Life Insurance Policies - There are Big Difference in How They Perform
Quit banks - or at least quit leaving lots of cash in them for extended periods. Now, nobody is suggesting you close any of your bank accounts, or give up existing services. It's just that businesses or individuals that keep large amounts of cash in checking or savings over long periods may want to know about an alternative.
Certain kinds of indexed universal life insurance (IUL) can be structured to provide liquid cash value that is 90% to 100% of your first-year contribution, and available for surrender or policy loan - even during the first policy year. The Early Cash Value Rider available from some carriers eliminates having to wait around for years to have access to your money. With some index strategies back-testing at 9% or above, and being able to pledge the cash for 6% loans, you never need to lose access to your money. Also, IUL index strategies nearly all involve hedging, so that each year, you never incur an investment loss!
Think of it this way. You might have a $100,000 Certificate of Deposit at your current bank - say a 5 year CD paying 2% interest. You couldn't touch the money during those five years without a penalty levied against the interest credited. For example, you want to buy a car for $40,000. Breaking up the CD would cost you in earned interest. So, you ask your banker if you could simply pledge the CD for a $40,000 loan. Thus, you would not interrupt the total interest being earned on the CD. The bank charges you, say, 4% interest on the car loan. You pay a net 2% above what you are earning. Not a bad deal.
Participating loans from IUL work exactly the same way. The earnings on the investment portion of the policy are not affected by having loans, or not having loans. The only cost of borrowing is the loan interest. Here's the important difference. While participating loans on IUL may cost you 6% interest (higher than the bank example), the better IUL index strategies may pay you 7%, 8%, even 10% in the long run. You also have to remember that policy expense charges are ongoing. Beating the loan rate is a real possibility though - in the long run. You need to expect it to take 15 years or longer for your cumulative index credits to exceed both the policy charges and the accrued loan interest.
However, as long as that day finally comes, you will achieve that enviable goal of positive leverage. Participating loans, so long as you provide for keeping the loan balance at less than, say, 80% of the Account Value, never need be paid off during the lifetime of the insured. Your collateral would outstrip the loan size with increasing room to spare. When the insured ultimately dies, death proceeds from life insurance are almost always income tax free. The proceeds first pay off the loan, and then pay the rest to the policy's beneficiary. So, instead of getting that coffee mug, you get a bunch of money paid if you die, and in some cases, you can get a substantial benefit in case of a long term disability.
For businesses, purchasing IUL on certain key employees under a 409A plan is a double benefit. It encourages the employee to stick around ("Golden Handcuffs"), while it also a great alternative place for the employer's cash.
So, when we look at savings, or when businesses look at the minimum amounts of cash they feel they need on hand to cover the ups and downs of their operations, why not leave that cash in IUL? In IUL policies, that cash can do you some good, instead of leaving it in a bank checking or savings account. Even a Certificate of Deposit gets you negative net interest (negative arbitrage) if you borrow against it.
Using IUL, and being your own banker, you can simply move your money from one bank to another "bank". This other "bank" gives you instant access to most or even all of your money through loans. (Remember the interest on the loans may be covered, or more than covered, by growth of the collateral which secures it - the Account Value). In addition, you get insurance. Pretty good deal too.
But wait, there's more! By moving your money into IUL, you move any investment growth from the world of "forever taxed", to "never taxed", like tax advisor, Ed Slott, CPA, says. Yes, life insurance cash value (Account Value) growth can continue indefinitely without income tax. Maybe Uncle Billy could have taken all those strings from around his fingers and trotted down to a different "bank" to make that deposit. He might even have avoided running into mean old Mr. Potter! (Back to IUL Table of Contents)