Life Insurance: A Wealth-Building Tool For The Rich

Life insurance is a crucial form of protection for families, helping them to cushion the financial blow of losing a loved one. However, it is also an investment strategy used by the wealthy to create and maintain wealth. Permanent life insurance, which includes whole life and universal life plans, combines a death benefit with a savings component. This allows the policyholder to invest on a tax-deferred basis, providing a tax-free benefit to beneficiaries upon the policyholder's death. This can be used to pay estate or inheritance taxes, ensuring that other assets do not need to be liquidated to cover these costs. Additionally, the wealthy can use offshore life insurance policies to pass down assets, such as stocks or yachts, to their children tax-free.

Life insurance as a tax-free personal bank

An Alternative Investment Strategy

America's wealthy elite have been using cash value life insurance to stockpile wealth for centuries. This strategy involves using life insurance as a personal bank and a financial bunker for tough times. It is an alternative to the risky investment strategies taught by Wall Street.

A Highly Efficient Form of Cash Value Life Insurance

This strategy involves a highly efficient form of cash value life insurance designed to supercharge savings and stockpile wealth. It is a product so powerful that it's responsible for the success of Walt Disney, JC Penney, Ray Kroc, and thousands of others.

How the Wealthy Use This Vehicle

The wealthy use cash value life insurance to create more wealth, take less risk, and create predictable income they can't outlive. They contribute extra money to their cash value to boost growth and take out loans against the value. This allows them to avoid taking out loans from traditional lenders or dipping into savings accounts to pay for large purchases.

Why Banks and Corporations Place Billions in This Vehicle

Banks and corporations place billions of dollars in this powerful vehicle because it provides the ultimate in safety, stability, and growth. It is also classified as Tier 1 capital, which is the safest capital a bank can have.

How to Earn High Returns

By leveraging his life insurance policies, Jake Thompson, the author of "Money, Wealth, Life Insurance," earned over 300 percent returns. He also used his cash value life insurance to invest in two real estate properties, making back his entire investment in rental income within three years.

How to Create a Safe, Predictable Foundation

Using cash value life insurance as a tax-free personal bank can help create a safe, predictable foundation to enhance every financial decision you make. It can provide liquidity and improve cash flow, allowing policyholders to secure funds for unexpected expenses, such as medical bills. It also offers guaranteed returns that are not tied to the market.

Life insurance as an investment tool

Life insurance is commonly known for providing a financial safety net for loved ones in the event of one's passing, but it can also serve as an investment tool. Certain types of life insurance policies, particularly permanent ones like whole, universal and variable, allow you to build cash value over time. You can access this cash value during your lifetime for various financial needs or grow it as an investment.

The cash value in a permanent life insurance policy can grow through interest rates, dividends or market performance, depending on the type of policy you have. Whole life insurance, for example, offers fixed premiums and guaranteed cash value growth. In contrast, variable life insurance offers the potential for higher returns but comes with the risk of market volatility.

Using life insurance as an investment provides several financial advantages. One of the most attractive features is the tax-deferred cash value growth, and withdrawals are often tax-free. Life insurance with an investment component also makes it possible to borrow against the cash value, providing a convenient way to access funds without disrupting the investment's growth. Additionally, adding a life insurance investment plan to your portfolio introduces an alternative asset class, enriching your investment diversity.

However, it's important to be aware of the associated risks and considerations. Permanent life insurance policies often come with higher premiums than term life insurance, which can add up over time and affect your overall financial planning. Accessing your cash value before a certain period may result in penalties or surrender charges, and market volatility can affect your cash value if you opt for variable or universal life insurance.

To invest in life insurance, start by assessing your financial situation, long-term goals and risk tolerance. Then, select a life insurance policy that offers investment opportunities, such as permanent policies like whole, universal and variable life insurance. Be sure to understand the costs, including premiums, fees and other charges, which can impact the growth of your cash value and overall returns. Once the policy is active, keep an eye on the cash value component and utilise it for loans or as collateral for other financial needs. Remember to monitor your policy and its performance regularly and make adjustments as needed.

Life insurance for business owners

Life insurance is a recommended precaution for almost everyone who supports a family, but it is especially important for business owners, who often carry more expenses and support more people.

Protect Your Family

Life insurance is crucial for anyone who supports a family, but it is even more vital for business owners, who often have more financial obligations and people depending on them. In the event of the owner's untimely death, a life insurance policy can help cover outstanding business debts and make up for the sudden loss of income. While surviving family members are generally not responsible for business debts, a suitable life insurance policy can assist in keeping crucial business assets, such as property, out of the hands of creditors.

Keep Your Business Running

Some businesses have supplier contracts, employees to pay, and daily operating expenses. These expenses will persist even if the owner passes away. A life insurance policy can help protect your family by allocating a portion of the death benefit to business expenses, ensuring the company can continue operating during this difficult time.

Equalize an Estate

Life insurance can help assure that each of your heirs will receive an equal amount of money or asset value upon your death. This is particularly relevant for business owners with children or a spouse, as some heirs will inherit ownership of the business, while others will not. Life insurance can provide a death benefit to those who do not inherit a share of the company, ensuring that all heirs receive a fair distribution of your estate.

Fund an Agreement

It is prudent for business owners to have a plan in place to ensure financial stability for their company after their passing. A common strategy is a buy-sell agreement, or buyout clause, among business partners. This stipulates that a financial transaction must be made by the surviving owners to settle ownership of the business. Life insurance policies can be utilised to fund these agreements, ensuring that your beneficiaries can fulfil them and maintain their interest in what you have built.

Protect Your Business from Loss of Key Personnel

"Key person" or "key man" life insurance policies are designed to protect business assets rather than personal assets. These policies are crucial for larger businesses, as they provide financial protection in the event of the death or disability of a key employee. For example, if the chief financial officer of a company with specialised knowledge passes away, key person insurance would help cover the costs of training or educating a replacement employee.

Life insurance to protect family wealth

Life insurance is a popular way for wealthy individuals to protect and maximise their family's wealth. It can be used as an investment tool with tax benefits, and can also be used to protect a family's inheritance or a business.

Protecting and maximising wealth

Life insurance can be used to protect and maximise the wealth of your family in several ways:

• Tax benefits: Life insurance death benefits are income-tax-free for your beneficiary. This is especially appealing if you want to provide an inheritance that doesn't create an extra tax burden.
• Estate taxes: If your estate is large enough, your heirs may need to pay estate taxes, reducing the amount they will inherit. Life insurance proceeds can be used to pay these taxes, helping to maximise the amount going to your heirs.
• Business protection: Life insurance can fund a buy-and-sell agreement in the event of a partner's sudden death. The deceased partner's family gets a payout while the surviving partners maintain control of the business.
• Investment strategy: Permanent life insurance policies that last your entire life can build cash value. This money can be withdrawn or borrowed while you are alive and can provide an additional stream of income.
• Protecting a family's inheritance: Life insurance can be used to protect a family's inheritance. For example, if you have a special-needs child, cash-value life insurance can be used to fund a special needs trust for the benefit of your child.

Types of life insurance

There are two main types of life insurance: term and cash-value. Term life insurance offers temporary protection for a specific period, while cash-value life insurance provides protection for a lifetime and can be a more efficient and effective component of a wealth transfer plan.

Life insurance to avoid estate taxes

Life insurance is a powerful tool for the wealthy to avoid estate taxes and preserve their wealth. Here's how it works:

Irrevocable Life Insurance Trusts (ILITs)

The most common way for the wealthy to avoid estate taxes is to use an irrevocable life insurance trust (ILIT). Instead of owning a life insurance policy directly, they take out a policy and put it inside an irrevocable trust. The trust owns the policy and receives the death benefit, which is excluded from estate taxes. The trust then pays the tax bill and distributes the remaining assets according to the insured's wishes. This strategy can save millions of dollars in taxes, especially for ultra-high-net-worth individuals.

Private Placement Life Insurance (PPLI)

Another strategy employed by the ultra-wealthy is private placement life insurance (PPLI). PPLI is a life insurance policy owned by an offshore trust. Assets placed into the trust are treated as premiums, and when structured correctly, these assets can be passed down to beneficiaries without incurring estate tax. This can result in significant tax savings for families with substantial assets.

Ownership Transfer

To avoid estate taxes, individuals can also transfer ownership of their life insurance policies to another person or entity. By doing so, the policy is no longer considered part of their taxable estate. However, it's important to note that the original owner must give up all rights to the policy, including the ability to make changes or borrow against it. The new owner must also pay the premiums. This strategy is most effective if done at least three years before the insured's death, as the three-year rule applies to ownership transfers.

Tax-Free Death Benefits

Life insurance death benefits are generally income-tax-free for beneficiaries, making them an attractive way to pass on wealth. In contrast, leaving money in a retirement plan like a 401(k) or traditional IRA would result in income tax for heirs. A life insurance policy provides a tax-free asset that can help cover estate taxes, ensuring loved ones don't have to sell off assets to meet tax obligations.

Frequently asked questions