Using Premium Financed Life Insurance for Tax-Advantaged Income
The purpose of a life insurance policy is to protect and preserve your assets and income in case you or your family suffer a loss (i.e., lose your income, loss of a family member’s income, the inability to work, or other reasons). But did you know that you may be able to use a life insurance policy to provide tax-advantaged? Did you also know that you may be able to have national and well-known banks assist in the funding of your premiums to provide a larger cash value? Think about this: Many people have (or had) a mortgage to buy a home, but have you ever considered a similar concept to fund your life policy for more cash growth?
Using Premium Financing to Increase Cash Growth
The ability to use banks to help fund your policy premiums can be accomplished using a concept known as “premium finance.” At this point, you may already be asking yourself: How is this possible? How much can I get from the banks to fund my retirement? Are there loan documents? What are the risks? What are the terms? All great questions, and we’ll offer some information to help you understand the concept of premium finance and tools to conduct further research.
It’s Not Where You Invest…It’s How Much You Invest
One of the most significant risks associated with retirement planning is “capital risk.” It is the risk that you may not have saved enough during your working years to support your desired lifestyle in retirement. Many of us will spend 20 to 30 years in retirement, and that’s a long time to make your assets last. A recent research article from Retirement Success by David M. Blanchett found that how much you have to spend in retirement is determined by how much money you saved as opposed to where you invested it. The study found that 74% of your retirement money comes from the cash you accumulated, and only 26% comes from investment growth. That’s a staggering thought!
Why Would Banks Want to Fund Your Life Insurance Policy?
Banks don’t like losing money, and by the nature of their Charter, they seek out secure sources of investments. Life insurance is often a vehicle used by banks because it is one of the more secure sources, and it can still provide them with competitive cash growth and you too. Banks are willing to partner with you to help pay the premiums on your policy because both you and the bank can enjoy the benefits of life insurance. Too, the cash value in a policy is often sufficient collateral for a loan. But keep in mind that many companies offer premium finance programs, and they can vary greatly.
Some programs may provide all of the premiums, and you only need to post some collateral. In contrast, some programs may share in the premiums (i.e., bank funds the majority of the premiums) with no collateral needed from you. Some programs require loan docs with a personal guarantee. Some have loan programs in which there are no personal guarantees, no collateral, no credit checks, no interest payments, and not even a signature. Too good to be true? No, just too good to be free. At some point, the bank will seek repayment of the loan out of the cash value in the policy (plus interest), but the remainder is YOUR cash to be used to create tax-free income (via policy loans). All the terms are set up front, and you will know your risks/reward scenario from the start with a premium finance program.
Does this work well for both parties? It does. That’s because you are using leverage and interest rate arbitrage to build a larger cash value. Leverage is the #1 strategy used by the wealthy to increase their net worth. Just like a 401(k), 403(b), or other IRS qualified programs offered by an employer – you and your employer are both adding funds to your account for a more considerable accumulation. The same is true with a premium financed policy, except you and the bank add premiums. In addition, you can add this strategy to your financial portfolio without affecting your other retirement accounts, and there are no IRS-imposed limits on premiums.
The Benefits of a Life Insurance Policy
There are many benefits associated with life insurance policies. The cash accumulation inside a correctly structured policy can be a source of funds to use as needed for tax-free income if appropriately structured. Here are some of the benefits of a life insurance policy with the option of cash accumulation:
• Asset and Income Protection
• Tax-Deferred Growth of Cash Value
• Potential for Tax-Free Income
• Potential for Market-Driven Rate of Return
• Safety (no market risk) with fixed products
• Liquidity / Withdrawal Privileges
• Cash in the Event of Death or Disability
• Cash in the Event of Chronic or Critical Illness
• Added Premium Payments from the Bank
Some Cautionary Notes
There are critical components of a life insurance policy that must be structured properly, especially when using a premium finance strategy. You will need the assistance of a qualified and trained insurance agent who knows exactly how to address your specific situation and design a policy for the purpose of protection and potential future income. For example — we mentioned earlier that there are no IRS-imposed limits on premiums, but there are limits based on death benefits and on IRS tax laws IF you want the potential of tax-free income. Many agents are not familiar with premium finance, so seek out qualified professionals and do your “due diligence” on the agent and the premium finance company.