthwhile because it, encourages saving and because the presence of adequate insurance can hold down social safety net costs to the government. Life insurance proceeds paid at death are untaxed, so it is possible for the entire amount to escape taxation. Single Premium (SPWL) policies are simply an extreme form of limited payment contract. The policy holder makes one very large payment, and that is all. These policies maximize the investment element of the whole process and in general the policy holder only sits back and allows the cash value to build up. The inside build up will be substantial after a few years and at that point the policy holder may borrow on the policy up to the built up cash value. The loan can be structured so that the appreciation in the cash value covers the interest on the loan. Since loans on life insurance policies are not taxed, the net result is that the policy holder can have his money, his insurance policy minus the loan, all without tax or out of pocket interest cost. New Single Premium life policy premiums accounted for 48.5 percent of all premium receipts last year, and Congress is urged to eliminate the tax advantage associated with this product. Not surprisingly, SPWL policies appeal strongly to upper bracket tax payers, who also use them as gifts, donations. Prospects for some sort of modifications are almost certain, but some sort of favorable treatment of this new phenomenon in the insurance field will remain, and the Message to our People is — USE IT. Compiled and edited from the Washington Post by Wm. B. Puskas WANTED: DOCUMENTS & ARTIFACTS If you have materials which you would like to donate to the museum, archives or library, please contact the curator of the Bethlen Archives and Museum, Rev. Zoltán A. Kovács at (412) 238-6711 or please send the materials to the following address: Bethlen Home Archives & Museum P. O. Box 657 Ligonier, PA 15658
