The Daily Herald Business Ledger
BANKING AND FINANCE: published July 19, 2019
by Chris Everett
Last week while listening to a client complain about the hoops his banker makes him jump through for an equipment loan, I asked him why he doesn’t do his own financing?
“I don’t have $125,000 laying around,” he said.
But he DID have it. He just forgot.
He forgot about the $300,000 growing in his cash value life insurance policy.
“But that’s for my retirement!” he said. “I’m going to get a tax-free pension out of that when I retire!”
I told him it was possible to have those insurance dollars do more than one job simultaneously. In fact, every dollar he was contributing to his cash value life insurance policy was already doing more than one job: It was creating a growing tax-free death benefit for his beneficiaries.
A lion’s share of the death benefit was available to him for long term care expenses. If he became disabled, the premium would be paid by the insurance company. If he needed a cash withdrawal or loan, he could get it in about 5 days. This safety cash was earning at least 4% plus a dividend tax free. Banks are not paying that. And when interest rates rise, the rate on this cash-stash would rise as well.
But for the immediate issue at hand, his need to borrow $125,000, I reminded him that a loan against his life insurance cash value is not a loan of that cash value. It’s a lien. Therefore, his cash value would continue to enjoy uninterrupted compounding. That’s “breaking news” right there. But I digress.
He smiled when I reminded him that the borrowing cost in his insurance policy was lower than the bank rate.
And while a lower interest rate may be enough motivation, the beauty of this strategy goes further than that.
Most obvious — You don’t have to kowtow to a bank any more to get the money you need. If the money’s there, the insurance company doesn’t care why you want to borrow. They don’t even care if you ever pay the loan back. The loan is collateralized by your cash value. Of course, it’s in your best interest to pay the loan back. Especially, in his case, since he wants to access his cash values in retirement as tax-free income.
Retirement Advantage — What if he ends up not needing to or wanting to take tax-free retirement income from the policy as planned? Those cash values give him another advantage.
What if he set up regular withdrawals from his market-based retirement account and the market corrects? He can call us to stop the regular withdrawal and instead, take the cash from his life insurance policy … tax free. Because it’s tax free, he can take less than what he needed to take from his Taxable Retirement Account.
Now he can wait for his retirement account balance to recover before he takes another withdrawal.
Most attractive — You can design the payback any way you want. For example, you might decide on a five, 10 or 15-year payback structure or even longer. You can even amend the payback structure any time you want — a great business advantage if or when you experience a cash flow challenge.
If you die during the loan, the insurance company would simply deduct the remaining debt from the death benefit.
Tax deduction — You can still deduct the cost of the loan as a business expense in the same way you would if you borrowed from the bank.
Interest Rate Changes: The policy loan rate remains constant, at least in his case. There are policies with variable rates, therefore understand your policy.
My client thanked me and walked out of the office with a bit of a pep in his step. I love what I do!