Infinite Banking – What Makes Cash Value Life Insurance a Premium Asset?
When you purchase insurance, you are insuring against a loss. This is the case for life insurance. And it’s a correct way to understand life insurance death benefit, which is the portion of any life insurance policy that pays out to your family if you pass away.
But the cash value of a specially designed whole life insurance policy is the often undiscovered and underutilized tool. It is the portion of your death benefit that you have access to use during your life, better categorized as a living benefit.
It’s this cash value of life insurance that would show up as an asset on your balance sheet, and a premium asset at that.
It’s important to understand what the cash value does and it’s role in your financial portfolio.
The cash value of life insurance is a superior place to store cash, because of its safety, liquidity, and growth.
It’s important to note here that we are not comparing life insurance to investments, which inherently carry risk.
It would be comparable to other safe, liquid assets such as checking or savings accounts, money markets, CDs or bonds.
In terms of growth, your cash value inside the policy grows through premiums, dividends, and interest. Once a dividend is paid, it sets a new floor inside the policy, and cash value never goes down in value, whether you fund it over your whole life or you stop payments early and have no more premiums due through an option called reduced paid-up.
You pay premiums to the life insurance company to keep the policy in force. While premiums are often thought of as an expense, when utilizing cash value life insurance, it would be more accurate to think of these payments like savings.
Once the life insurance company accounts for up-front costs such as paying for the death benefit, commissions to the agent and covering administrative costs of running the company, the insurance company’s responsibility is to invest those dollars to generate a return for the company. Because company profits are paid out to whole life policyholders of a mutual company through dividends, it is to everyone’s advantage that the company is profitable.
The life insurance company takes a long-range view of generating returns. To do this, they hold various assets on their books in order to grow their money.
While a bank is using leverage and fractional reserve banking, the life insurance company is holding dollar for dollar reserves. This is why you see more stability with life insurance companies overall, as referenced by the 526 banks that have failed since 2008, compared with 17 life and/or health insurance companies that have gone into receivership or liquidation. You can mitigate even this small amount of risk by working with a large mutual insurance company with a 100+ year history of paying dividends, A ratings or higher, and a Comdex score of 90+.
During the Great Depression, when more than 10,000 banks failed, 99.9 percent of consumers’ savings in life insurance and annuities remained safe with legal reserve life insurance companies. ~ Barry James Dyke
The life insurance company’s primary asset is corporate grade bonds, held to maturity. They use laddering to stagger the maturation timeframes to maximize their liquidity and income. John Moriarty’s book, Understanding Specially Designed Life Insurance Contracts, digs further into the asset allocation of a mutual life insurance company.
Life insurance companies have had a long-standing reputation of stability, so much so that banks themselves invest Tier 1 capital assets, their low-risk equity capital, into BOLI (Bank Owned Life Insurance). Similarly to specially designed life insurance for individuals, the cash value is capital the banks want to hold as reserves and equity, and is owned by the banks as an asset on the bank’s balance sheet. The bank is able to generate higher returns with BOLI than most other comparable safe assets, and the payoffs provide an income stream to offset rising costs for the bank like employee benefit programs. Reference the Partners 4 Prosperity article, The Banker’s Bunker: Where Banks Save Their Money, a 2-part series for more information.
Another important feature that distinguishes cash value of life insurance is that it is a tax-free asset. You pay taxes on your income when you are paid initially. Then, you put your taxed dollars into life insurance, and, as long as you use it correctly, your money is not taxed again. The growth is not taxed inside the policy, and the death benefit is not taxed when it pays out to your beneficiaries after you die.
Let’s contrast this taxation with how you’re taxed on a stock account, savings, money market, or CD. Here, you would pay tax before funding the asset, AND you would pay tax on all of the interest gained on the account. When you get a rate of return on a taxable account, you have to subtract the tax rate to get a true internal rate of return.
However, in a life insurance policy, you are not paying tax on the growth.
Because you’re not taxed, there’s a differential in comparing growth rates of other assets. When looking at life insurance over a 30+ year period of time, we see a growth rate of between 3 – 5%, at today’s dividend scale, which is 150 – 300 basis points above what you’d get in a typical savings vehicle.
When we look at the taxable equivalent, it’s closer to 4 – 6% internal rate of return.
Guaranteed to be Positive
Your cash value grows with a guaranteed, positive rate of return. Instead of rising and falling like in the stock market, equities, or indexed funds – your cash value only grows, with no potential for loss.
This allows you to keep pace with the tangible sting of inflation that you feel with rising costs in personal life or business.
The cash value of your policy is money that you have access to use by borrowing against it with a policy loan. This allows you to not only store cash, but be able to use it as a loan with no restrictions on the basis of credit, age, the intended use of the money, or waiting for the market to be high enough to warrant converting to cash, and without having to pay hefty taxes and penalties.
In conclusion, the cash value of life insurance stands out as an alternative asset class for a place to store your cash, where you have guaranteed growth that more than combats inflation, safety and stability, and the ability to access your capital.
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