Cash value life insurance solves a lot of problems that we’ve already discussed, but in this chapter I wanted to discuss a few other areas where it can save you, and earn you, additional money.
Throughout your life you’ll likely save hundreds of thousands of dollars to buy all kinds of necessary and unnecessary items. Cars, homes, medical expenses, education, weddings, to name a few.
It’s clear that borrowing on high interest credit cards and loans is an expensive way to pay for those items, so I won’t go into any more detail than that. I’m going to assume you save and pay cash.
In addition to large purchases, you’re hopefully keeping emergency savings liquid, safe, and accessible.
What most people haven’t thought about, however, are the thousands of dollars that have been lost (or not earned) by saving for these items in the conventional way.
When you pay cash for something, you have to save for it first. And where do you save it? Somewhere you know you can get it when you need it. For most people, this is some form of savings or checking account.
There are two problems here. The first is in regards to how you save it, and the second, how you spend it.
As you set money aside for these large purchases and emergencies, you’re putting thousands of dollars to very little use in low interest, taxable accounts. If you’re earning 1% inside a savings account, but could be earning 5% in a life insurance policy, you’re missing out on 4% interest every year. We call this opportunity cost, and it means thousands of dollars lost in your lifetime.
In addition to low interest and growth, you are also required to pay taxes on what little you have earned. This reduces your savings efficiency even further.
Now this doesn’t apply just to large purchases. You may keep cash for emergency savings. You might be an investor or business owner that sits on large amounts of cash, waiting to use it.
When you plug cash value life insurance into the equation, your savings dollars earn more, and your tax burden is reduced. It’s a much more efficient way to save.
Now the second problem is this. When you pay cash for a car, you typically don’t plan to put that money back into your savings on any schedule. You simply plan for your next purchase, and save what’s necessary. This emphasizes the real value you are placing on your dollars… very little.
Let me explain…
When you borrow money from a bank, do you expect them to charge you interest? Of course. When you lend someone money, do you expect them to pay you interest? Of course. Yet when you use your own money, you place no such value there. Why?
This is exactly why I recommend taking loans against the insurance policy. It ensures that you are accountable to the money you use. It ensures you never liquidate your account to make a purchase with no intention of keeping that money growing. It requires you to never interrupt the continual growth of your dollars. Overall it makes you more accountable, more efficient, and more profitable.
Making Your Investments Better
As I’ve previously mentioned, using your policy to make investments only makes those investments more profitable. I’m now going to address why.
Let’s jump into an example. Let’s say I’ve got an investment where I can earn 10% returns and I invest $100,000.
At the end of the year, I’ll have made $10,000. At capital gains rates of 15%, I’ll owe $1,500 in taxes.
Total profit: $8,500
Now let’s assume I’ve got that money tucked in my cash value life insurance policies, and I borrow the money from the insurance company at 5%. Here’s how it breaks down:
Essentially what we’ve done is turned an effective 8.5% return to a 9.25% return. How? By taking advantage of an interest deduction that reduced my taxable gain to $5,000.
This is a very simple version of the story however. What we haven’t mentioned is the money in my life insurance policy is giving me death benefit and is growing competitively after the investment is liquidated. Without the policy, my money would most likely go back to being extremely inefficient, in a low interest, taxable environment.
The point is that life insurance makes you smarter as an investor. It makes your investments more profitable, and gives you a benchmark to beat. If you can do better than the policy growth, do it, if you can’t, don’t. It’s that simple.
Making Your BusinessBetter
Just like an investor, cash value life insurance can add extra benefits to what you are already doing in your business. Why? It keeps your money working more efficiently, and helps reduce the taxable income from your business.
By using this type of policy, business owners are able to make better use of their capital, reduce their personal and business tax liability, cover key employees in a more efficient way, and a slew of other items depending on your business.