A safe, tax advantaged wealth building tool most people aren’t using??!!

So I first became aware of this personal finance tool from an acquaintance who happens to be a financial advisor. You may say in this instance, it’s a good example of everything that is old becoming new again! I’m sure most of you reading this have considered or currently have some form of life insurance. If I had to venture a guess, it’s either through your employer or you have purchased a term life insurance policy. From a pure insurance standpoint, it makes a lot of sense to go that route. It provides a good amount of coverage at a low rate. However, keeping in mind that this is not financial advice and purely my personal opinion, there are a lot of good reasons to consider a whole life insurance policy if you work with a broker who is familiar with the various riders that can be put into place to allow you to use this as a cash value plan where you can save large amounts of money over your annual premium amount.

To learn more about these policies and how they work, I was turned onto the book Bank on Yourself by Pamela Yellen. In the future I will do a more thorough review just on this book, but for now I will say that it offered significantly more detail than the original quick conversation and also generated a lot more questions on my part. I eventually reached out to a bank on yourself advisor to ask questions and have them run some scenarios for me. Obviously, it will be different for every individual because with the life insurance component the cost is impacted by your age, health, family history, etc……Also it will depend upon the size policy you are interested in and the death benefit you want to leave for your heirs. Based upon my criteria the break even depending upon the policy selected was usually around 5 years and then you began seeing between a 5-6% annual return from the dividends on the cash value side of the policy. The reason I mentioned earlier than sometimes something old can be new again is because years ago a whole life policy with cash value was a fairly common thing for people to have. Nowadays, not so much.

Admittedly, 5-6% isn’t the great returns everyone is looking for, but when you consider the fact that it comes without any risk to your principal, that is when it gets more interesting to me. Also, it’s a tool many people use to replace 3rd party financing, thus the bank on yourself concept! Once you have built up enough cash value you are able to take a loan out of your own policy to cover large expenses like house down payments or car purchases. Wouldn’t it feel much better to be paying yourself back monthly than making those car payments? Also, at least with the plan types described to me, even if you have taken out a loan you continue to earn dividends on the full cash value amount (loan included) which is also a great bonus.

Lastly, probably one of the biggest influencers in my personal decision making process, is the tax advantaged status of the policies. Of course consult with your own advisor or accountant, but it was explained to me that with the current tax laws you can take disbursements up to the amount you have contributed TAX FREE! Now that’s all well and good, but what about once you pass that point? Well, then you can flip over to taking out loans which obviously would not be taxable income. Depending upon your balance and the size of the loan, they could in theory be paid back by your annual dividends. Giving you a significant amount of tax free income.

Understandably, this won’t be for everyone. But If you have maxed out your other tax advantaged savings options and you are looking for life insurance anyway, it may be worth considering.

Gen Xer

Author: Gen Xer