The appeal of tax-free growth on your money is one of the biggest reasons large organizations and savvy individuals plug millions of dollars into these policies every year. You’ll have a hard time finding a better place for these types of tax benefits.
Tax-free Death Benefit
When you’ve amassed a large amount of wealth like Walt Disney, JC Penny, Ray Kroc, and others, there’s only one thing that stands in the way of passing that hard work on to your family…
…the Government.
Whether you have a big estate or a small estate, passing on money can be painful. Some of the largest estates are stripped to nearly nothing after taxes and probate.
Take the King of Rock and Roll himself, Elvis Presley. At the time of his death in 1977, his estate was worth $10 million. 73 percent of the estate went toward legal fees, estate administration costs, and estate taxes, leaving only $3 million to his daughter.
In addition to tax-free growth, cash value life insurance provides a tax-free death benefit, and one that bypasses probate altogether.
This means your life insurance death benefit will transfer with no income tax to those you leave it to, and there won’t be fees and expenses to get it there.
I can assure you of one thing, there is no better asset to die with than life insurance. It is the most heavily used estate-planning tool in the country because it can help pass on more of your hard earned money to your family.
Social Security
The icing on the cake in the tax discussion is this.
As a taxpayer, we all pay a social security tax. Its purpose is to give us an income down the road when we retire, but here’s the problem…
Most people don’t plan on it as their primary source of income, so if you’ve been diligent in saving, and you want to take a retirement income down the road from money you’ve saved or invested, your social security income could be at risk of taxation.
Now since it was originally a tax paid to receive it, it seems a little unfair to pay a tax on it, being penalized for having saved well.
The perk to cash value life insurance is that it remains one of the last places where you can draw money and not have it count against this social security tax. Even other tax-free sources of income, like tax-free bonds, still count income into the social security tax equation.
Cash value life insurance gives you the ultimate in tax benefits across the board.
Guarantees
Cash value life insurance policies are also equipped with solid guarantees.
While dividends, or company profits, are technically not guaranteed, a portion of the growth inside your policy is.
In the event that the insurance company can’t pay out a dividend, you are guaranteed to see an increase to your cash value inside your policy. Meaning you’ll always move forward.
While the above is true, it’s also important to mention that the insurance companies I personally recommend have paid profits for over 100 years straight, making it pretty unlikely that we won’t continue to see that in the future.
Accessing Money Inside Your Policy
While its been mentioned in a few sections already, I want to go into a little more detail on the best way to use money from your policy.
First and foremost, as you build cash value in your policy, you can access those funds at any time and for any reason. There are two ways to do so.
Withdrawals
One option for accessing money from your policy is to actually withdraw it. Even though it is possible, I don’t typically recommend it. Loans can provide more advantages and better benefits.
Loans
The fundamental difference between a loan and a withdrawal is that the withdrawal is a withdrawal of your money, while the loan is a loan from the insurance company.
By contract, the insurance company guarantees you the ability to borrow money up to the amount you have in cash value. And since you are a policyholder, these loans come at competitive rates.[12] Why? Because you have collateralized the loan with your cash value and there is no risk to the insurance company.
That low risk, and low maintenance use of capital is a great way for the insurance company to safely grow its capital, so they offer it to you at very advantageous rates.
For example, a company I have policies with just paid a 7.1% dividend last year, and their loan rate was 5%. Borrowing from the insurance company in that scenario netted me the difference.
Beyond the simple difference in loan rates and dividends, there are other advantages to loans as opposed to withdrawals. There are no tax consequences if you borrow beyond your cost basis (what you’ve put in). If, on the other hand, you withdraw past your cost basis, you could incur taxes. In addition to keeping it tax friendly, it keeps the policy cash value growing and working for you, it keeps the death benefit high, and it makes you accountable for the money you use.
By borrowing money from the insurance company, you ensure that your capital never stops compounding. It forces you to keep capital constantly working in your favor.
The Safest Place on the Planet
At the beginning of this book we walked through the time of The Great Depression. A very sad time.
But amid such chaos and confusion, life insurance companies held strong. While there is never any guarantee that something couldn’t happen, based on track record cash value life insurance is the best bet for safety of capital. It’s for that exact reason that banks rely so heavily on it.
They are extremely well oiled machines, and it would be hard to take them down. We’ve seen them consistently providing growth for over a century while experiencing twelve recessions and one Great Depression.
Stock Companies vs. Mutual Companies
There are 2 different kinds of life insurance companies; stock and mutual.
Stock companies pay out earnings to stockholders first, then potentially to policyholders.
Mutual companies, on the other hand, have no shareholders and only pay out earnings to their policyholders. The profits are what we refer to as dividends.
I like to compare it to making a deposit at the bank, and that deposit giving me credit as a shareholder to receive company profits. A highly unlikely scenario at a bank, but a good example of how a mutual company operates.
In looking for a way to maximize the use of cash value life insurance, a stock company does not stand out as the place to go. Mutual companies provide the most benefit, and are clearly a better option.
No Minimums or Maximums
There is no government minimum or maximum contribution to a cash value life insurance policy. We are free to contribute as much or as little as we want.[13] The only limitation will be how much insurance the insurance company is willing to offer. More on that shortly.
Extreme Flexibility
When talking about cash value life insurance, most are under the impression that premiums are due every month or year for nearly the rest of their life. This is hardly the case with high cash value life insurance.
One of the benefits of high cash value life insurance is the amount of money frontloaded into the policy. Because we jam-pack these policies with high levels of cash in the beginning years of the policy, we create a large amount of flexibility to adjust to different circumstances.
Future premiums can be reduced, or can even be completely eliminated in any year if necessary.
This gives us the ability to make a plan today and adjust, if necessary, tomorrow.
Keep in mind this is not your run of the mill policy, it’s specially designed for these benefits. I’ve designed 3 specific case studies that will show you some of the flexibility discussed
here. We’ll look at those shortly.
Death Benefit
While I mentioned the tax benefits surrounding death benefit, I want to hit the topic straight on.
First, it’s important to note that the risk of your death is now on the insurance companies shoulders and you have insurance. This is critical to caring financially f
or you and your loved ones.
Secondly, if your money is growing safely, while simultaneously giving you life insurance, then it’s a no brainer. The question becomes, “how much do I get?”
Having death benefit is a great side benefit of these cash value policies, and can be the jump-start to future wealth within your family. You’ll almost accidentally pass on a significant amount of money to your family.
Another thing to account for is the ever-increasing amount of death benefit.
You see, as cash value builds inside your policy there is a natural increase in the death benefit. The more cash value you put into the policy, the more the death benefit has to go up. So what naturally happens is the older you get, the more money you will pass on to your family. Pretty cool huh?
The “High” in High Cash Value Life Insurance
I wanted to make sure and write a section that distinguished why I call it “High” cash value life insurance, because it’s different than your traditional policy.
Have you ever heard of Joe Ayoob? This guy holds the world record for flying a paper airplane 226 ft. 10 inches. That’s a little over 3 quarters of a football field. That’s pretty crazy…
While you could give me the exact same piece of paper Joe Ayoob uses to fly world record paper airplanes, there’s really no chance I’ll be able to fold it for high performance. Mine barely make it across the table, let alone a football field. The same applies here. The performance of a cash value life insurance policy is based on how it’s structured (or folded).
For example, a typical cash value life insurance policy has a big fat $0 of cash value in the first year or even first several years. It can take decades to perform, which is the main reason some people don’t like it. While it does recoup those early years and performs well, it’s not the most efficient.
A high cash value life insurance policy is much more efficient, focusing on better growth now, and in the future. We see positive returns in the first few years, meaning more cash value than contributions, and better performance every year moving forward.
The biggest difference here is structuring the policy around cash growth and accumulation, and not death benefit. By doing so, you can maximize the growth of your cash.
Ownership
I’d like to add one small nugget here. Since the primary focus is not the death benefit in many cases, the insured (the person who’s life is insured), is not the top priority. You can maintain complete control as owner of a policy while insuring the life of someone else. The insured is simply the life the insurance is based on, but has no say in policy decisions.
So if health, age, or other factors don’t allow you to get the insurance you need, you can simply own the insurance on the life of another individual.
Closing a Policy
Life insurance policies can be closed at anytime. Your cash value is also called your “surrender value.” You can walk away with your surrender value anytime you want. However, if you do close your policy, you will be required to pay taxes on the growth of your policy (anything above what you have contributed).
This is why we want to die with this policy intact. This is easy to do with a little planning and your family will always be left with more money via the death benefit than if you cashed it out anyways.
By handling it properly, you can exercise options inside any insurance policy to eliminate future premiums, or out of pocket payment, and simply let your cash value grow. This is referred to as a “reduced paid up” policy.
This still gives you access to the cash value while keeping the policy in force. This keeps your money working inside the policy, keeping all the powerful advantages, without having to contribute additional money to the policy.
Chapter 7
A More Efficient Savings Strategy
Cash value life insurance solves a lot of problems that we’ve already discussed, but in this chapter I wanted to discuss a few other areas where it can save you, and earn you, additional money.
Throughout your life you’ll likely save hundreds of thousands of dollars to buy all kinds of necessary and unnecessary items. Cars, homes, medical expenses, education, weddings, to name a few.
It’s clear that borrowing on high interest credit cards and loans is an expensive way to pay for those items, so I won’t go into any more detail than that. I’m going to assume you save and pay cash.
In addition to large purchases, you’re hopefully keeping emergency savings liquid, safe, and accessible.
What most people haven’t thought about, however, are the thousands of dollars that have been lost (or not earned) by saving for these items in the conventional way.
When you pay cash for something, you have to save for it first. And where do you save it? Somewhere you know you can get it when you need it. For most people, this is some form of savings or checking account.
There are two problems here. The first is in regards to how you save it, and the second, how you spend it.
As you set money aside for these large purchases and emergencies, you’re putting thousands of dollars to very little use in low interest, taxable accounts. If you’re earning 1% inside a savings account, but could be earning 5% in a life insurance policy, you’re missing out on 4% interest every year. We call this opportunity cost, and it means thousands of dollars lost in your lifetime.
In addition to low interest and growth, you are also required to pay taxes on what little you have earned. This reduces your savings efficiency even further.
Now this doesn’t apply just to large purchases. You may keep cash for emergency savings. You might be an investor or business owner that sits on large amounts of cash, waiting to use it.
When you plug cash value life insurance into the equation, your savings dollars earn more, and your tax burden is reduced. It’s a much more efficient way to save.
Now the second problem is this. When you pay cash for a car, you typically don’t plan to put that money back into your savings on any schedule. You simply plan for your next purchase, and save what’s necessary. This emphasizes the real value you are placing on your dollars… very little.
Let me explain…
When you borrow money from a bank, do you expect them to charge you interest? Of course. When you lend someone money, do you expect them to pay you interest? Of course. Yet when you use your own money, you place no such value there. Why?
This is exactly why I recommend taking loans against the insurance policy. It ensures that you are accountable to the money you use. It ensures you never liquidate your account to make a purchase with no intention of keeping that money growing. It requires you to never interrupt the continual growth of your dollars. Overall it makes you more accountable, more efficient, and more profitable.
Making Your Investments Better
As I’ve previously mentioned, using your policy to make investments only makes those investments more profitable. I’m now going to address why.
Let’s jump into an example. Let’s say I’ve got an investment where I can earn 10% returns and I invest $100,000.
At the end of the year, I’ll have made $10,000. At capital gains rates of 15%, I’ll owe $1,500 in taxes.
Total profit: $8,500
Now let’s assume I’ve got that money tucked in my cash value life insurance policies, and I borrow the money from the insurance company at 5%. Here’s how it breaks down:
Essentially what we’ve done is turned an effective 8.5% return to a 9.25% return. How? By taking advantage of an interest deduction that reduced my taxable gain to $5,000.
This is a very simple version of the story however. What we haven’t mentioned is the money in my life insurance policy is giving me death benefit and is growing competitively after the investment is liquidated. Without the policy, my money would most likely go back to being extremely inefficient, in a low interest, taxable environment.
The point is that life insurance makes you smarter as an investor. It makes your investments more profitable, and gives
you a benchmark to beat. If you can do better than the policy growth, do it, if you can’t, don’t. It’s that simple.
Making Your BusinessBetter
Just like an investor, cash value life insurance can add extra benefits to what you are already doing in your business. Why? It keeps your money working more efficiently, and helps reduce the taxable income from your business.
By using this type of policy, business owners are able to make better use of their capital, reduce their personal and business tax liability, cover key employees in a more efficient way, and a slew of other items depending on your business.
Case Study 1
Consistent Contributions
In this case study, I will illustrate the exact layout of a high cash value life insurance policy. I’m going to show you the following things:
Annual contribution of $20,000 per year
Money, Wealth, Life Insurance Page 3