Today we’re going to discuss what I have always felt was the best reason to have money in cash value life insurance and use it as part of your financial strategy. This may seem counter-intuitive. 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 wise investor/saver.
That benefit is simply…liquidity.
But what about Years One and Two?
I’m really not a big fan of locking up lots of money. Some people think it’s a good idea for those with less constraint when it comes to looking at shopping as a recreational activity but more often than not this anti spendthrift mechanism turns out being a financial penalty when one of two (or both) events takes place:
- Person in question runs him or herself out of money and has no other funds to access when doing so is required
- Person in question is presented with an opportunity to access the funds though at a penalty and opts to do it because they have no other option, or place too high a discount on the penalty incurred to do so
Ultimately locking money away as a means to prevent your bad behavior from taking over it a method of treating a symptom not curing an underlying problem.
But that’s a digression…
For the less skilled in the life insurance realm, it’s common to 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?
It’s a question generated by ignorance. The truth is we can make cash surrender value available from day one, and not just a little, 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. Bringing just one more example to the table that when it comes to these products, good or bad is less about the products themselves and more about the design and implementation on the behalf of the practitioner.
Cash is King
We’ve been well known for our desire to keep plentiful cash reserves to ensure again emergency and seize upon opportunity. Cash in the bank is fine, but as the common criticism goes the yield is terrible.
There’s always money market account, but with most MMMF’s yielding around 1% it’s not like we’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 fund of telling people, life insurance is the best savings account I’ve ever opened.
Liquidity with Minimal Consequences
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 by a policy loan. There are those who like to play with semantics and make this sound like a terrible idea, but the truth is mechanically it works out pretty awesomely.
I had noted a long time ago that you can technically spend your money without losing the ability to earn more money on your money. Some like the analogy that goes something like: you can take your money out of the garage and drive it around town, and then put it back in the garage when your done all without seriously affecting how it grows.
Despite some of his other shortcomings, Nelson Nash was the one who correctly pointed out that you 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 a way to mitigate the cost associated with that never avoidable financing reality we face.
Asset Rich Cash Poor
For some reason we as 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 this props up networth) while being cash poor. This isn’t just something found on the consumer side, many large corporations have suffered from adopting this strategy. The 2008 financial collapse was kicked off largely 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.
Post opt 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 networth 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 join us.