A few years ago I was approached by an older gentleman in his early sixties named Jim. Jim wanted my help and expertise to move more assets into a high cash value life insurance policy.
24 years ago Jim was approached by his brother, Scott, a newly licensed insurance agent, to buy an insurance policy for him and his family. As you can imagine, he felt obligated to buy the policy. His fear of telling his brother “no” was far greater than the few hundred a month it would cost him for the policy. There’s a good chance many of you may have experienced this same situation.
As the years went on, his investment strategy was to follow the advice of the “experts” and his peers… “Invest in stocks, mutual funds, and your 401k.”
Now fast-forward 24 years. Jim has assets in 401ks, IRAs, and his life insurance policy. But here’s what’s interesting. It took Jim 24 years to realize his life insurance policy was his best investment. It had earned a little over 6%, it never lost money, and it had outperformed the investments in his 401k and IRAs. Now he wanted to move the rest of his money into a high cash value life insurance policy.
Ironically the policy he had so reluctantly purchased from his brother turned out to be the smartest financial decision he had made.
This is not an uncommon story. I’ve heard it more than once. Had my client been presented with a high cash value life insurance policy, as opposed to a more traditional type policy, he would have seen the benefits he was excited about much sooner.
Growth
A case study by Mass Mutual Life Insurance Company showed the performance of 3 policies from 1980-2013. The internal rate of return for each of these policies were 5.65%, 6.02%, and 6.22%.[10]
And while it’s not necessarily excessive returns, it’s better than what most people have earned in the last decade or two in the markets, without the emotional stress that comes from such a wicked roller coaster ride.
According to Crestmont Research, the S&P 500 earned actual returns (before management fees and taxes) of 0% in the last 5 years and 2% in the last 10 years. You’ll have to go back 20 years to hit a high of 7% annual returns.[11]
Now if you’re thinking you might be able to do better with mutual funds, it’s highly unlikely. According to Standard & Poor’s, over 99% of mutual funds consistently underperform the S&P 500. Chances are, if you’re invested in the stock market and/or mutual funds, the S&P 500 returns would be your best case scenario.
In comparison, cash value life insurance has done very well, and we’ve only started scratching the surface. You see, cash value life insurance is one of the most tax friendly financial tools we have. Money inside cash value life insurance, when handled properly, grows tax free, can be used tax free, and passes on tax free.
So let’s consider 2 additional factors, taxes and fees.
The case study showed life insurance policy returns of 6%. If you are in a 30 percent tax bracket, it’s the equivalent of 8.6% returns with taxes.
Now assuming a conservative 1% management fee, the equivalent return in the market would have to be upwards of 9.6% to compare to the life insurance returns. I can safely say (with the research to back it) it’s not very realistic to expect 10% returns every year in the market. Anyone who has had money in the markets for more than a few years knows that.
Another calculation we could make is the additional cost of term insurance you would have to buy in order to compare more accurately to what the cash value policy offers. While we are heavily focusing on this as a place to stockpile cash, it’s important to remember that the death benefit it provides is extremely beneficial as well. We’d have to increase our “equivalent returns” even higher to account for that.
In short, the growth inside a cash value life insurance policy is not flashy, but is conservative, consistent, and extremely competitive. Anyone who tells you otherwise is woefully ill-informed.
“But I Can Get A Better Return”
You might think the point of this section is to try and convince you that you can’t get better returns, but it’s not.
I strongly believe that conventional forms of investing will fall very short of what a solid cash value policy will do with far less risk, especially stocks and mutual funds. But the truth is it doesn’t matter.
One of the best benefits of cash value life insurance is the guaranteed access to money at any time you want it. If you feel you can get better returns somewhere else, and you’re willing to take the risk, the insurance policy will actually make the investment more profitable… more on how that works later.
Case and point. I have money in life insurance, but I’ve leveraged my policies for greater growth opportunities. My real estate investments have paid double-digit returns consistently for a number of years, and my policies have not restricted me from making those investments. On the contrary, accessing those dollars from my policies has simply made my investments more profitable.
Look at it this way. Your policy is creating a benchmark for you to help decide if risk is worth taking. If your policy is earning 5%, this is your benchmark. If you can do better than 5%, the money is there for you to use and increase your returns elsewhere, so long as you are willing to take the risk.
Tax-free growth
I don’t know about you, but I’m worried about taxes. Most people give up more to income taxes than almost anything else, and it can really damage your finances as we’ve seen. I know that if I don’t prepare adequately, I’ll have to suffer the consequences of poor planning.
Among many benefits, I believe one of the most attractive benefits of cash value life insurance is the way it is taxed. These benefits alone attract those that want protection from the uncertainty of taxes.
Let’s talk about a few of those tax benefits.
The first, and arguably one of the most important, is the tax-free growth.
It’s pretty simple actually. Growth inside an insurance policy is called a dividend, and by definition, is considered a “return of premium.” Since they are considering it a return of what you have already paid, it is not taxable.
That being said, there is one caveat; as the policy grows, you will have undoubtedly accumulated more than you contributed if you’ve designed it for high cash value. If at any point you decide to withdraw your money from the insurance policy, the growth (everything above the cost basis of the policy) can be taxable.
For example. If I’ve contributed $100,000 to the policy, and my cash value is $300,000, withdrawals up to $100,000 would be considered cost basis, and not be taxable. Withdrawals passed that cost basis would result in taxation. By handling this policy correctly, I can avoid the taxable events by using a combination of withdrawals and loans. I’ll talk more about how to do this later.
As long as it remains intact, it will continue to grow tax-free indefinitely. As you’ll soon discover, there is practically no reason to ever cancel the policy, keeping those dollars tax-free for the rest of your life.
The appeal of tax-free growth on your money is one of the biggest reasons large organizations and savvy individuals plug millions of dollars into these policies every year. You’ll have a hard time finding a better place for these types of tax benefits.
Tax-free Death Benefit
When you’ve amassed a large amount of wealth like Walt Disney, JC Penny, Ray Kroc, and others, there’s only one thing that stands in the way of passing that hard work on to your family…
…the Government.
Whether you have a big estate or a small estate, passing on money can be painful. Some of the largest estates are stripped to nearly nothing after taxes and probate.
Take the King of Rock and Roll himself, Elvis Presley. At the time of his death in 1977, his estate was worth $10 million. 73 percent of the estate went toward legal fees, estate administration costs, and estate taxes, leaving only $3 million to his daughter.
In addition to tax-free growth, cash value life insurance provides a tax-free death benefit, and one that bypasses probate altogether.
This means your life insurance death benefit will transfer with no income tax to those you leave it to, and there won’t be fees and expenses to get it there.
I can assure you of one thing, there is no better asset to die with than life insurance. It is the most heavily used estate-planning tool in the country because it can help pass on more of your hard earned money to your family.
Social Security
The icing on the cake in the tax discussion is this.
As a taxpayer, we all pay a social security tax. Its purpose is to give us an income down the road when we retire, but here’s the problem…
Most people don’t plan on it as their primary source of income, so if you’ve been diligent in saving, and you want to take a retirement income down the road from money you’ve saved or invested, your social security income could be at risk of taxation.
Now since it was originally a tax paid to receive it, it seems a little unfair to pay a tax on it, being penalized for having saved well.
The perk to cash value life insurance is that it remains one of the last places where you can draw money and not have it count against this social security tax. Even other tax-free sources of income, like tax-free bonds, still count income into the social security tax equation.
Cash value life insurance gives you the ultimate in tax benefits across the board.
Guarantees
Cash value life insurance policies are also equipped with solid guarantees.
While dividends, or company profits, are technically not guaranteed, a portion of the growth inside your policy is.
In the event that the insurance company can’t pay out a dividend, you are guaranteed to see an increase to your cash value inside your policy. Meaning you’ll always move forward.
While the above is true, it’s also important to mention that the insurance companies I personally recommend have paid profits for over 100 years straight, making it pretty unlikely that we won’t continue to see that in the future.
Accessing Money Inside Your Policy
While its been mentioned in a few sections already, I want to go into a little more detail on the best way to use money from your policy.
First and foremost, as you build cash value in your policy, you can access those funds at any time and for any reason. There are two ways to do so.
Withdrawals
One option for accessing money from your policy is to actually withdraw it. Even though it is possible, I don’t typically recommend it. Loans can provide more advantages and better benefits.
Loans
The fundamental difference between a loan and a withdrawal is that the withdrawal is a withdrawal of your money, while the loan is a loan from the insurance company.
By contract, the insurance company guarantees you the ability to borrow money up to the amount you have in cash value. And since you are a policyholder, these loans come at competitive rates.[12] Why? Because you have collateralized the loan with your cash value and there is no risk to the insurance company.
That low risk, and low maintenance use of capital is a great way for the insurance company to safely grow its capital, so they offer it to you at very advantageous rates.
For example, a company I have policies with just paid a 7.1% dividend last year, and their loan rate was 5%. Borrowing from the insurance company in that scenario netted me the difference.
Beyond the simple difference in loan rates and dividends, there are other advantages to loans as opposed to withdrawals. There are no tax consequences if you borrow beyond your cost basis (what you’ve put in). If, on the other hand, you withdraw past your cost basis, you could incur taxes. In addition to keeping it tax friendly, it keeps the policy cash value growing and working for you, it keeps the death benefit high, and it makes you accountable for the money you use.
By borrowing money from the insurance company, you ensure that your capital never stops compounding. It forces you to keep capital constantly working in your favor.
The Safest Place on the Planet
At the beginning of this book we walked through the time of The Great Depression. A very sad time.
But amid such chaos and confusion, life insurance companies held strong. While there is never any guarantee that some thing couldn’t happen, based on track record cash value life insurance is the best bet for safety of capital. It’s for that exact reason that banks rely so heavily on it.
They are extremely well oiled machines, and it would be hard to take them down. We’ve seen them consistently providing growth for over a century while experiencing twelve recessions and one Great Depression.
Stock Companies vs. Mutual Companies
There are 2 different kinds of life insurance companies; stock and mutual.
Stock companies pay out earnings to stockholders first, then potentially to policyholders.
Mutual companies, on the other hand, have no shareholders and only pay out earnings to their policyholders. The profits are what we refer to as dividends.
I like to compare it to making a deposit at the bank, and that deposit giving me credit as a shareholder to receive company profits. A highly unlikely scenario at a bank, but a good example of how a mutual company operates.
In looking for a way to maximize the use of cash value life insurance, a stock company does not stand out as the place to go. Mutual companies provide the most benefit, and are clearly a better option.
No Minimums or Maximums
There is no government minimum or maximum contribution to a cash value life insurance policy. We are free to contribute as much or as little as we want.[13] The only limitation will be how much insurance the insurance company is willing to offer. More on that shortly.
Extreme Flexibility
When talking about cash value life insurance, most are under the impression that premiums are due every month or year for nearly the rest of their life. This is hardly the case with high cash value life insurance.
One of the benefits of high cash value life insurance is the amount of money frontloaded into the policy. Because we jam-pack these policies with high levels of cash in the beginning years of the policy, we create a large amount of flexibility to adjust to different circumstances.
Future premiums can be reduced, or can even be completely eliminated in any year if necessary.
This gives us the ability to make a plan today and adjust, if necessary, tomorrow.
Keep in mind this is not your run of the mill policy, it’s specially designed for these benefits. I’ve designed 3 specific case studies that will show you some of the flexibility discussed
here. We’ll look at those shortly.
Death Benefit
While I mentioned the tax benefits surrounding death benefit, I want to hit the topic straight on.
First, it’s important to note that the risk of your death is now on the insurance companies shoulders and you have insurance. This is critical to caring financially for you and your loved ones.
Secondly, if your money is growing safely, while simultaneously giving you life insurance, then it’s a no brainer. The question becomes, “how much do I get?”
Having death benefit is a great side benefit of these cash value policies, and can be the jump-start to future wealth within your family. You’ll almost accidentally pass on a significant amount of money to your family.
Another thing to account for is the ever-increasing amount of death benefit.
You see, as cash value builds inside your policy there is a natural increase in the death benefit. The more cash value you put into the policy, the more the death benefit has to go up. So what naturally happens is the older you get, the more money you will pass on to your family. Pretty cool huh?
The “High” in High Cash Value Life Insurance
I wanted to make sure and write a section that distinguished why I call it “High” cash value life insurance, because it’s different than your traditional policy.
Have you ever heard of Joe Ayoob? This guy holds the world record for flying a paper airplane 226 ft. 10 inches. That’s a little over 3 quarters of a football field. That’s pretty crazy…
While you could give me the exact same piece of paper Joe Ayoob uses to fly world record paper airplanes, there’s really no chance I’ll be able to fold it for high performance. Mine barely make it across the table, let alone a football field. The same applies here. The performance of a cash value life insurance policy is based on how it’s structured (or folded).
For example, a typical cash value life insurance policy has a big fat $0 of cash value in the first year or even first several years. It can take decades to perform, which is the main reason some people don’t like it. While it does recoup those early years and performs well, it’s not the most efficient.
A high cash value life insurance policy is much more efficient, focusing on better growth now, and in the future. We see positive returns in the first few years, meaning more cash value than contributions, and better performance every year moving forward.
The biggest difference here is structuring the policy around cash growth and accumulation, and not death benefit. By doing so, you can maximize the growth of your cash.
Ownership
I’d like to add one small nugget here. Since the primary focus is not the death benefit in many cases, the insured (the person who’s life is insured), is not the top priority. You can maintain complete control as owner of a policy while insuring the life of someone else. The insured is simply the life the insurance is based on, but has no say in policy decisions.
So if health, age, or other factors don’t allow you to get the insurance you need, you can simply own the insurance on the life of another individual.
Closing a Policy
Life insurance policies can be closed at anytime. Your cash value is also called your “surrender value.” You can walk away with your surrender value anytime you want. However, if you do close your policy, you will be required to pay taxes on the growth of your policy (anything above what you have contributed).
This is why we want to die with this policy intact. This is easy to do with a little planning and your family will always be left with more money via the death benefit than if you cashed it out anyways.
By handling it properly, you can exercise options inside any insurance policy to eliminate future premiums, or out of pocket payment, and simply let your cash value grow. This is referred to as a “reduced paid up” policy.
This still gives you access to the cash value while keeping the policy in force. This keeps your money working inside the policy, keeping all the powerful advantages, without having to contribute additional money to the policy.