Are there section 7702 changes in 2021? The pandemic and new administration caused significant changes in life insurance. In addition, with COVID-19 and new administration laws all over the news, many people wonder what life insurance will change in 2021. Furthermore, COVID-19 is making changes in life insurance. The current administration’s tax exemptions significantly influence insurance buying, selling, and benefits. This article will discuss life insurance changes in 2021 and 2022.
Life Insurance: Protect Your Family from Financial Hardship
Benefits of Life Insurance
Life insurance is like a fruit-bearing tree. It bears fruit at the time you need it. However, life insurance delivers different types of fruits. Furthermore, it comes in various styles to meet the goals of policyholders. Moreover, life insurance has many benefits, depending on the purpose of life insurance.
Death and end-of-life expenses always come unexpected and inconvenient. Life insurance provides guaranteed financial security for your family in case of sudden demise. What’s more, a life insurer will give the death benefit to your beneficiary.
- The death benefits will help your family to cover the costs of the following:
- End-of-life expenses and funeral costs
- Unsettled liabilities like mortgages, loans, and credit card balances
- Living expenses of the remaining family members
- Education of children
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There are different types of life insurance depending on the customer’s goals. Permanent life insurance offers opportunities to build wealth. It has a cash value component you can use while alive.
Life insurance policy owners receive favorable tax treatment. Death benefits are tax-free, while accumulated cash value has tax-deferred growth.
Some types of permanent life insurance policies have a cash value feature. Moreover, the cash value accumulates over time. You can use the earned cash as retirement savings.
Effects of COVID-19 on Life Insurance
This pandemic taught everyone about the importance of life insurance the hard way. Sadly, more than 600,000 Americans unexpectedly died due to Coronavirus. Also, sudden death can bring financial difficulties to the bereaved family. COVID-19 indeed proved the value of life insurance in these trying times. As the Coronavirus spread, it also spread awareness of the need for life insurance. According to Life Happens, a life insurance industry group, 31% of American consumers are eager to get life insurance because of this pandemic.
Let’s face it, we can’t control the future…but we can control what happens to our loved ones after we’re gone.
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What Will Be Changing in Life Insurance for 2021?
Many changes happened in life insurance in the past year. Furthermore, the pandemic and new administration caused dramatic changes in the insurance industry. In addition, insurers continuously adopt changes to provide coverage to consumers worldwide.
Changes in Life Insurance Brought by COVID-19
- Digital Access
This pandemic shut down most offices and stores. Consequently, life insurers provide consumers with digital access to continue protecting consumers. In addition, digital access made applications, payments, and claims reporting more convenient and safe.
- Accelerated Underwriting
Insurers accelerated their underwriting process due to the pandemic, eliminating medical exams to estimate life expectancy.
This is to speed up their underwriting process and continuously provide consumer coverage. Instead of medical exams, insurers now use modern data modeling to estimate applicants’ life expectancy and premium rates. This change makes applying for life insurance coverage more accessible and faster.
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No Medical Exam Life Insurance Carriers
- American International Group, Inc. (AIG)
- Banner Life
- Increased Coverage Amount
Most insurers offer life insurance death benefits with a maximum coverage limit of $1 million. But during this pandemic, some insurance providers boosted their death benefit to $3 million. Furthermore, this is good news for people who want to buy life insurance with higher coverage as they don’t have to deal with a lengthy underwriting process. Consumers now have more options when it comes to coverage limits.
- Lower Monthly Premium
Some life insurers now offer lower monthly premiums for consumers with low mortality risk for Covid-19. Younger adults without medical health conditions who don’t smoke will now see lower rates offered than prior rates.
- Increased Offering of Hybrid Life Insurance Policies
Hybrid life insurance is a new policy that provides long-term care and death benefits with a no-lapse guarantee.
Types of Life Insurance Policies
Getting life insurance in 2021 has always been challenging. It is so easy you can quickly get life insurance using your smartphone. Consumers can choose the type of life insurance policy based on their financial goals.
- Term Life Policies
This type of life insurance provides a specific coverage term. Consumers can choose from 10, 20, or 30 years depending on their financial plans and goals. Group life insurance is an example of a term life policy.
- Whole Life or Permanent Life Policies
Permanent life policies provide lifetime coverage to consumers. It has a cash value feature where part of your monthly premium earns a minimum interest. Examples of permanent life policies are whole traditional life, universal, and indexed variables.
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Changes on Life Insurances Due to Low-interest Rates
The Consolidated Appropriations Act of 2021 was passed to address the economic problems caused by Covid-19. This bill changed the Internal Revenue Code 7702, which significantly affects life insurance products. To understand how these changes impact life insurance products, it is essential to review IRS Code 7702.
IRS Tax Code Section 7702
Section 7702 of the IRS Tax code sets the requirements for insurance contracts to qualify as life insurance for tax purposes. Before the creation of section 7702, all life insurance policies have a tax-free advantage. To prevent people from taking advantage of this law, they created section 7702. They use Code 7702 to distinguish legitimate life insurance policies from investment vehicles acting as life insurance policies.
Requirements of Tax Code 7702
The federal government has mandated that real-life insurance plans differ from investment instruments. A contract must pass one of two tests to qualify for life insurance. If you don’t meet one of the conditions, the income from the life insurance policy will be taxed as ordinary income.
- Cash Value Accumulation Test (CVAT)
The cash value surrender of the contract must always be, at most, the single net premium for the contract to pass the cash value accumulation test. The cash value savings received by the policyholder in the case of cancellation shall not exceed the cost of a single lump sum policy. They used the minimum statutory interest rate of 4% to calculate the single net premium.
- Guideline Premium and Corridor Test
This test requires that total life insurance premiums paid always stay within the recommended premium level at that time. The minimum statutory interest rate to calculate the single guideline premium is 6%.
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Changes to Section 7702 in 2021 and its Effect on Life Insurance
As interest rates continuously go down, so do the investment’s earnings. This low-interest rate environment has caused economic problems, especially in the insurance industry. Life insurance companies earn through investing in corporate bonds, mortgages, and equities. The government lowered the interest rate assumptions in response to the country’s low-interest rates. These amendments will help life insurance companies continue providing guaranteed life insurance products to consumers.
New Section 7702 Effects on Consumers
More than anyone, consumers are the ones who will significantly benefit from these changes in section 7702. Decreasing the statutory interest rate allows consumers to increase their premium limits. The higher the premium, the more cash value you can accumulate in your life insurance policy. Aside from its financial security, life insurance will allow you to grow your money with tax deferral.
Effects of Biden’s Proposed Tax Reforms on Life Insurance
The new administration has proposed changes in gift/estate tax exemptions. Currently, each American has gift/estate tax exemptions of $11.7 million. The proposed changes will lower the gift tax exemptions to $3.5 million. President Biden proposed changes to tax exemption might take effect before the year 2021 ends. People with high net worth must take advantage of a lifetime gift exemption while the changes haven’t taken effect yet. They can make significant gifts by pre-funding or adding skills to current life insurance trusts.
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Act Now and Seize the Opportunity
There’s no perfect time to get life insurance but now. Even without the pandemic going on, life is still full of uncertainty. Life insurance will ensure you leave your family with enough financial support upon your demise. With the changes to life insurance benefits, getting life insurance while you still have the chance is a good idea. Interest rates, tax exemptions, and underwriting procedures can change anytime. As a result, consumers should seize this chance.
We hope you learned a lot about Section 7702 changes in 2021.
Don’t freak out. We’re here to help. We’ll find the best insurance coverage for whatever life throws at you at Advantage Insurance Solutions. Call us at (877) 658-2472 today to get started!