So here we are talking once again about the wonders of cash value life insurance. I know, I know…most of you are rolling your eyes in sarcastic disbelief that we could possibly have anything more to say about the subject.
After all, we've written nearly 300 posts at the insurance pro blog and more than a handful have revolved around the use of cash value life insurance. Not to digress but I would like to point out that we often use the terms cash value life insurance and permanent life insurance interchangeably. Just to clarify.
Cash Value Life Insurance Is Just a Moniker
Also, keep in mind in the discussions of cash value life insurance as a generic term–we’re not distinguishing between participating whole life, universal life and/or indexed universal life. All three products can be used to accomplish similar results, what’s appropriate depends entirely upon your goal, how old you are, what sort of dollar commitment you’re willing to make, how much time do you have to reach your goal etc.
If we are talking about a particular feature of one product or another, we’ll always distinguish that product from the others.
Our Plans Going Forward
We thought it would be useful if we composed a series of posts/articles that would detail the benefits of using cash value life insurance as an alternative asset class. And instead of trying to do it all in one post (which would strangely resemble a book), we’re going to break it down into a series of posts. Later on, as each post is written we’ll probably create a separate page on the site that will provide some sort of sequence for how to best digest the information complete with links to each post.
But for now we’re going to publish the series as inspiration strikes us and in no particular order.
When Brandon and I were discussing the series and sort of the “Top Ten Reasons to Own Cash Value Life Insurance” we listed flexibility as one of the most underrated all.
I think most people who’ve done any sort of research on using cash value life insurance in its purest form, know that it offers an extreme amount of flexibility. However, we often discount this a bit too much. Or at least I do as it’s something that we know and talk about sort of “offhanded” everyday.
That being said, we tend to overlook the potential that having a “no limit” asset has to our clients.
Now, before I dive too deeply into that discussion…I should mention that the flexibility of cash value life insurance has at least three parts:
1. Funding Limits Not Capped–the ability to place as much premium into a policy as you are willing. Of course there are constraints depending upon the face amount of the policy but most of the time you are able to contribute large amounts to cash value life insurance. Also, another key factor is that there are no income caps on life insurance contributions as there are with other types of savings plans (IRA’s, Roth IRA’s and 401ks to name a few).
2. Withdrawal flexibility–the ability to access your cash value at any time you choose by making a phone call.
3. Funding Period flexibility–if a policy is properly designed, you will have the ability to fund at varying levels, stop funding, reduce funding, restart funding as cashflow permits or does not. You’re not stuck with particular funding plan forever.
For today, we’re just going to talk about number one, but in later posts we’ll get back to number two.
Why Is Having An Uncapped Funding Limit a Big Deal?
That’s a silly question…right?
Over the past 13 years, I can’t count the number of times I’ve talked with people who are looking for ways to save more money than their reitrement accounts will allow. Remember, IRAs and 401ks have contribution limits attached to them. For tax year 2013, IRA contributions are capped at $5,500 and 401k contributions are limited to $17,500.
Those numbers don’t sound too bad…right? If you put $17,500 a year into your 401k, you'd accumulate a nice balance over your working years, no doubt about it.
But if you think about the future tax liability, the implications become much more important. I know, some of you are thinking but what about the Roth IRA?
I’ve got no beef with Roth IRAs. Just that you can’t put enough money in one and if your income is too high, you’re not eligible to contribute to one at all.
The problem that faces many of our clients is that even if they can max out the contributions to their qualified retirement plans, they a.) can’t really have a huge impact for them given their income and b.) the future tax liability they are creating for themselves in their retirement.
We’ve found that the impact of taxes on your qualified money is severely underestimated by most people–financial planners and advisers included. The consequences of delaying the taxes to some later date can be nauseating at best. At its worst, it creates substantial kinks in your plans for your retirement.
But I digress.
Consider the implication of having an asset where you can adjust your contributions up and down at will, you have the ability to derive a non-reportable income if managed and executed properly, and you have no limit as to how much money you can deposit along the way.
These are distinct and powerful advantages that we shan’t overlook.
Consider a scenario where you already own a policy that you pay premiums of $50,000 on an annual basis. Just a few days ago, the timing was right and you were able to sell an asset that you owned (stock, real estate, coin collection etc.) that netted you $100,000. Sweet!
You call us and say, “hey can I put this $100,000 in my policy”. Chances are we’ll be able to work that out for you after a conversation with the insurance company. Some details will be important in this scenario but even if you can’t do it with an existing policy, you can always buy another policy that is designed optimally to receive that 100k over a period of time.
I’m not aware of any other vehicle that allows you to take a taxable asset and turn it into a tax favored asset with no limit.
There are considerations to be made and I’m not trying to oversimplify it. Just trying to make the point that it can be done and there are no regulatory/IRS/government rules that would prevent you from putting as much money as you want into one or better yet…a variety of cash value life insurance policies.
Who Does This Work for?
Loading up cash into permanent life insurance contracts can work for just about anyone but it probably has the most impact for high income earners who have time to allow for compounding growth.
We’ve made no qualms about the fact that this strategy uses life insurance and that there are certain costs involved with it that have to be overcome. That process does take a little time.
In short it works best for people who have a significant discretionary income. Yeah, I know that seems like a total cop-out…
But, that number is going to be different for every situation.
Consider that there are certain economies of scale when considering the use of cash value life insurance as an asset. As we've stated many times in the past, the more money you can apply to excess and/or paid up additions, the better your policy will perform over time. Simple formula really.
Some of our clients and prospective clients have really begun to take this seriously, especially as they are keenly aware of their potential tax liabilities moving forward. We think that going forward using cash value life insurance as an asset will take on a more primary role for certain groups of people. Particularly those who are looking for a way to have a greater percentage of their income be non-reportable for income tax purposes.
If you’d like more information on this strategy and how to apply it to your situation, we’re more than happy to help.