When most people think of life insurance, they only think about what happens after they’re gone. But for clients with the right type of policy, life insurance isn’t just a safety net - it can be a financial tool.

And as a tax professional, you’re in a prime position to help them tap that hidden value.

Today, we’re breaking down how permanent life insurance policies offer living benefits that can provide liquidity, tax planning advantages, and retirement flexibility - without triggering tax chaos or compromising long-term goals.

🔍 First: Not All Life Insurance Works This Way

Before exploring cash-out options, we need to distinguish between term and permanent life insurance:

• Term insurance is “pure” insurance—if the insured dies during the policy’s term, the beneficiaries get paid. If they don’t, nothing happens. There’s no cash value to access.

• Permanent insurance, on the other hand, includes a savings component called cash value, which grows tax-deferred over time and becomes available during the policyholder’s lifetime.

The most common types include:

• Whole life – fixed premiums, fixed growth

• Universal life – flexible premiums and coverage

• Indexed or Variable life – growth tied to market indexes or investment performance

• Variable Universal Life (VUL) – combines market exposure with premium flexibility

Once enough time and premiums have built up the policy’s value, clients can start using it like a financial resource. But how they access that money matters. (Read along to see our breakdown into this strategy)

The Latest Rundown – News in Tax & Advisory 🗞️

1. AICPA’s 2025–26 Priority Guidance Plan Recommendations 📝

The AICPA has submitted 183 specific recommendations to the IRS’s 2025–2026 Priority Guidance Plan. Key themes include pushing for simpler tax rules, clear definitions, safe-harbors, and consistency across the Internal Revenue Code.

2. Rev. Proc. 2025‑23: Automatic Accounting-Method Changes

The IRS released Revenue Procedure 2025‑23 (effective June 9, 2025), simplifying automatic accounting method changes for Forms 3115. It updates prior guidance (Rev. Proc. 2015‑13) with 17 significant adjustments.

3. Lessons Learned from the 2025 Filing Season

Despite IRS staffing challenges and significant budget cuts (approximately 20% fewer employees and a proposed 37% budget reduction in FY 2026), the 2025 filing season proceeded smoothly. Highlights include:

• Effective implementation of disaster relief provisions

• Increased taxpayer focus on credits like EITC, CTC, and energy incentives

• Importance of thorough client intake and clear communication.

🔎 What Tax Professionals Should Do Now:

• Submit feedback to the IRS on proposed Circular 230 revisions.

• Explore Rev. Proc. 2025‑23 to advise clients making accounting changes.

• Adjust workflows for digital-asset reporting under Notice 2025‑33.

• Consider requesting OPR records if under review.

• Plan client communications around estimated payments
  

Continuing: “Life Insurance isn’t just for Death”

💸 Withdrawal, Loan, or Surrender? Choose Wisely.

Partial Cash Withdrawals allow policyholders to tap into their cash value without cancelling their coverage. These withdrawals are tax-free up to their cost basis—which is typically the total amount of premiums paid. However, they reduce both the cash value and the eventual death benefit.

Example:
If your client paid $100,000 in premiums and withdraws $250,000, only $150,000 will be taxed as income. The rest is tax-free.

Policy Surrender is more aggressive—it terminates the coverage and triggers a payout of the remaining cash value (minus surrender charges). Taxes apply to any gains over the cost basis.

Be aware: surrender charges can be high—up to 35% in early years. Always review the policy’s surrender schedule before recommending this move.

Policy Loans are often the most flexible option. These are tax-free and don’t require repayment while the client is alive. However, unpaid balances plus interest are deducted from the death benefit.

The good news? The cash value still earns interest even while the loan is outstanding. For savvy clients, this creates a low-interest borrowing tool that doesn’t disrupt their portfolio or trigger capital gains.

🔔 Caution: Overfunding a policy too quickly can trigger the IRS’s Modified Endowment Contract (MEC) rules—resulting in painful tax consequences. If classified as a MEC, withdrawals become taxable and may even incur early distribution penalties. Always watch the 7-pay limit when contributing additional premiums.

🏦 For Older Clients: Policy Sales and Viaticals Offer Alternatives

Some clients—particularly those over 70 or with deteriorating health—may consider selling their policy to a third party in a life settlement.

Here’s how it works:

• A buyer (typically a bank or fund) takes over the policy, pays the premiums, and collects the death benefit later.

• Your client receives a lump sum today, often more than the surrender value, but gives up the coverage.

• Taxes: Proceeds up to the cost basis are tax-free; gains between the basis and surrender value are ordinary income, and anything above that is taxed as a capital gain.

For terminally or chronically ill clients, viatical settlements offer an even better outcome: the entire settlement is tax-free, and they receive up to 85% of the death benefit in cash. These proceeds can help cover long-term care, medical bills, or estate transition costs.

Want to confidently advise your clients on insurance-linked tax strategies like this?

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🎯 Closing Thought

As advisors, it’s our responsibility to look beyond the traditional uses of financial products and help clients unlock their full value.

Permanent life insurance can provide tax-smart liquidity, protect beneficiaries, and even serve as an emergency fund or retirement planning tool—when used correctly.

But these strategies require guidance. With the wrong moves, clients could trigger taxes, penalties, or lapse their coverage altogether.

Reply to this email if you want to learn how you can join us for next week!

Here’s to your growth — inside and out,
– Angie Toney & The Executive Touch Team

^_Disclaimer

^{_{The content shared in this newsletter, including any strategies, tax scenarios, or business insights, is intended purely for educational and informational purposes and should not be taken as personalized professional advice. Examples discussed are illustrative in nature and not guarantees of any specific tax outcome or business result. Your results may differ based on your unique circumstances, efforts, and changing external factors.}}

^{_{Remember, tax and business decisions are highly individual and influenced by many factors such as evolving regulations, personal expertise, and market conditions. We encourage you to seek advice from qualified tax and financial professionals before making significant decisions that could impact your business or finances.}}