Should Insurance Agents Talk Taxes With Clients?

lawyerBack when I became a Chartered Life Underwriter I was required to pass 10 college level classes with a score of 70 or above, have a minimum of 3 years experience working with insurance and subscribe to a written code of ethics.

The experience and ethics requirements were not a problem.  All that I needed to do was survive (at that time fewer than 4 people who started in the insurance industry lasted longer than 4 years.  I turned out to be one of the 4.)

It was no problem to subscribe to the ethics code.  I was raised to think of others first.  I had no problem promising that I would think of my clients before myself.

The classes, however, were a different story.  I had no problems with the first 5 classes.  I breezed through the first 5 correspondence courses in less than a year.  They were relatively easy for me.

In those courses I learned more about how to use Life insurance to meet needs.  However, the material for the 6th course, on taxes arrived at my house in Tulsa, OK.  To put it in the vernacular of the day, “it ate my lunch.”

I am not used to failing tests.  In fact, I had not failed a test since my sophomore year of college.  I had been prepared to pass the tests for the first 5 courses every 6 weeks.  The course on Taxes would prove to be different.  It took me 6 months of study before I felt comfortable that I would be able to pass the final exam.

I went to the testing center in Oklahoma City with some trepidation.  I had scored at least 90 on each of the previous 5 exams.  On the exam for the course on taxes, I was lucky to pass the course with a score in the 70s.

As a rookie insurance agent I was taught that the cash value of permanent life insurance grows in a tax-deferred manner and is available through a “tax-free” loan.  I thought I knew everything there was to know about how taxes applied to Life insurance.

Boy, was I wrong!

I came to realize the truth of, “He knows enough about Taxes to be dangerous.”  There are several tax principles that a financial professional needs to know before he is competent to give tax advice.


It is still true that the death benefit of a life insurance policy is free from income taxation.  However, the only part of Life insurance that is available income “tax-free” is the death benefit.

When you access your money through a “tax-free” policy loan, you are committing yourself to keep that policy for your entire life-time.  If your Life insurance policy ends with anything other than a death benefit or “1035 Transfer of Assets” to an annuity, you will end up paying taxes on all of the money you borrowed that represents interest.


There are other forms of taxes that affect Life insurance besides income taxes.  If your life insurance increases the value of your estate above a certain level, your estate could accidentally be subject to state or federal estate taxes.

When I was doing my CLU studying, the threshold for the federal estate tax was $600,000 for a single individual and $1,200,000 for married couples.  If an individual purchased Life insurance that would increase his estate over those levels in a way that was not acceptable to the I.R.S., the policy would be subject to the estate tax.

Today, the level at which the estate tax is applied is $5,000,000.  Since I do not market to “high-value” clients, I am not as worried now as I was then about accidentally increasing someone’s estate and involving the I.R.S.


Although the I got the lowest score of my CLU studies in the course on taxes, I learned a valuable lesson that has guided me throughout my career.

I know better than to tell clients that they can rely on the tax advantages of Life insurance to plan for their retirement or education for their children.

I also know the appropriate way to work with an estate lawyer to shelter Life insurance proceeds from the I.R.S. when an estate is calculated.

Those are indeed valuable lessons for any insurance agent to learn.  However, they are not the most valuable lesson.  The most valuable lesson that an insurance agent can learn is that he is not a tax expert.

The tax code changes each year.  It depends on the whims of the politicians in Washington D.C.

An insurance agent should stick to the death benefits of a Life insurance policy.  When the discussion turns to “taxes,” an insurance professional needs to learn to defer to a tax professional.

In our weekly email I try to keep our clients updated on trends in insurance.  In it I talk about all types of insurance that Baby Boomers use.  When you subscribe you will automatically get a copy of our free e-book, “Why You May Need Life Insurance.” 

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