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Life Health > Life Insurance

Whole life: where cash value is king

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The phrase “cash is king” is so true, especially for negotiable transactions such as purchasing a vehicle, a home, gold or any other type of investment. Having cash in hand is power, but there is something that can be even more valuable than cash. And that is the cash value in a permanent life insurance policy.

Many find they need the protection that life insurance offers in situations, such as preserving the lifestyle of a surviving spouse and children, to insure the smooth transfer of closely held business interests, to use as a funding source to pay estate taxes, or to transfer wealth to the next generation. Once the need for a death benefit has been established, there is the added benefit of paying additional premium in order to build the cash value. 

There are many reasons why this type of life insurance policy may be the right place for your clients to grow their hard-earned money while having access to it throughout their lives.

Why is “cash value” better than “cash?”

One of my clients, a young dentist, was asked what he would do if he had $500,000 in cash. His immediate thought was to pay off his student loans and then put the rest down on a new home. Why would he want to give up having that nice cash cushion only to be back to where he had been five minutes earlier with no liquidity? How was he planning to build his dental practice, purchase 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 ultimately losing value to inflation each year. Additionally, interest made on that money is taxable, which further erodes the value of your cash.

On the other hand, if a client’s after-tax dollars were gradually 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. It can also be just as accessible as leverage in a negotiable situation. If the right product is chosen, the cash value can grow uninterrupted as collateral while they are borrowing the money from the insurance company to use for the purchase of the investment.

The cash value is also there for life events that happen where your clients need access to cash. It is always there ready to use for college tuition, wedding expenses, a 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 $500,000 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.

Which is better — the government’s plan or your client’s plan?

When people are asked what they believe to be their biggest expense in life, they will commonly say their house, car or education. In fact, the biggest expense may actually be taxes. There is an income 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 tens of thousands or even hundreds of thousands in taxes with good investment and estate planning. As former U.S. judge and judicial philosopher Learned Hand once said, “There are two systems of taxation in this country: one for the informed, and one for the uninformed.”              

It is time for your clients to take control of their money because no one will care about their money more than they do. A good way for them to gain control is to pay their income taxes now while taxes are near historical lows, and then gradually 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-preferred status of life insurance is one of the biggest benefits in the tax code.

Foresight or hindsight?

The most common words I hear from my clients after I show them these tax-favored strategies are: “I wish I had known about this 30 years ago.” Well, as long as your clients are still in good health, there are opportunities to use this strategy into their 70s, and even more options if they consider 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 absolutely 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.


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