If you have been following this four part series on Life Insurance Awareness, you will recall that in part three, we discussed the nuts of bolts of building your own bank through permanent cash value life insurance policies. We walked through the process and benefits of cash value build up, the different ways to access your money, and even a real world example illustrating how building your own bank can transform your financial world. The final chapter in this series is designed to expose you to a few advanced strategies that many people are using right now to take the fullest advantage of their own personal “bank”. Keep in mind that yes, the death benefit is the main reason most people contribute to a life insurance policy, but the living benefits of the built up cash reserve can provide tremendous value while you are still alive, as well.
You may have noticed there is a gap of a few weeks between part three and part four of this series, and while I am sure so many of you have been on the edge of your seats eagerly awaiting the latest entry (or most likely not), there was an important reason that I waited. This election season has been full of intrigue, surprises and many polarizing view points, and this blog has no intention of getting political one way or another. You can find that on many other sites of your choosing. However, one thing that the election did illustrate is the fickle and unpredictable nature of our stock market. A few weeks before the election, a Clinton victory seemed in the bag and many pundits and “experts” were calling for, at worst, a flat market for the next few months, possibly even an uptick as Hillary eased her way into office. What happened? The night of November 8th we saw state after state being won by Trump, and a surprise victory seemed more and more likely. Investors panicked and the after-hours trading sent Wall Street spiraling into a tailspin. The Dow Futures market was down over 600 points. Those same “experts” spent the remainder of the night predicting widespread disaster come morning, almost recession level bad. What happened? The sun came up, investors changed their tune and calmed down a bit, and the damage wasn’t nearly as bad. Things settled down over the next 24 hours and by the end of the week, the market was at a record high (based on the Dow). The lesson to be learned here is that our stock market is quite unpredictable and just when you think you have it figured out, it continues to defy the experts’ analysis. This particular instance happened to be a positive one for our markets, but the opposite is true as well, and many times, those sharp declines seem to come out of nowhere. The bottom line is that the market is tremendously difficult to predict and time, no matter what any expert tells you. Is it good to have some money in the market? Absolutely. Over time, you will earn a pretty nice rate of return and it is still a viable option for a piece of your nest egg. However, this lack of consistency and predictability also illustrates why it is good to have another piece of that nest egg protected from risk and uncertainty. You want to make sure you will have at least SOME of your money available to you when you need it most. That is why I recommend building your wealth and nest egg through BOTH the market AND cash value life insurance policies. Between the tax advantages, liquidity, and consistent and predictable growth, a permanent cash value life insurance policy offers countless benefits to those savy enough to pursue it and it should be a vital piece of your financial portfolio. Let’s take a look at a few high level ideas for how you can use that cash value to benefit you and your family long term.
Investing in Real Estate:
There are few investments that provide as much residual income and passive wealth than real estate. I am no real estate expert by any stretch, however, a smart investor could be taking full advantage of their cash value in their life insurance policies to prime that pump and get the ball rolling. The strategy here is to take a loan (or withdrawal) from your cash value to purchase an investment property, or at least a nice down payment. Keep in mind, the loan on your cash value is paid back on your terms and can be very flexible. The idea is to use the rental income or whatever money the property generates to cover the property taxes and repay the loans. The loan interest can even be tax deductible in certain situations (contact your tax advisor for more insight into that). In an ideal scenario, you would be in a positive cash flow situation where the income exceeds the amount you are paying back (and if you have set flexible loan terms, this can be accomplished rather easily). But let’s just assume for a minute that your rental income is breaking you even on the loan/taxes. Once the loan is paid back, you now have all of your money back in your policy, rental income still coming in, and best of all, you OWN the property. Do this multiple times and before you know it, you have created a powerful web of residual income flowing in monthly, in addition to the equity you now have by owning multiple properties. The possibilities are endless. It’s your money. Put it to work for you!
College Savings for Children:
One of the most daunting and expensive parts in raising a child is saving for their college tuition. While there are options in place such as 529 plans, a growing number of people are using cash value life insurance policies to aid in this funding. This money can be taken from your policy as either a loan, which as you recall, can be paid back flexibly on your own terms, or just a basic withdrawal. It is best to start this as soon as the child is born, so that you have plenty of time to save and build up cash value for college (not to mention you should have some life insurance when you have a child anyway). I am planning a full article in the future about this but for now, let’s take a brief look at some of the benefits of using life insurance vs. a traditional 529 plan or other funding vehicle:
Financial Aid – When assessing how much financial aid you are eligible for, the government considers all of the income and wealth available to pay for tuition and expenses, including 529 plans. However, cash value accumulated in a life insurance policy is exempt from this formula. The more money you save for college in a life insurance plan, the less you will have to declare on a financial assistance form, resulting in a greater amount available to you in financial aid. This is one of the greatest advantages to using life insurance as a college savings vehicle. It opens up many other funding options, should you need more money.
Risk – College savings that is put into a 529 plan or some other market invested strategy is subject to serious risk. I cringe when I think about how many people had their children’s college savings fund invested in some sort of 529 plan or brokerage account during the market crash of 2008. Many people lost 20%-30% even upwards of 40% of their savings, and if your child was scheduled to go to college sometime shortly after that, you did not have enough time to recover the money. Using a cash value life insurance policy to save for college protects against that risk since the money still earns some interest, but is not invested in the market and therefore not exposed to the potential disastrous declines.
Flexibility in Usage of Funds – A 529 plan provides similar tax advantages as using a life insurance policy to fund college tuition, however if you do not use the money directly for college related expenses, a 529 plan will charge you fees and penalties to access your money. Should your child receive a scholarship, go to a foreign school, or opt out of college altogether, be prepared to pay penalties to access that money, in addition to now being taxed on the earnings. Life insurance plans, however, do not discriminate on what you use the money for. If it is meant for college savings, and your child gets a free ride, you can use the money for whatever you like without any excess fees or taxes involved.
Supplementing Retirement Income:
Many people find themselves having less retirement income and fewer resources when they decide to retire these days. Social security is nice, and 401k/IRA distributions are nice, but if you have cash built up in a permanent life insurance policy, you have access to a tremendous untapped source of tax free supplemental income. The idea here is to withdraw from your cash value every year and “spend down” your bank in order to provide extra cash during retirement. This will not be a loan; you are simply taking the money. In this scenario, I recommend planning ahead and having multiple policies in place (one can be a term policy) so that there is still enough of a death benefit to cover expenses. Spending down your cash value will deplete the death benefit. However, if you have those expenses covered, either through another policy, a pension that goes to your spouse, or some other asset, then you are free to use this cash while you are living. Let’s take a look at a few scenarios:
Waiting on Social Security – The longer you wait to take your Social Security, the more you will receive every year from the government. Obviously there is a limit to that, but in general, you can use your cash value from your insurance policy to supplement your income each year you choose not to take your social security. Filling this income gap allows you to maximize your social security benefit return and ultimately earn more money, each year, in the long run.
Lowering Your 401k/IRA distribution – Because you are pulling money from your insurance policy tax free for the most part, you can use less of your 401k or IRA account each year, allowing to grow even more in the long term. Because 401ks are taxed when you take distributions, you would need to take about $130,000 dollars (give or take) out of a 401k to net the same amount you would if you took $100,000 out of your cash value in your insurance policies, all things being equal. By taking income from your cash value, it allows you to leave more money in that 401k/retirement account to earn more interest for the future.
Pension Maximization – This is a very common scenario for government, state, and union employees who receive pensions (teachers etc). There are two different ways to use life insurance to maximize your pension. The first is to take 100% of your pension benefit while you are living, then purchasing a life insurance policy, which provides the income for your spouse to live on when you pass away. In most cases, the premium needed to fund this policy is significantly less than the extra money you are receiving each month by taking the full pension, so you are coming out ahead financially. This is a very common scenario and one that I HIGHLY recommend to mostly anyone receiving a pension. The second scenario is if you already own a policy in place with enough cash value, you can take less of your pension (say 50%), and use your cash value to supplement the income gap. This allows your spouse to still be well taken care of after you pass by receiving not only 50% of your pension and the higher social security, but also whatever remains from the death benefit of your insurance policy.
These are just a few of the many high level strategies you can put into place with your cash values in your life insurance policies. Putting your money to work for you can be a very powerful tool and can greatly benefit you and your family financially. You can see why I refer to this as “Building Your Own Bank”. This concludes the four part series on Life Insurance Awareness. Hopefully you have found value in the contents and have come out of this with a greater understanding and appreciation for not just the need for insurance, but also the benefits that certain policies can provide you while you are living as well. Remember, protection first! Protecting yourself, your family and your assets should be a top priority of anyone looking to achieve financial peace of mind and build wealth along the way. If you have any questions or are interested further, I recommend you contacting your financial planner/advisor (or me) and they would be happy to assist you in answering any questions and getting you set up.
Peace and Wealth 