Tag Archive for: Cash Value

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Amanda Rogers

Using Life Insurance as an Investment Tool

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Life insurance is more than what meets the eye. Forbes writes that life insurance is primarily purchased for risk management. How so? Life insurance helps families manage the risk of financial survival after the loss of a breadwinner. 

The death benefit from a life insurance policy can be used by the beneficiaries in many different ways, including to help:

  • Fund day-to-day living expenses, such as food, gas, and medicines
  • Pay off debts, like mortgages, credit cards, and car loans
  • Provide income to surviving relatives for health care or education needs, or
  • Pay federal and state estate taxes

While life insurance is great at managing the economic risk of death and can provide a rate of return on premiums paid over the years in exchange for a  death benefit, it also can be an effective investment tool for the policy owner while the insured is still alive.

Let’s discuss this further.

Life Insurance as an Investment Tool

As you look to diversify your investment portfolio, life insurance can be a dependable, lower-risk option to funnel money into because of its growth potential and tax benefits. 

There are two types of life insurance categories: term life insurance and permanent life insurance. Here, we are focusing only on permanent life insurance because it includes a cash value account in addition to a death benefit. The cash value component is used by the policy owner to protect, grow, and access wealth on a tax-favored basis while the insured is still alive. 

Let’s discuss how permanent life insurance can act as an investment tool.

Permanent Life Insurance

Permanent life insurance is designed to last your lifetime and is composed of three components:

  • Premiums
  • Cash value, and
  • A death benefit

The cash value is a tax-advantaged savings account. It serves as a living benefit that the policy owner can access for any reason before the insured has died.

When you make a premium payment, what happens? A portion goes to pay for the cost to insure a life for the death benefit amount, as well as for policy fees, state premium taxes, and commissions.

The remainder of their premium goes into your cash value account, which can grow and be accessed without paying tax, for you to use for any purpose at a later time.

There are a few different types of permanent life insurance contracts to note—and the main differences between the types of permanent policies have to do with what mechanism grows that cash value account.

Types of Permanent Life Insurance

  • Whole Life Insurance
  • Universal Life Insurance
  • Index Life Insurance
  • Variable Universal Life Insurance

Visit our article “Permanent Life Insurance: What Options Are Available to You?” for more details on each permanent policy.

Life Insurance as an Investment: Cash Value Life Insurance

All four aforementioned permanent life insurance policies include a cash value component which, when structured properly, can serve as a tax-favored investment vehicle that the policyholder can use while the insured is still alive. 

With all life insurance policies, a permanent policy still includes a large tax-free death benefit paid to the beneficiaries when the insured passes away. 

But the cash value component can have tremendous value as well. It’s available to the policyholder while the insured is alive, and grows tax-deferred.

The cash value can be used to offset future premiums and/or accessed tax-free, for any reason, using either policy loans or a withdrawal of principal. This component adds flexibility and provides a tax-favored source of income for retirement, travel, healthcare needs, or emergencies.

A Final Word

Life insurance, when structured properly, can be a low-risk option to stabilize and grow an investment portfolio on a tax-advantaged basis. In order to ensure your life insurance policy is acting as an investment tool, however, you need proper guidance and insight into selecting the right policy.

This is where our team at Acumen Insurance Solutions comes in.

Contact us today to learn more, then read on to find out what permanent life insurance options are available to you.

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The Acumen Team

How to Protect Your Family Using Life Insurance

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Do you need life insurance? Chances are yes.

Life insurance is designed to protect your family and loved ones after you’ve passed away. Investing in life insurance is especially important if you’re financially responsible for a child, partner, aging parent, or disabled loved one.

Why? Life insurance helps to provide financial security for your family and loved ones following your departure. Let’s discuss how to protect your family and loved ones with life insurance.

What is Life Insurance?

Life insurance is a contract between a policy owner and a life insurance company. In this contract, the life insurance company promises to pay a designated beneficiary a death benefit upon the passing of the insured.

Most of the time, that death benefit is paid income tax-free to the beneficiary.

Life Insurance Options

There are two main categories of life insurance available:

  • Term life insurance, and
  • Permanent life insurance

Simply put, term life insurance is less expensive and lasts for a period of years whereas permanent life insurance lasts for an insured’s lifetime, and is, therefore, more expensive. Permanent insurance also has a tax-advantaged cash value component that can be accessed by the policy owner during the insured’s life.

Interested in learning more about the differences between each? Check out our article “Term Life Insurance vs. Permanent Life Insurance.”

The Benefits of Having Life Insurance

Life insurance coverage can help in the following ways:

Provide Financial Security

Life insurance can help replace lost income after one passes away. The death benefit of a life insurance policy can be used for any number of reasons, including to:

  • Pay monthly bills and day-to-day expenses
  • Pay off debt (i.e. mortgage, car loan, or credit card)
  • Pay federal and/or state estate taxes
  • Provide an inheritance

Cover End of Life Expenses

Death is expensive—and often is a cost most families don’t want to be troubled with, especially following the death of a loved one. Life insurance can help a family pay for end-of-life expenses like burial and funeral services, cremation, burial plots, caskets, etc. 

Pay for Medical Bills

Life insurance can help a family pay for hefty medical bills if the insured passes away from health-related issues. There are also policies with optional benefits that can help pay for ongoing chronic or terminal illness care expenses.

Supplement Educational Expenses

If the deceased loved one has children or grandchildren, life insurance can help pay for educational expenses (i.e. college or private school).

Consider Cash Value Life Insurance

Cash value life insurance is permanent coverage—insurance that is designed to last for the insured’s lifetime—that includes a tax-favored investment account that the policyholder can use while the insured is still alive.

(Yes, cash value life insurance allows you to financially help your family and loved ones while you’re still living – and it grows tax-deferred!)

The cash value can be used to offset future premiums and/or accessed tax-free, for any reason, using either policy loans or withdrawals. This component adds flexibility and provides an immediate tax-favored source of income for retirement, travel, healthcare needs, or emergencies.

Read on to learn more about cash value life insurance.

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Partner with Acumen Insurance Solutions to Protect Your Family

There are many other benefits to owning life insurance. Life insurance could help keep a family business running or provide a charitable legacy—the options are endless.

Remember, it’s better to buy life insurance sooner than later. Why? Life insurance is less expensive the younger and healthier you are.

Moreover, your life insurance needs will evolve over time – so best to get familiar with your options now. Interested in learning more? Read on to see how your life insurance needs might change in our article “Can I Change My Life Insurance?”

hundred dollar bills
Amanda Rogers

Using Cash Value Life Insurance to Retain Top Talent

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There are a lot of questions when it comes to cash value life insurance…what is cash value life insurance? What are the benefits? How can it help your organization retain top talent?

Let’s answer all of these questions below, starting with what cash value life insurance is.

What is Cash Value Life Insurance?

Cash value life insurance is permanent coverage—insurance that is designed to last for the insured’s lifetime—that includes a tax-favored investment account that the policyholder can use while the insured is still alive. 

As with all life insurance policies, there is still a large death benefit paid to the beneficiaries when the insured passes away. 

But the cash value component can have tremendous value as well, since it’s available to the policyholder, for any reason, while the insured is alive. It grows tax-deferred and can be accessed tax-free via policy loans and withdrawals of principal. This adds flexibility and provides a tax-favored source of income for retirement, travel, healthcare needs, or emergencies.  

The Key Benefits of Using Cash Value Life Insurance to Retail Top Talent?

There are several advantages of using cash value life insurance to retail top talent such as: 

  • It can help attract and retain top talent by providing the beneficiaries with a valuable financial benefit in the event of an insured employee’s death. 
  • It can help incentivize key people to stay at the company and continue to perform at a high level or risk forfeiting valuable benefits.
  • It can help the company address “key-man” issues by offsetting the cost of recruiting and training new talent should an insured employee pass away. 
  • It can help improve morale and motivation among employees by providing them with a financial safety net in the event of their death. 
  • It can help create a sense of loyalty and commitment among employees by providing them with a benefit that they may not be able to get from another employer.

Which Life Insurance Plans Offer Cash Value Components?

The following types of permanent life insurance policies may include a cash value feature:

  • Whole life insurance
  • Universal life insurance
  • Indexed universal life insurance
  • Variable universal life insurance

Term life insurance—which is life insurance for a period of years—does not offer the cash value feature. Rather term life insurance only has two components: the premium that’s due and the death benefit.

Read on to learn more about the differences between term life insurance and permanent life insurance.

How Does Cash Value Life Insurance Help Retain Top Talent?

So, how does cash value life insurance help retain top talent?

Legal Agreement
First, a plan needs to be created using a legal agreement, then “funded” with permanent life insurance. Whether the policy is owned by the employer or the key employee depends on the situation.

The agreement outlines the employee’s obligations, typically tied to longevity and performance, that will trigger the payment of a meaningful retirement income over a period of years (for example, 75% of average salary paid each year from age 66 to 80).

This can help incentivize top talent to stay for a longer period of time and perform. If they do, they’ll receive a retirement benefit and if they don’t, they typically won’t receive anything.

Using Cash Value During Life

Cash value life insurance is the preferred method of funding these agreements. First, the cash value grows tax-deferred and serves as the source of the retirement income that is eventually paid to the key employee. Many policies offer competitive cash value yields without risk of loss or direct market exposure. 

Death Benefits

If the executive passes away unexpectedly, the death benefit is used to replace the projected income stream for his/her family that the executive would have received in retirement. The organization may also be entitled to a portion of the death benefit to compensate for the cost of losing and replacing the key person.

Offering a stream of income in retirement is a powerful retention tool, but the “self-completing” feature that life insurance death benefit provides can be so meaningful to the executive’s family that it can make it almost impossible for the executive to leave. 

It’s important to note that the organization could fund the plan with something other than life insurance, such as mutual funds, stocks, and/or bonds. However, these investments are taxable every year whereas the growth of the life insurance cash value is tax-deferred.

In addition, there is typically a risk of loss with these investments and they do not offer a self-completing feature like the life insurance death benefit. Lastly, life insurance carriers are some of the oldest and strongest companies in the world and can be trusted with these important assets.  

Funding Executive Retention and Executive Retirement Programs

Funding these plans isn’t free, so having a mechanism in place to offset costs can make approval by the organization’s decision-makers easier. 

In contrast to the policy used to fund the executive retention and retirement plan, above, our firm also uses a special life insurance-based program that allows organizations to earn 3.5-to-6.0% currently on their cash assets, without sacrificing safety or liquidity. 

If these funds are currently earning 1.0-to-2.0% in the bank, CDs, or short-term bonds, the organization can shift them to the life insurance-based program and use the “found” earnings to fund the executive retention plan. 

Using life insurance as a mechanism to fund executive retention and retirement plans, and as a way to offset the costs of such plans, can make these arrangements truly a win-win for the executives, their families, and the organization.

Learn More on Our Blog

Interested in learning more? Read on to learn about the benefits of credit union-owned life insurance, why a credit union should invest in credit union-owned life insurance, or what permanent life insurance options are available to you, including information on how cash value grows in each plan type.

*Important Notes: Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Policy performance is based on current rates as charges, and some values are not guaranteed. Medical and financial underwriting is required. Withdrawals and loans from life insurance policies classified as Modified Endowment Contracts (MEC) may be subject to income tax and a federal tax penalty, if taken prior to age 59½. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. See policy illustration for details. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.