12/03/2015
In our mission to help families, we often sell the advantages of living benefits apart from the death benefit protection. Withdrawals from a whole life policy can provide tax-free income in retirement. Having cash in your hand is powerful, but there is something that can be even more valuable than cash. That is the cash value in a permanent life insurance policy. Many of us need the protection that life insurance offers; preserving the lifestyle of a surviving spouse and children, to insure the smooth transfer of business interests, or to transfer wealth to the next generation. Once the need for a death benefit has been established, there is the added value of paying additional premium to build the cash value.
Example: A young dentist, was asked what he would do if he had $700,000 in cash. Immediately he thought to pay off his student loans and then put the rest as a down payment on a new home. Why would he give up that cash situation to be back to where he had been five minutes earlier with no liquidity? How was he planning to build his practice, buy equipment and pay for his staff? Cash is great, but once spent, it may be gone forever. And if left sitting in a savings account waiting for an opportunity, it is earning little interest and losing value to inflation each year. If after-tax dollars were taken from a savings account and used to purchase a whole life insurance policy, the credited cash values can grow tax-deferred throughout his or her life. If the right product is chosen, the cash value can grow uninterrupted. The cash value is also there for life events; for college tuition, wedding expenses, down payment on a home, medical expenses and, ultimately, to fund retirement years.
The peace of mind that comes from having that cash value permanent life insurance policy is another reason why cash value is king. In the case of the dentist, wouldn’t he be better off keeping the $700,000 in cash value within the permanent life policy? As long as the policy is kept in force and the premiums are paid, the cash value would grow while he is paying down student loans, making payments on a 30-year fixed mortgage, using his cash value as collateral to purchase dental equipment, etc., all while having a large income tax-free death benefit standing by in case he passed away prematurely.
When asked, what is the biggest expense in life? They commonly say their house, car or education. In fact, the biggest expense may actually be taxes. There is tax on wages, sales tax on purchases, investment taxes, and perhaps, ultimately, estate taxes at the time of death. It is difficult to avoid the first two, but your clients may be able to save hundreds of thousands in taxes with good planning
It is time to take control of our money because no one will care about our money more than we do. A way to gain control is to pay income taxes now while taxes are near historical lows, and then move some of that money into a cash value permanent life policy where it will grow tax-deferred, can be accessed by way of policy loans during their living years, and then ultimately pass income tax-free to their families upon their passing. The tax-advantaged status of life insurance is one of the biggest benefits in the tax code.
The most common words I hear after I show these tax-favored strategies are: “I wish I had heard about this earlier…” If you are still in good health, you can use this strategy into your 70s, and more options with other healthy family members with an insurable interest and a need for life insurance. And if they fund the policy right up to — but not over — the modified endowment contract (MEC) limit, they can maximize the policy’s growth.
If young people beginning their first job have the foresight to implement this strategy, they will have a foundation for their future. This plan will protect them in a recession or even a depression. And it will work under all circumstances efficiently, not just in perfect conditions.
