How To Use Life Insurance To Build Wealth? Unfortunately, most people think of death when they think of life insurance. And few want to think about or talk about dying. As you may know, certain beneficiaries receive a financial benefit at the time of death. However, here are how to use life insurance to build wealth.
Types of Life Insurance
First, while there are numerous types of life insurance options, they fall into term, perpetual, or hybrid categories:
Term life Insurance
Term life insurance is the most economical as it provides coverage for a temporary period such as 10 years, 15 years, etc. Unfortunately, less than 1% of term life insurance pays. This is because people usually survive the plan’s time frame.
Permanent Life Insurance
Long-term liability insurance provides coverage for a person’s entire life. Permanent life insurance builds cash value. Cash value is a portion of premiums paid that is accumulated in a savings account. Over time, the money saved earns interest and, in the case of mutuals (owned by policyholders), dividends.
Universal life insurance
Universal Life insurance is a combination of temporary and permanent life insurance. Universal Life or UL is term life insurance that can protect the insured throughout their life. If not designed properly, this type of policy can become a huge waste of money. If the plan is well designed and managed, it can be an economical way to get permanent life insurance.
How To Use Life Insurance To Build Wealth
Insurance industry financial experts share a range of wealth-building strategies for life insurance to enjoy during your lifetime as well as for bequests. Here is an overview of how to use life insurance to build wealth when you need it:
1. List your policy for cash value.
Once considered the ‘only’ option when a policy was no longer wanted, needed, or affordable, many policyholders still choose this option simply because they don’t understand the other options available. This isn’t usually the option we recommend, as you’ll be submitting all policy benefits with your policy…and you could end up running out yourself.
2. Sell your policy
As we discussed in our life insurance articles, one way to get cash when you need it is to sell your policy and the rights to your death benefit. This option has become widespread only in the last few decades and is gaining popularity. Selling a policy can work well for people of advanced age and/or with serious medical conditions, both of which increase the likelihood of willing buyers. But what if you are 50 years old and running marathons?
3. Withdraw your cash value
If you include under your ‘base’ (the amount you have paid into your policy), you can withdraw some (or even all) of your cash value without penalties or taxes. You also don’t have to pay back what you withdraw as it was your money in the first place. This can be a preferred option for a home equity loan or a loan from your 401(k) or IRA because there are no penalties, taxes, or qualifying processes. However, your cash value will stop growing when you withdraw it, so consider the following option…
4. Borrow at your present value
Typically, people borrow against their cash value by going directly to the life insurance company for the loan. Because the cash value is collateral and owned by the company, it’s also quick and easy (no credit checks, paychecks, or approval processes). If interest rates are better at your bank, you may be able to take out a loan from your bank instead and still use your cash value as collateral. (Ask your banker or explore possible resources here.)
People, and even financial advisors, often talk about “borrowing your cash value.” But that is a misleading, imprecise term. You are not borrowing the cash value yourself (nor are you repaying interest yourself, despite what you may have been told). When you borrow from your insurance company, you use your cash value by borrowing against it.
5. Borrow against your death benefit
In some situations, you can use your policy to borrow money from a bank or private individual using your death benefit as collateral. As with selling your policy, this is not an option unless you are in your 80s or 90s. But depending on your situation, it may make more sense than selling your policy. And if you need the money for medical care – maybe you’re battling cancer or another serious illness – check if your policy offers the following benefits:
6. Receive an accelerated death benefit
Whether you have this option or not depends on the options and drivers you chose when you took out your policy. You want to have your policy checked or contact your life insurance company to see if you have an accelerated death benefit. If you do so, you may be able to receive a portion of the policy’s face value (total value including death benefits) by proving that you have a qualifying diagnosis or medical condition.
7. Retire your policy
Unlike lending on your policy, this is an irrevocable option and should only be used at a later age under the guidance of a professional. Most insurers offer this option. Unlike a reverse mortgage, this option starts your policy paying you. You choose a period, eg 10 or 20 years, life expectancy, or for life plus a certain amount to the beneficiaries. During this period, you would receive a certain amount of income every month.
8. Payment of Your Dividends
If you’re just looking for “a little extra” money to make the difference between survival and success, this could be your ticket. Typically, your policy’s dividends are used to buy co-payments made, but instead, they can be received tax-free up to your base.
9. Set up a charity fund with your policy
Charitable residual trusts can be used to sell highly valued assets (like real estate, stocks, or a company) in a way that reduces capital gains taxes and also benefits charitable causes. It is also a way for the person donating the policy to receive an income stream that comes from the charity investing the money from the asset.
10. Profit while you live
The most valuable asset a person has is their health and the ability to make money to save, spend, invest and give. However, if a terminal illness is diagnosed, medical expenses can wipe out a person’s savings or hamper their ability to accumulate wealth over their lifetime.
“Some life insurance providers offer an accelerated death benefit, a provision that allows the policyholder to receive a portion of the death benefit if they become terminally ill,” said Yogesh Shetty of Live Well & Earn Insurance. “If you’re diagnosed with a terminal illness, you can take out part of your life insurance to pay for medical expenses.”
11. Forced future savings
When funds are tight but life insurance coverage is needed and a seamless way to save money is desired, this type of term life insurance can be an excellent wealth-building tool.
“Returning premium term life insurance is a great way to build wealth,” says Sa El, co-founder of Simply Insurance. “If the person survives the term, the Return of Premium Life Insurance Policy reimburses all premiums paid into the policy. It’s like cash back protection.”
12. Create trust babies
Whether people have sizable or modest incomes, life insurance is a way to create trust in babies and legacies. A trust is a fund consisting of assets held by a designated trustee for the beneficiaries. The trustee determines how the assets are paid out to the beneficiary through the trustee.
“Once the trust is established, the trust owner can designate the beneficiary, the terms of payment, and the trustee.” per year equivalent to a $1.5 million term life insurance policy. Then they set up the trust as a beneficiary and then designate the beneficiary of the trust. This strategy can transform a family’s financial landscape and put them in a financially stable position.”
13. Use cash value as collateral
Whether capital is needed for business start-ups or business renovations, many minority business owners struggle to get small business loans approved.
“The cash values of permanent life insurance policies can be used as collateral for bank loans,” said Adam Doran, a financial advisor at Prevail Innovative Wealth Strategies. “Even if the bank doesn’t offer, ask if that option can be considered.”
14. Build your bank
Permanent insurance policies have a forced savings mechanism. This accumulation of cash, called cash value, is like building your bank and can be used for many things.
“Instead of borrowing money from a bank,” explains Clark Insurance’s Kerry Peabody, CLU, CLTC, “the policyholder can take out a cash value loan for many things.
15. Other life insurance benefits
Life insurance has other practical benefits that can help you throughout your life and help your heirs after you die, said Tanya Taylor, New York City-based financial coach and founder of Grow Your Wealth.
“The death benefit can be used to pay off your estate taxes instead of selling assets,” she said. “The death benefit can also be used for debt repayment and final cost support.”
Additionally, she said, owning a lifetime policy allows you to withdraw cash when you’re short on cash or affected by stock market volatility. If you have a business, life insurance also helps with succession planning.
Conclusion: Wealth-Building You Can’t Ignore
The game changes when you look at life insurance through the prism of a permanent policy. Suddenly you have an excellent combination of a death benefit and the opportunity to build wealth with permanent life insurance. Accumulating tax-free cash allows you to explore perm policies while thinking about the future and not just what happens when you die. Reason enough to get enthusiastic about permanent life insurance if you ask us.
Life insurance is not just a financial benefit for the family in the event of death; It can be a tool to enhance an investment portfolio and financial plan. Contact a registered financial adviser or licensed insurance agent for tax and eligibility requirements.