Can You Use Life Insurance for Wealth Accumulation?

When most people think of life insurance, they tend to think of it in its most basic form. The life insurance policy pays a death benefit to a beneficiary or multiple beneficiaries when the person insured by the policy passes away. But many have learned the powerful benefits of using life insurance for wealth accumulation.

If you spend any amount of time reading, watching, or listening to personal financial advice gurus, you will hear about all the evils of using life insurance in this way. Often these people refer specifically to whole life insurance or cash value life insurance more generally in their rants.

There are some legitimate reasons for their opinions. However, in most cases that we see in our practice (selling life insurance to people all over the United States) the problems most people have with their whole life, indexed universal life or other types of cash value life insurance are caused by poor policy setup. In other words, life insurance works really well for wealth accumulation when set up correctly from the beginning. The reason people rail against it is mainly that they only have experience with a poorly implemented version of it.

It’s unfortunate because it’s a little like deciding that you think cars are just awful. After all, you were one of the unfortunate souls who bought a Yugo back in the 80s.

Is Life Insurance Considered an Asset?

Before sitting down to write this article, I will confess that I never really considered this simple question. That seems a little ridiculous, even as I type it here on the blog, but it is true nonetheless. To answer the question clearly, yes, life insurance is considered an asset.

Two facts make it true and they are:

1. 1.  The IRS most definitely believes that the death benefit (or face amount) of life insurance policy is an asset. If you die and you own a life insurance policy, the death benefit is included as part of your estate. That means when the final calculation of all your assets is totaled to calculate whether or not you might have an estate tax liability, the proceeds of your life insurance policy are absolutely included as part of that calculation. Now, I know some sharp people will read this and say to themselves, “Yeah but…” and they are right, there is an exception of sorts. And that is if the life insurance policy that insures your life is not owned by you but by an irrevocable life insurance trust (ILIT), the death benefit proceeds are not included as part of your estate. How that works is another discussion for another day or you can head over and read this article that goes deep into life insurance and taxes.
   2.   Bankers believe that the cash value of a life insurance policy, in particular a dividend-paying (participating) whole life insurance policy. Why do I say this? Well, many banks are willing to make loans to you and assign your policy’s cash value as collateral for the loan. In fact, some of our clients do this, so we are familiar with the process. Bankers who understand the financial stability of mutual companies that issue dividend-paying or participating whole life insurance policies are more than willing to set up this arrangement. In fact, many banks own very large cash value life insurance policies themselves—bank-owned life insurance (BOLI). The reason why they do is a deeper discussion. If that interests you, check out this page over at the Office of the Comptroller of the Currency’s site.

There could be more proof that points to the fact that any type of cash value life insurance belongs on the asset side of your balance sheet but those two pieces of proof are pretty good ones to start with.

The Factors that Make Life Insurance Ideal for Cash Accumulation

This is not intended to be an exhaustive list by any stretch. There are dozens of factors that could make life insurance (whether whole life or universal life) ideal for accumulating wealth. But some of the most common ones that come up over and over with our clients and potential clients are:

• • The cash value remains stable and earns a steady rate of return. Yes, the overall return (internal rate of return) can vary a bit over time depending on dividend interest rates for dividend-paying whole life insurance and interest credits in an indexed universal life insurance policy but if you are making the premium payments, your policy will accumulate cash at an increasing rate over time. When you need it or when you want it for the matter, the cash will be there.

• • Life insurance cash values remain tax neutral as long as they are accessed correctly. It’s not difficult to stay out of tax trouble here, just imperative that you pay attention to what you are doing and it certainly helps to work with a skilled agent that can guide you. But one of the things that many clients enjoy is some degree of safety if tax rates do move higher over time. There are a lot of varying opinions about the direction of tax rates, however, deficits are rising and somebody’s gonna have to pay for it. The logical conclusion for many is that tax rates are headed up.Cash value life insurance enjoys tax-deferred growth and tax-free access—again, as long as you access the money through policy loans or a withdrawal up to your cost basis. What is preferred should be a discussion you have with your agent and will largely depend on the reason you want to access the money.

• • The death benefit pays your beneficiary the proceeds with any income tax due. I’ve already discussed this one above but it’s worth reiterating. For most people, who will not have an estate that is subject to federal estate tax, life insurance death benefit proceeds pass to your designated beneficiary free taxes.

• • Lastly, remember you always have access to the majority of your cash value in the form of policy loans. You do not have to be 59.5 or require some financial hardship to tap it. It’s a very simple process of calling the life insurance company and making the request. Typically speaking, you will have the money electronically deposited in your bank account within a few days depending on the company.

Life insurance really is among the ideal assets for creating and accumulating wealth. As we talk about with your clients and potential clients all the time, it is one of those assets that you work a little to create and comprehend on the front end but it's very simple after that. You fund the policy with the right design and it will accumulate cash that you can access any time you want, will grow predictably, will not dance around, and provide you with a pool of tax-free capital to use at your discretion.

If you would like to pursue a policy for yourself, please use our contact form to send us a message. We'll get back to you as fast as we possibly can!