Today, we’re going to discuss what I have always felt is the best reason to use cash value life insurance as part of your financial strategy.
It may seem counterintuitive. It may even seem incorrect.
But, I assure you that when implemented properly, this is most assuredly the best feature the product brings to the table for a wise investor/saver: liquidity.
I’m not a big fan of locking up lots of money. It may seem like a good idea for those with less self-control when it comes to shopping as a recreational activity, but more often than not, this anti-spendthrift mechanism comes with a financial penalty when one (or both) of two events takes place:
1. The person in question runs him or herself out of money and has no other immediately available funds
2. The person in question is presented with an opportunity to gain immediate access to their funds at a penalty and opts to do it because they have no other option
Ultimately, locking money away as a means to preventing your bad behavior from taking over is treating a symptom and not curing an underlying problem, but I digress.
Life insurance rookies often ask about the first few years of a life insurance contract when there is zero cash surrender value.
The questions we receive look something like this:
How can you say that there is so much liquidity when there is no cash surrender value in the first few years of the contract?
The truth is, we can make cash surrender value available from day one, and not just a little but quite a bit.
If we design policies correctly for the purpose, either by blending whole life insurance or guideline funding universal life insurance, we’ll have access to funds from the very inception of the contract. This is just one more example proving that when it comes to these products, their design and implementation on the behalf of the practitioner matter more than the products themselves.
Holding plentiful cash reserves or cash equivalents is always a good idea for two reasons:
Options are a good thing.
The one thing that seems to unite most successful investors is that they are extremely patient.
If the growth potential isn’t there or they don’t see obvious deep value opportunities, they simply sit on their pile of cash until the time is right.
Consider the words of Sir John Templeton:
“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
This is sage advice to say the least—you won’t lose money if you’re holding cash in a market that is inflated and subsequently crashes; plus, you’ll have the ability to cash in on the opportunities that abound as a result of the crash.
It’s probably no big surprise that we really like cash value life insurance as a place to store cash equivalents. It provides a competitive return, tax favored status, and ready access to funds when opportunities arise.
Cash in the bank is fine, but as the common criticism goes, the yield is terrible.
There’s always money market funds, but with most yielding around 1%, it’s not like they’re doing a whole lot better.
Cash value life insurance, on the other hand, can yield 500 to 1,000 times better than your standard bank savings account, and your access to funds is pretty similar. As I’ve grown fond of telling people, life insurance is the best savings account I’ve ever opened.
We’ve covered this topic numerous times, but it’s appropriate to bring it up here. We know that one of the ways to access cash in a life insurance policy is through a policy loan.
There are those who like to play with semantics and make this sound like a terrible idea, but the truth is that as far as mechanics go, it works out pretty awesomely.
I previously noted that you can technically spend your money while earning more money on your money. You can take your money out of the garage, drive it around town, and then put it back in the garage when you’re done without seriously affecting how it grows.
Despite some of his other shortcomings, Nelson Nash correctly pointed out that you must finance everything you buy, whether by paying interest on a loan or forfeiting it on the money to used to make the purchase. Life insurance is an excellent way to mitigate the costs associated with the unavoidable reality of financing.
For some reason, Americans have adopted a paradigm that drives many to a situation of being asset-rich (by which I mean they hold assets that have value and thus prop up their net worth) while being cash-poor.
This isn’t something found only on the consumer side; many large corporations have suffered from adopting this strategy.
The 2008 financial collapse was mainly kicked off by large organizations that had plenty of assets on their balance sheet but very little cash on hand, which crippled their ability to function when the credit markets locked up.
A post-op analysis of 2008 shows a large desire among America’s wealthiest to have had more cash on hand during the event, and more recent data appears to suggest that the 1 percenters are taking this hindsight really seriously.
Liquidity is a wonderful thing. The problem most people struggle with is how to keep net worth liquid without destroying buying power due to sub inflationary yields.
There are many who have figured out how to do this and have been doing it for years. Cash value life insurance is the key tool we use to accomplish this, and we invite you to talk with us.