Cash flow banking is a proven wealth building strategy ideal for entrepreneurs that utilizes a dividend-paying whole life insurance policy with a paid-up additions rider to maximize growth and protect your assets. But how exactly does cash flow banking for entrepreneurs work?
In this article, we’ll explain the concept behind cash flow banking for entrepreneurs, outline how to use a participating life insurance policy in a business environment, and explain the benefits of this wealth building strategy for entrepreneurs and their families.
WHAT IS CASH FLOW BANKING?
If you’ve never heard of using a life insurance policy as a personal bank, you’re not alone. When most people think about life insurance and its uses, they think of term life insurance, which provides coverage for a predetermined amount of time and pays out a death benefit if you pass away within the covered term. Whole life insurance works differently. It provides coverage for your entire life and pays out a guaranteed death benefit, and it also features a built-in savings account called “cash value”.
The cash value of a whole life insurance policy reflects the amount you’ve paid into your policy, minus fees and administrative costs. Should you surrender your policy, it’s the maximum amount your insurance company would pay you. But surrendering your policy isn’t the only way to get money from your insurance company while you’re still alive. You can make partial withdrawals from your cash value, or you can borrow it tax-free in the form of a policy loan.
What’s more, whole life insurance policies also pay a guaranteed rate of return that increases the cash value of the policy. Plus, participating whole life insurance policies from mutual insurance companies pay non-guaranteed dividends. Storing wealth in a participating life insurance policy grows money faster than in a traditional savings account or high-yield savings account and faster than a CD or money market account. It carries less risk than market-based investments like stocks or bonds. And it’s more liquid than a qualified retirement plan or real estate investment.
HOW TO USE LIFE INSURANCE FOR BUSINESS CAPITAL
Every entrepreneur faces similar challenges in business. Chief among them: Acquiring business capital. While most will find themselves dealing with banks for small business loans or tapping into personal savings to get up and running, there’s a better option.
Cash flow banking is ideal for entrepreneurs because it provides a source of business capital without depleting personal savings or requiring bank approval. The only approval you’ll need is a clean bill of health and steady income to qualify for a whole life insurance policy. Once your policy is established, your cash value will begin to accumulate. It’s yours to access whenever you need for your business via tax-free policy loans.
There’s no limit on the number of whole life insurance policies a person can own, provided the face value doesn’t exceed their net worth. When you bring a business into the picture, it makes sense to have a personal life insurance policy and a business/multiple business insurance policies. In fact, some banks even require it to qualify for a business loan. In other words, if you’re going to have to get an insurance policy anyway, why not structure it to work in your best interest as an entrepreneur and avoid borrowing from banks altogether?
Unlike bank loans, you don’t need a certain level of credit or collateral to qualify, and you get to determine the payback schedule. Plus, policy loans often have lower interest rates than those you’ll be charged by a bank or other third-party lender. Funds are available in your account within a matter of days. Simply submit a policy loan request and your insurance company will transfer funds to your bank account.
Entrepreneurs new to cash flow banking might think they’re simply borrowing their own money, but that’s not exactly how cash value works. For one, the interest and potential dividends paid by your insurance company increase your borrowing power. More importantly, your policy will continue to grow regardless of outstanding loans.
If you have $50,000 in cash value in a whole life insurance policy and borrow $25,000 in a policy loan, your policy will still earn interest on $50,000. No other financial tool provides this benefit for entrepreneurs. If you were to borrow $25,000 from a $50,000 savings account, you would only earn interest on the remaining $25,000. And even though you’re paying interest on a policy loan, the fact that you’re earning interest on the full cash value of the policy means you still end up with positive net interest in most cases.
BENEFITS OF CASH FLOW BANKING FOR ENTREPRENEURS
In addition to providing tax-free business capital, cash flow banking offers four key benefits for entrepreneurs:
- Cash flow banking can be used as an employee benefit
- Cash flow banking provides a business succession plan
- Cash flow banking protects key personnel
- Cash flow banking offers increased tax advantages
Holding multiple policies in a business increases your cash flow banking capacity as an entrepreneur, but you can also utilize policies as part of an employee benefit package. In some instances, you’ll even receive a tax benefit for paying the policy premium for your employee. Should an employee pass away unexpectedly, the death benefit may be paid to the employee’s family. If the employee leaves the company, they may have the option to assume ownership of the policy or the business owner may surrender the policy and receive its cash value, minus applicable taxes.
As an entrepreneur, if you were to pass away unexpectedly your business would be at risk of going under. If you have a business partner, it will help guarantee the succession of the company if you purchase a type of whole life insurance called a buy-sell agreement where the death benefit of the policy is used to purchase the other partner’s share of the company. Alternatively, if you retire you may reassign your policy to your successor. Regardless, these types of policies can be used for cash flow banking within the company.
Business owners can purchase whole life insurance policies on key employees because they could incur a financial loss if said employees were to pass away unexpectedly. This type of whole life insurance, called key person insurance, pays out a death benefit to the company for the purpose of offsetting costs associated with hiring and training a replacement. While the insured employee is still living, the cash value can be used for business capital.
Finally, there are a number of tax advantages associated with cash flow banking including tax-free policy loans, tax-free growth of interest and dividends, tax-free death benefits and estate-tax benefits.
Whether you currently own a business or are thinking about starting one, cash flow banking for entrepreneurs can help decrease barriers to entry by providing continued business capital and offers other key benefits essential to your company’s success.