A cash flow insurance policy can help protect you from market volatility, provide tax-free retirement income, reduce reliance on banks and third-party lenders, and help you keep more of your money. But what exactly is it? If you’ve never heard of cash flow insurance before, this article will explain the basics of this type of life insurance policy.
LIFE INSURANCE: THE BASICS
When most people think of life insurance, they think of a term insurance policy. Term policies have low premiums (annual cost) and only pay out a death benefit if you pass away during the specified term. Outlive your term and the policy is void.
Cash flow life insurance policies have higher premiums, but they’re guaranteed to pay out a death benefit for life. And that’s not the only difference. A cash flow insurance policy offers living benefits too. In other words, you can use the policy during your lifetime AND it will still pay out a death benefit to your beneficiary.
Every time you pay a premium, a portion of it is reflected in a built-in savings account called cash value. The cash value of your policy represents how much your policy is worth, minus any administrative fees. And paying premiums isn’t the only way to increase the cash value of your policy.
Depending on the type of cash flow insurance you own, your insurance company pays a rate of return on top of what you pay into the policy. Some returns are based on equities and other market-based accounts, but if you own a whole life insurance policy from a mutual insurance company, the rate of return is guaranteed for life and not subject to market volatility. Plus, mutual insurance companies also pay non-guaranteed dividends.
HOW TO USE A CASH FLOW INSURANCE POLICY
What do you do with the cash value in a cash flow insurance policy? There are two primary ways to access this value during your lifetime—via withdrawals or policy loans. Here’s how each method works:
When you take a withdrawal from your cash flow insurance policy, you reduce the death benefit. Any money you withdraw is tax-free, up to the amount you’ve paid in premiums. Any wealth generated from returns is subject to taxes, but dividends are usually considered tax-free. Taking a withdrawal from an insurance policy is similar to taking a withdrawal from your bank savings account: It reduces funds available in the account, any gains are considered taxable income beyond what you’ve deposited into savings, and future gains are calculated based on the remainder of funds.
When you take a policy loan from your cash flow insurance policy, it doesn’t affect the death benefit unless the loan is still outstanding when you pass away. Any money you borrow is tax-free, including wealth generated from returns and dividends. Unlike a bank savings account, when you utilize a policy loan with a mutual whole life insurance policy, future gains are calculated based on the value of the account—regardless of how much you’ve borrowed. In other words, you can borrow a dollar and earn a return on it at the same time.
Here’s a basic example of how a policy loan works:
Paul has $50,000 in cash value in his cash flow insurance policy. He earns a 5% guaranteed rate of return ($2,500/year). Paul takes out a $25,000 policy loan at 7% interest ($1,750) charged by his insurance company and pays the loan within the year. He will still continue to earn interest on $50,000, in spite of the outstanding loan. His positive net interest is $750 ($2,500 – $1,750).
Policy loans can be used for real estate, business capital, college tuition… anything you want. They can even be used for retirement. In this case, the loan isn’t paid back, it’s deducted from the death benefit of the policy. Whether this option is right for you depends on your family’s needs and whether or not a significant death benefit is important for your financial goals.
Read More: Cash Flow Banking With Whole Life Insurance
WHERE TO BUY A CASH FLOW INSURANCE POLICY
Want to learn more about how to get living benefits out of your life insurance policy?
with a Wealth Strategist at Paradigm Life today. We specialize in cash flow insurance policies and work with the nation’s top-rated mutual insurance companies to find you a dividend-paying policy with a guaranteed rate of return structured to grow and protect your wealth. Your goals are our goals, and we’re with you every step of the way.