Mcdonald's Life Insurance: Cash Value For Franchise Owners?

McDonald's Corporation was founded by Ray Kroc, who bought out the McDonald brothers in 1961 using cash value from his two life insurance policies. This allowed him to cover the salaries of key employees and fund a marketing campaign for his new mascot, Ronald McDonald.

Cash value life insurance is a permanent policy that can build funds over time through its cash value component. This type of insurance is often used by business owners to provide liquidity and capital for their businesses. It can be used to take out loans, make withdrawals, or surrender the policy for cash. While it offers flexible access to funds and lifelong coverage, it tends to have higher premiums than term life insurance.

Ray Kroc's cash value life insurance policies

Permanent life insurance policies are an attractive option for business owners as they provide protection for business continuation and build tax-exempt cash values year after year with strong leverage capabilities. Ray Kroc, the man behind the McDonald's empire, understood the benefits of such policies and owned two cash-value life insurance policies.

In the early days of McDonald's, cash flow was tight, and Kroc was determined to invest every dollar he could back into the business. To overcome the constant cash flow problems, Kroc borrowed money from his two cash-value life insurance policies to pay the salaries of key employees. He also used the funds to create an advertising campaign for the soon-to-be-famous mascot, Ronald McDonald.

Kroc did not take a salary during the first eight years of his business, choosing instead to preserve precious cash flow and invest in the company's growth. The cash value life insurance policies provided him with the necessary liquidity to fund his vision when traditional banking options were not available.

The use of these policies allowed Kroc to maintain uninterrupted compounding growth and protection within his policy. The policies served as a private family bank, providing him with access to funds at any time and for any reason. This helped McDonald's grow to more than 700 restaurants within 10 years. Today, McDonald's serves more than 50 million people each day through over 36,000 locations in 100 countries.

Cash value life insurance as a business strategy

Cash value life insurance is a form of permanent life insurance that features a cash value savings component. This type of insurance is more expensive than term life insurance as it lasts for the lifetime of the holder and offers a cash value that can be used for various purposes. When you pay your premium, a portion goes towards funding the policy's cash value, which earns interest over time at either a fixed or variable rate. This cash value can be used to borrow against, withdraw from, or use to pay policy premiums.

There are several benefits to cash value life insurance. Firstly, it provides lifelong coverage, and beneficiaries will receive a death benefit when the insured person dies, as long as the premiums have been paid. Secondly, the cash value component can be used as an investment-like savings account, providing liquidity to businesses and individuals. This can be particularly useful for businesses that are struggling to find or borrow money for growth. Additionally, cash value life insurance offers tax advantages. The cash value accumulates on a tax-deferred basis, and if you borrow money against the policy, you won't have to pay taxes on the loan. Finally, cash value life insurance policies often include dividends, which can be taken as cash, added to the cash value, used to pay premiums, or used to increase the death benefit amount.

However, there are also some drawbacks to cash value life insurance. Firstly, it costs more than term life insurance, which provides more coverage for a lower price. Secondly, cash value can take a long time to build up, and you may have to wait many years before accessing a substantial amount. Thirdly, in most cases, the cash value is not paid to beneficiaries; instead, it typically reverts to the life insurance company. Additionally, if you borrow too much against the policy, it could lapse, and taxes may apply if you withdraw the cash value or surrender the policy.

Overall, cash value life insurance can be a useful business strategy as it provides liquidity and can be used to cover expenses and salaries, as in the case of Ray Kroc and the founding of McDonald's. However, it is important to carefully consider the pros and cons before deciding if this type of insurance is the right fit for your business.

Cash value life insurance vs. term life insurance

McDonald's founder Ray Kroc borrowed money from two of his cash value life insurance policies to help cover the salaries of key employees and to fund an advertising campaign for the mascot Ronald McDonald.

Cash value is a component of some permanent life insurance policies, such as whole life and universal life insurance. Term life insurance does not have a cash value component. Cash value life insurance can be used as an investment-like savings account, where the cash value typically earns interest or other investment gains and grows tax-deferred.

How Cash Value Life Insurance Works

When you make a premium payment for cash value life insurance, it is allocated in three ways: a portion goes into the policy's cash value, another portion covers the insurer's cost of providing the death benefit, and the remaining amount goes towards life insurance company fees and charges. The cash value can be accessed through a policy loan, withdrawal, or surrender of the policy.

Benefits of Cash Value Life Insurance

• Beneficiaries receive a death benefit.
• Participating life insurance policies offer dividends.
• Additional coverage can be added through riders, such as an accelerated death benefit.
• Cash value life insurance offers tax advantages, with tax-deferred accumulation and tax-free loans.

Drawbacks of Cash Value Life Insurance

• Higher cost compared to term life insurance.
• Building cash value can take time, and accessing the cash value may require waiting for a substantial amount to accumulate.
• Cash value is typically not paid to beneficiaries and reverts to the insurance company upon the policyholder's death.
• Borrowing too much can lead to policy lapse if the minimal cash value level is not maintained.
• Taxes may apply on withdrawals of cash value or surrender of the policy.

Term Life Insurance

Term life insurance offers coverage for a fixed period, such as 10, 20, or 30 years, and is generally more affordable than cash value life insurance. It does not build cash value, and the premiums are typically level throughout the coverage period. Term life insurance is suitable for those who only need coverage for a specific period, such as during the years of raising children or paying off a mortgage.

Benefits of Term Life Insurance

• Lower cost compared to cash value life insurance.
• Sufficient coverage for most families, offering the best value to protect loved ones.
• Conversion options may be available to convert the term policy to permanent coverage at a later date.

Drawbacks of Term Life Insurance

• Temporary coverage, with no built-in cash value component.
• Does not offer the flexibility to borrow against the policy or access cash value.

Pros and cons of cash value life insurance

Cash value life insurance is a permanent life insurance policy that remains in effect until death, provided that the premiums are paid. It is a type of insurance that offers a savings component, allowing the insured to build up a cash balance. This cash value can be used in several ways, such as taking out loans or withdrawals, or using it to cover premium payments or other expenses.

Pros:

• Beneficiaries receive a death benefit: Cash value life insurance provides a death benefit to beneficiaries, which is a permanent feature of the policy.
• Potential dividends: Many whole life insurance policies are "participating," meaning there is a possibility of receiving life insurance dividends if the policy is from a mutual insurance company. These dividends can be used in various ways, such as cash, adding to cash value, or buying "paid-up additions."
• Extra coverage with riders: Riders can be added to the policy for extra coverage. An accelerated death benefit rider is often included at no extra charge, and similar riders for chronic, critical, or long-term illnesses are also available for an additional charge.
• Tax advantages: Cash value life insurance offers tax benefits as the cash value accumulates on a tax-deferred basis. Any loans taken against the policy are also not taxed. Additionally, beneficiaries receive the death benefit tax-free.

Cons:

• Higher cost than term life insurance: Cash value life insurance typically costs more than term life insurance. If lifelong insurance coverage is not needed, and building cash value is not a priority, then term life insurance may be a more cost-effective option.
• Time to build cash value: Building significant cash value can take a long time, and it could be years before accessing a substantial amount.
• Cash value typically not paid to beneficiaries: In most cases, the cash value reverts to the insurance company upon the insured's death, and beneficiaries receive the death benefit minus any loans or withdrawals made from the cash value.
• Policy lapse with excessive borrowing: If too much money is borrowed or withdrawn from the policy, the cash value may fall below the minimum level, causing the policy to lapse.
• Taxes and interest on withdrawals: Withdrawing cash value or surrendering the policy may result in taxes on the portion of money that came from interest or investment gains. Additionally, loans taken against the policy will accrue interest until they are repaid.

Accessing the cash value of a life insurance policy

Cash value life insurance is a type of permanent life insurance that includes a cash value component. This means that the policy has a savings account-like feature that grows over time. The cash value can be used for several purposes, such as supplementing retirement income, funding a house remodel, or paying for a grandchild's college tuition. Here are some ways to access the cash value of a life insurance policy:

Taking out a loan

You can borrow against the cash value of a permanent life insurance policy. The loan amount accrues interest until it's paid back in full, and the maximum policy loan interest rate is dictated by state law. For example, in California, insurance companies can't charge more than 8% annually. It's important to note that if you die before paying off the loan, the outstanding balance will be deducted from the death benefit your beneficiary receives.

Withdrawing money

You can withdraw money from the cash value of your life insurance policy. If the withdrawal includes investment gains, that portion is typically taxable as income, and it reduces your beneficiaries' future life insurance payout.

Surrendering the policy

If you're willing to end your life insurance policy, you can cancel it and receive a surrender cash value payment, which may be a lump sum or paid over time. However, by surrendering the policy, you'll lose your life insurance coverage, and your beneficiary won't receive a death benefit. Additionally, surrender fees and taxes may reduce the amount you receive.

Selling the policy

In some cases, you may be able to sell your life insurance policy through a life settlement or viatical settlement. This involves selling the policy to a third party for more than the cash surrender value but less than the death benefit. Once the sale is complete, the buyer becomes responsible for paying your insurance premiums and maintenance fees for the rest of your life and will receive the policy's death benefit when you pass away.

Paying policy premiums

The cash value of your life insurance policy can also be used to pay policy premiums. If there is a sufficient amount, you can stop paying premiums out of pocket and have the cash value account cover the payments.

It's important to carefully consider the options for accessing your cash value, as they can impact the amount available to you, your death benefit, and your account's growth. Consulting a financial advisor can help you understand the potential consequences of each option.

Frequently asked questions