Now that we have learned how to design a Whole Life Policy for success and where to view as part of your overall portfolio, it’s now time to look at practical uses of this amazing financial tool.
Part 3 – How to use your Whole Life Policy
Your Whole Life policy can do a lot of things and provide a lot of flexibility, but we want to focus on 4 key areas in this post. We will do an even deeper breakdown of each topic in a few upcoming posts.
- Retirement Income
- Emergency Fund
- College Funding
- Financing Yourself
- Retirement Income – There are a lot of financial advisors that are experts in asset accumulation during your working years but translating that into “retirement income” is whole different expertise. WL for CV can play a key role during your retirement income years, as your policy becomes a tax-free bucket for you to draw upon with no RMDs or early access penalty to contend with. Since pensions have become a thing of the past for most people, everyone reaching their retirement age, will begin accessing their various accounts that they’ve spent a lifetime accumulating, for the income needed to live in retirement. An example of these accounts/buckets, include IRA, Roth IRA, 401ks, Stock portfolio, etc. Some of these might carry some tax advantages and others will be susceptible to an ever-changing tax rate. Let’s look at a 401k account as an example; you can contribute to this account during your working years with pre-tax income, which allows you to reduce your current income tax, while also allowing the money to grow in a tax deferred environment. Tax deferred are the words I want to focus on, which means you will have to be taxed on the money when it’s accessed. Let’s say 25 years from now, the US continues to carry an ever-growing deficit and the only way to turn things around is for Congress to change tax rates. So now the top bracket is 65%; I know it sounds crazy but in 1971, the top tax bracket was 70%. If you accessed $100,000 from your 401k, your after-tax amount would only be $35,000. So yes, the 401k might give you some short-term advantages during your working years, but it leaves you exposed to two extremely important factors that are out of your control during retirement: Taxes and Market Volatility. Creating a new “bucket”, using WL for CV where success isn’t determined by the market movements or an unknown tax liability, can and should be essential for your retirement income plan.
- Emergency Fund – If you don’t have an Emergency Fund, you really should. This Fund should provide typically 4 to 12 months’ worth of expenses for you to pay bills and live your life. Whole Life can be a phenomenal tool for building this fund, but it won’t happen right away. Due to the early year expenses of whole life, it will require a few years before premiums paid into the policy will equal the cash value, typically 5-10 years. While your cash value is building in the WL Policy, you will have to keep cash available until this policy can become your only Emergency Fund. When using WL as your Emergency Fund, you can benefit from the following: Liquidity, Principal Protection, Cash Reconciliation, Creditor and Liability Protection, Higher Return on Funds and Additional Death Benefit.
- College Funding – Most people have heard of or use a 529 College Saving Plan. WL provides the same tax efficiencies as a 529 plan, namely tax deferred growth and tax free cash access, but also adds several other benefits:
- No Effect on Financial Aid – Life Insurance cash values are not factored into Financial Aid Applications
- NO restrictions on WHAT or WHO the money can be used for
- WL for CV – provides safe and stable returns, not correlated to the stock market
- Using the Primary Breadwinner as the Insured – I’ve read a few articles on this topic that would argue using the kids as the insured for these types of policies. I firmly believe that insuring the primary breadwinner is the prudent approach, for the simple fact that if the parent should pass away before the child goes to college, the death benefit will create the funds for college. If the same thing happens and child is the primary insured, who continues to fund that policy once the breadwinner isn’t there??
- Financing Yourself – For the past 100 years, Life Insurance has an established history of providing an alternative financial source for businesses and individuals. When traditional lending didn’t work, many have turned to their cash from their whole life policies. A few things that standout as the primary benefits on using your cash value vs. traditional financing –
- Your Whole Life Policy can’t say NO – When you need to borrow from a bank, there is a financial underwriting process and not everyone is approved. With Whole Life, no credit checks, no applications; you submit a form to request a loan on your cash value and the turnaround time before you have your check is typically 1 week.
- Ability to Avoid the Scary Payment – Unlike a traditional loan, where there is a fixed repayment schedule that needs to be paid, a loan against your cash value can give you much greater flexibility, with no outcomes that can affect your credit score. We firmly believe that having repayment plan is important when using Whole Life this way, but when real life happens and your cash flow changes, having flexible loan repayment terms that you can control and constantly change, can become incredibly valuable.
- Your Cash Value Keeps growing – When taking a loan on your cash value, the money isn’t coming directly out of your cash value, the insurance company is loaning you the proceeds with your cash value acting as collateral for the loan. As you are paying pack the loan balance, your original cash value will always continue to grow
I hope enjoyed our first deeper dive into WL for CV. A lot more to come. Stay tuned!!!
