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Today we're keeping with the theme from last week's episode. We're discussing the alternatives that you have to whole life insurance.
So, if you weren't stuffing thousands every year into your whole life policy, what else could you be doing with that money?
Obviously, you could be buying more cars, boats, houses, toys etc. but we're assuming that you (our loyal community) aren't interested in all those things. Instead you are interested in piling up cash to take advantage of other opportunities as they present themselves to you.
Well, maybe not all of you are on that path but our discussion should still be interesting to most of you.
The main question we're dealing with today…
Is Life Insurance a viable alternative to your savings account?
Life insurance cash values accumulate tax deferred so no annoying 1099’s come the end of the year with a tax liability attached.
This also means that you can compound growth of your money more efficiently since you have more money each year you compound (i.e. no removing some of the balance to pay the taxes due).
Since life insurance offers quick liquidity, there’s no real risk in terms of financial crunch due to emergency needs of money – you can access your money at any time and for any reason – processing is generally extremely quick (a day or two) and money can be sent via EFT.
*IMPORTANT NOTE* not all life insurance companies process loan requests as quickly as they should, and this might be a consideration when deciding on where to send your money.
Life insurance cash values can be accessed tax free so accumulating wealth and accessing it can be done without tax liability. There’s a specific way in which one must go about doing this, but it’s not all that difficult to do. It's something we help clients navigate on a regular basis.
CREDITOR PROTECTION – while some states afford various protections to married couples who title their assets correctly, life insurance is creditor/liability protected in most states (but not all). This seals life insurance cash values off from claims against you regardless of how the liability came about
States that recognize Tenants by the Entirety usually afford protections against assets titled as such only if the liability is solely due by one spouse. Joint liabilities subject TENT ENT titled assets to be 100% subject to claim. Life insurance doesn’t care about whose liability generated the claim, it’s untouchable where protected by state law.
There is no need to hold life insurance in trust or LLC to accomplish this protection
RATE OF RETURN is much better than all money equivalent accounts we are aware of and not just by a little, by a lot.
If one placed $1,000 per mo into a MMA paying 0.52% APR (current avg. according to Bank Rate) they’d accumulate $123,200 in 10 years.
If placing the same amount into a WL policy we’d design for this purpose they’d have $145,779in 10 years (assuming 3.75% CAGR). Simply doing nothing more than storing the cash in a different place they’d create $22,579 more. That’s an 18% raise for doing nothing.
ESTATE PLANNING with a bank account can take shape in a few ways to avoid probate.
- TOD
- JTWRS
- JTIC
- JTENT
Potential problems with JTWRS and JTIC – you have to actually share the account with someone who might not be a spouse if you are planning an automatic transfer. Also, this sort of titling creates potential gift tax liabilities when one tenant contributes substantially more to the account.
If the account is owned individually, then the account must be probated to transfer – probate is a public event.
Life insurance has a beneficiary designation and the money transfers immediately to the named beneficiary without need to jointly title or probate anything.
The death benefit itself significantly augments the value of the account upon death.
An emergency saving account becomes “super charged” by death of a spouse to ensure even more emergency savings now that one spouse must carry on the household finances alone, and note from our previous example about higher rate of return, they are not giving up money to do this.
FINANCIAL DISCLOSURE
Life insurance is not subject to the same financial disclosure that most other assets are. A lot of value can be shielded from disclosure, which helps people qualify for financial aid.
Life insurance distributions do not affect MAGI (modified adjusted gross income) meaning it can be used to enhance SSI (social security) benefits by potentially reducing the taxability of these benefits.
Income distributions from a life insurance policy do not have an income tax liability (assuming they are done correctly) which potentially reduces effective and marginal tax rate for income generated from taxable accounts or pensions in retirement.
ACCESS TO MONEY W/O LOSS OF EARNINGS
Life insurers continue to pay dividends and/or interest on policies with outstanding loans. This means that you have the ability to use your money (take it out of the policy and use it) while still earning interest and/or dividends on your money.
Imagine taking $5,000 out of your bank account and the bank still paying you interest on the $5,000 despite having withdrawn it.
What are the Cons?
Life insurance is not FDIC or NCUA insured. While life insurers do hold substantial assets conservatively to protect your interests, there is no insurance program that protects from default of the insurer like the FDIC and NCUA protects depositors. States do have insurance guaranty funds, but they function somewhat differently and do not provide the same level of protection
Life insurance contract never have positive returns in the first year (or few years). This draw back is well worth the commitment in our eyes, but immediate access to 100% of the money contributed is not possible for life insurance.
Since there is life insurance put in place, you do have to medical qualify for it. This means people in extremely poor health or whose lives contain certain activities deemed dangerous by the insurance industry do not have this option on the table.
