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Cash value accumulation refers to the equity built up tax deferred inside a permanent life insurance policy. Just like other industries, life insurance products are designed for specific financial purposes (similar to an SUV being designed for higher, off-road ground clearance and a sports car designed to go handle well on paved roads). Some permanent life insurance products are not designed to develop much equity while others are designed to accumulate and distribute cash value with substantial tax advantages during the lifetime of the insured. Choosing an accumulation method (fixed, indexed or variable) is a matter of ascertaining personal risk tolerance and overall asset allocation need or preference. Funding a policy to accumulate cash value usually requires premiums that are larger than other permanent policies because the additional premium is designed to accumulate equity in this unique tax-deferred savings vehicle. Owners of such policies should understand that they are intentionally purchasing less death benefit coverage than what their premium could otherwise buy in order to have a reasonable portion of their premium go toward developing equity that can be used for other purposes later in life.

Life policies geared for cash value accumulation are often viewed more as an asset allocation tool with an integrated death benefit because in addition to paying a benefit at death, an additional primary purpose is to withdraw equity down the road. Cash value can be removed tax-free via withdrawals of principal or loans. Fixed or indexed crediting policies can add balance to a portfolio otherwise weighted more heavily toward variable type accounts with market based returns.

Understanding the substantial tax benefits of withdrawing cash value earnings tax-free, congress set upper limits on how much premium can be deposited into a life insurance policy. The limits increase as the amount of death benefit purchased increases. If an owner puts too much in during the first seven policy years, the policy can become a modified endowment contract (MEC). A MEC does not allow earnings to be withdrawn tax-free and intentionally eliminates much of the cash flow benefit generated by cash value accumulation policies. The premium limits for cash value policies are larger than limits placed on other products, such as qualified plans and IRAs, allowing consumers to use life insurance as an important vehicle to accumulate and distribute wealth with substantial tax benefits. Trilogy representatives help policy owners avoid MEC’s and design cases that retain the unique tax benefits afforded only to life insurance under IRS code section 7702.

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