Using Life Insurance to Build Wealth
There are many types of life insurance and multiple uses. The first thing to understand is the difference between term insurance and everything else. Term insurance, simply put, is rented insurance, just like that for a car. If something happens to you during the “term” of the policy, say 10 or 20 years, there is a payout. Term has no inherent value and is not an asset. You can't sell it, use it as collateral for a loan, or derive any financial benefit from it unless you get very sick or die.
Another type of insurance is called permanent insurance. This type of insurance is an asset. It builds a cash value and that value can be used in various ways. While it provides the same type of death and significant illness benefits as term, it also works like a savings account where you can use the money for other purposes. In fact, you can use your cash value for whatever purpose you want, without prohibitions on how it’s used, or tax penalties for using the money at the wrong time. Cash value life insurance, specifically dividend-paying whole life, might be the most tax-advantaged financial asset you can own.
Just for a moment, try to put aside what TV personalities or other self-proclaimed experts have told you. Briefly stated, here are several of the attributes of a properly designed, wealth-building strategy using life insurance.
Cash Value, which can be used either as a source of financing or income.
Guaranteed growth. When the stock market goes down, this asset still goes up.
Tax-free growth. No capital gains taxes, no mark-to-market taxes.
Tax-free distribution. If used properly, you can tap a policy to provide tax-free income for life.
Tax-free, red tape-free death benefit. If you die, the proceeds go to your beneficiaries, tax-free, privately, without probate, incontestable in court.
Health benefits. If you get sick, you can tap into your own death benefit to fund your own health care - a living benefit.
Insurance policies are off the table when determining financial aid awards, unlike 529 plans or IRAs.
Ultra-low-cost financing. Hassle free access to your cash value through policy loans. Through a concept referred to as non-direct loan recognition, the entire policy value earns a dividend regardless of any outstanding loan.
The type of life insurance policy described above has existed for decades but is also relatively unknown. It is also somewhat unpopular with some insurance agents due to its commission structure, which generates about one-third of the commission earned on typical cash value policies.
All in all, a cash value life insurance policy has the potential to accomplish several financial tasks at once. It is used for insurance, naturally, but can also be a powerful hedge against excessive taxation, a source of health care funding, and a formidable cash reserve to self-finance major purchases, or to take advantage of financial opportunities such as a depressed stock market.
If you have doubts or fears about purchasing life insurance, you're not alone. Countless types of insurance plans exist, and some highly visible celebrities and booksellers criticize and even ridicule insurance in frothy tirades. However, everyone's situation is unique, and advice targeting a mass audience by definition is not addressing your situation. The best way to determine if insurance, or any other financial product, is suitable and appropriate for you is to educate yourself and undergo a complete financial analysis. Arieff Consulting will conduct this analysis at no charge, provide you with your very own Potential Financial Solution, and objectively, unemotionally, support our findings by showing you the math.
Additional resources
This article from nearly 10 years ago documented a trend in the insurance industry, where the wealthy and high-earners had discovered cash value insurances assets as a "tax shelter for the rich." 55% of such assets were owned by the wealthiest 10% of families as far back as 2007. The trend has only increased.
The Infinite Banking Concept (https://infinitebanking.org/about)
Nelson Nash was one of the first, if not the first, to write about how to use dividend paying life insurance to build wealth. His book Becoming Your Own Banker, written in 2000, was foundational to the development and success of this niche aspect of the insurance industry.
Bank on Yourself (https://www.bankonyourself.com)
This extensive website provides a treasure chest of information about dividend paying whole life insurance. It also features a robust search function where you can quickly access information on the topics that most interest you, such as "taxes," "rate of return," or "college funding."
Note: Arieff Consulting is a BANK ON YOURSELF (R) authorized professional.