Leveraged life insurance is a sophisticated strategy for investing money and creating wealth. This method, though not widely discussed in mainstream financial planning, offers a unique avenue for building an investment portfolio. At its core, leveraged life insurance revolves around the innovative use of life insurance policies – not merely as safety nets but as dynamic tools for financial growth and opportunity.
Historically, investors and financial planners have tapped into the potential of life insurance, exploiting the spread between the growth rate in these policies and the lower interest rates offered by banks. This is the core of the leveraged life insurance strategy, utilizing this spread–often around 2%–and the tax advantages of whole life insurance, to significantly amplify investments.
This guide examines the process of funding a life insurance policy, borrowing against its cash value, and then leveraging these funds into smart, cash-flowing assets. We will look at the many different investments, from real estate to business, and how this approach improves on them.
Understanding Leveraged Life Insurance
The Concept of Leveraged Life Insurance
To begin, leveraged life insurance, a term that may seem complex at first, is a strategy where individuals leverage against their life insurance policy cash values to make investments. This strategy depends heavily on banks, and their willingness to offer CVLC, or cash value line of credit loans.
The Role of Cash Value Line of Credit (CVLC)
A CVLC, or cash value line of credit, is a simple instrument. It’s a line of credit offered by a bank or financial institution against a whole life insurance policy’s cash value.
Importantly, cash value in a life insurance policy is essentially cash, banks offer this line of credit with little to no underwriting.
Specifically, life insurance policies grow with dividends, whereas banks loan money based on LIBOR–the benchmark for interest rates.
Leveraging life insurance, as a strategy, benefits from this spread–historically around 2%. Overall, that means between the growth rate of the life insurance policy and the bank loan interest rate, you would be able to borrow money at 2% lower than the life insurance policy is growing. For families that desire their wealth be better protected, private family banking is another way to ensure you choose the most effective strategy.
It’s this spread that enables policyholders to capitalize on their investments in a way not possible through traditional banking methods. Infinite banking ensures your life insurance policy is effectively managed for optimal financial security and growth.
The Process of Leveraging Life Insurance
Now, let’s look at the process of leveraging life insurance, step by step, and how it works.
- Funding a Whole Life Policy – To start, you will want to fund your initial whole life insurance policy. To do this correctly, you will want to use an expert who understands the process and what you want to accomplish.
- Borrowing Against Cash Value – Once your policy has built up enough cash value, it becomes a resource you can tap into. This is where a Cash Value Line of Credit (CVLC) comes into play. Instead of a direct loan from the insurance company, you approach a bank and take out a loan against the cash value of your policy.
- Making an Investment – With the funds from the CVLC loan in hand, you’re now ready to invest. The goal is to direct these funds into investments that yield higher returns than the cost of the loan itself. This could mean investing in real estate, funding a business venture, or any other investment that aligns with your financial goals.
- Repaying the Loan – Overtime, as your assets cash flow, you repay the bank loan. This frees up additional capital to make future investments.
- Repeat the Process – Leveraging life insurance is not a one-time event. As more cash value becomes available, you can leverage against these funds to make more investments.
This is the general process of leveraging life insurance to grow wealth.
With that, now let’s look at the main benefits from using this strategy.
Main Benefits of Leveraged Life Insurance
Accordingly, leveraged life insurance done through a whole life policy, offers a range of benefits that can significantly enhance your financial strategy. Let’s look at the key advantages.
Financial Spread
The most compelling benefit of leveraging life insurance is the financial spread you can achieve. By taking a loan against the cash value of your life insurance policy at a lower interest rate (through a CVLC) and investing that money into higher-yielding opportunities, you create a spread.
This may not sound like a lot, but year over year, compounded, it makes a big difference. A 30 year investment of $10,000 at 10% grows to $174,500. At 12%, it grows to $300,000. That’s almost twice as much investment growth. Investors who aren’t considering this strategy are losing out.
Tax Deductibility
An often-overlooked advantage of leveraging life insurance for investment purposes is the tax deductibility of the interest on the loan. When you use the borrowed funds for investment purposes, the interest you pay on the loan is tax-deductible. All in all, this tax benefit effectively reduces the cost of borrowing, thereby improving your overall rate of return on investments. Imagine the benefits if we can take that 2% return and make it 3%. It’s simply no-risk, additional investment growth.
Enhanced Rate of Return
Namely, combining the benefits of the spread and tax deductibility leads to an enhanced overall rate of return on your investments. Consequently, leveraging life insurance in this way can make your investments more profitable compared to traditional investment methods.
These benefits highlight how leveraging a whole life insurance policy can be a powerful tool for growing your finances. It’s a strategy that goes beyond conventional savings and investment methods. It offers a unique way to accelerate wealth accumulation and achieve financial goals more efficiently.
Practical Applications of Leveraging Life Insurance
The leveraged life insurance strategy isn’t just a theoretical concept; it has practical applications across various investment scenarios. Here’s how different investor profiles can benefit from this strategy:
Real Estate Investing
For real estate investors, leveraging life insurance can be a game-changer. By using a CVLC loan, you can invest in property with funds borrowed against your life insurance policy. Here’s a quick example to illustrate the impact: Suppose you’re comparing two scenarios – one where you invest directly in real estate and another where you use leveraged life insurance. If your real estate investment yields a 15% return but your life insurance and loan arrangement effectively nets you an additional 3% (considering the spread and tax write-offs), your overall growth rate in the leveraged scenario is 18%. Indeed, this enhanced return can significantly boost your real estate portfolio’s performance.
Business Owners
Business owners can greatly benefit from this strategy. By placing funds in a life insurance policy and borrowing against it, you can operate your business with added financial growth and tax benefits. Importantly, the funds can be used for expansion or equipment purchases. It also be used as working capital. It can provide a flexible and efficient way to finance your business needs–all while collecting a 2% spread.
Investors in Businesses and Other Assets
Additionally, investors looking to buy businesses or invest in other assets can also gain from the leverage spread and tax advantages. Leveraged life insurance offers an alternative source of growth on top of any investments being made.
Leveraging into More Life Insurance
Indeed, a unique but effective approach is to use borrowed funds to buy more life insurance, creating a cycle of leveraging. This strategy involves purchasing additional life insurance policies with the loan and repeating the borrowing and investing process. Over time, this can compound the spread benefits, potentially leading to double-digit growth rates.
Each of these applications demonstrates the versatility and effectiveness of leveraging life insurance. Whether you’re a real estate investor, a business owner, or a savvy financial investor, this strategy offers a novel way to enhance your investment outcomes and achieve your financial objectives more efficiently.
Additional Benefits of Using Whole Life Insurance
Additionally, leveraging life insurance, especially whole life policies, extends beyond just the financial strategies of borrowing and investing. There are several inherent benefits of whole life insurance that make it an attractive option for this strategy:
Tax-Free Policy Growth
One of the most significant advantages of whole life insurance is the tax-free growth of the policy’s cash value. The dividends you earn on the policy, which contribute to the cash value, are typically not taxable. This feature makes whole life insurance a powerful tool for accumulating wealth in a tax-efficient manner.
Liquidity
Whole life insurance policies offer liquidity through their cash value component. This means that you have access to funds when you need them. Whether for personal use, investment opportunities, or as part of your leveraging strategy. This accessibility is crucial for maintaining financial flexibility and ensures that you can respond to opportunities or needs as they arise.
Safety and Minimum Growth Guarantees
Whole life insurance policies come with safety nets in the form of guaranteed minimum growth rates. This means that regardless of market conditions, your policy will continue to grow at a predetermined rate. This guarantee provides a level of security and predictability in your financial planning. It makes it a reliable component of your broader investment strategy.
Death Benefit
In addition to the investment and leveraging aspects, whole life insurance policies provide a death benefit that is tax-free. This benefit ensures that your beneficiaries are financially protected, making these policies an integral part of estate planning and wealth transfer.
These additional benefits underscore the multifaceted value of whole life insurance. When used as part of a leveraging strategy, they not only enhance your investment potential but also provide security, flexibility, and long-term financial planning advantages.
Maximizing Investments
Accordingly, leveraging life insurance, particularly through whole life policies, is a powerful and versatile strategy for financial planning and investing. Therefore, this approach improves upon traditional investment methods, offering a unique blend of benefits that can significantly amplify overall returns.
As we have seen, there are many practical applications for this strategy that cater to a wide range of investment goals and scenarios. Therefore, from real estate investors to business owners, the potential to maximize returns and achieve financial objectives is significantly heightened with this approach.
By understanding and utilizing this strategy, you can potentially improve on every investment you make.
About Wise Money Tools
Wise Money Tools is a non-traditional wealth management company known for its expertise in helping clients expand and safeguard their wealth. Founded and led by Dan Thompson, the company stands out for its personalized approach to investment strategies, catering to a diverse clientele that includes professionals in their working years as well as those nearing or in retirement.
At the heart of Wise Money Tools’ philosophy lies a commitment to non-traditional methods that focus on growth, safety, tax advantages, and cash flow.
Contact us today to set up a free strategy session and see how Wise Money Tools can help you change your financial future.
