As discussed last week, cash value life insurance has a number of benefits. These include no volatility, tax-free growth and protection for your loved ones.
The downside we pointed out though, was the low returns (4-5% per year) compared to the stock market (8-9% per year) over long periods of time.
However, what if you could get stock market like returns while still maintaining the benefits of cash value life insurance?
Well, let us introduce you to a strategy very few people know called “premium financing”.
Premium financing increases your returns and the protection for your family provided by your cash value life insurance policy.
The way it works is like this: You will borrow money from a bank to pay the premiums on a much larger policy than you would be able to afford on your own. You pay the interest on the bank loan out of pocket. Over time, as the policy grows, the cash value inside the policy itself begins to pay the interest on the loan and can even pay back the entire loan itself without you having to come out of pocket.
For example, let’s say you have $50K of excess savings per year for 10 years you could use to pay premiums on a policy to build your cash value life insurance. Let’s say this premium was going to buy you $2 million of death benefit and provide you with $1 million of cash you could take out in 20 years. Using premium financing, you might be to still pay $50K for ten years, but you may be able to get a policy that would require a $200K annual premium and provide $8 million of death benefit. After paying the interest and policy loans, your cash value in 20 years wouldn’t be 4x the size it was without premium financing, but it would be close to double (i.e. $2 million).
To summarize, for the same premium you were already planning to pay, you increased your death benefit by 400% and your investment returns on the cash value nearly doubled. All the while you maintained no volatility, tax-free growth and protection for your loved ones. Very lucrative.
One caveat. You typically have to already be rich before the banks will make this deal with you.
If you know someone who could benefit from premium financing we would love to have a conversation with them to explain the underlying mechanics of exactly how it works.
All the best,
Your Fortis Capital Management Team