Have you ever heard of  “Infinite Banking”?  It is a great strategy that is pioneered by Nelson Nash that uses the cash value of life insurance as your personal bank.   In essence you buy big ticket items with the cash inside the dividend paying whole life insurance policy and finance the purchase with it.  For example, you buy a new car with the buildup in your policy and then amortize the loan over a period of time and pay your policy back at a fair interest rate above the interest rate of the insurance company.   Rather than make the bank or finance company rich, you are able to recapture a lot of the finance charges you would otherwise payout elsewhere.  After paying back the loan to yourself, you have completely repaid the principal and made the interest spread yourself.   This will turbocharge your policy.

Not only is the cash value used during your life for various purchases, investments, etc., but it can be used for retirement income as the money can be accessed at retirement tax-free.  In order to create the “infinite Banking” concept you need to capitalize the bank.  Just like Bank of America or the community bank, there was no money in the bank until it was capitalized.   Once it is capitalized, the fund has been created to use for this purpose.  It is important to set the policy up correctly with a good mutual company and to fund it the appropriate way.    The structure of the policy is important for your long term success.

When selecting life insurance, most clients just want a simple explanation. They are not looking for a complex analysis of all the features, riders, and insurance speak.

Here are some simple basics that can be of assistance:

1. There are 3 types of different types of life insurance- Term life, whole life, and Universal Life (Each one has many variations).
a. Term life is like a renting insurance for a period of time at a level rate (for example 10 year, 20 year, or 30 year). No equity is built and you have a death benefit only as long as you pay.
b. Whole life insurance is designed to last for your whole life (permanent insurance). It is a level premium that starts off much higher than term, but remains level for the life of the contract. When term rates go way up after the level period, they will surpass what is being paid on the whole life. Whole life builds equity (cash value) that can be used and borrowed against during the course of your life. Unlike the concept of renting with term, this is like owning/buying your insurance.
c. Universal Life is another permanent insurance like whole life, but with much more flexibility. The premium is flexible and allows the policyholder to pay the premium that best allows them to achieve their goals. For example, a guaranteed universal life is just enough premium to have a death benefit for the rest of your life. On the guaranteed universal, you have no cash value build up to speak of. If you fund the policy at the maximum level, you can create a large cash value for retirement use. The premium level paid can be adjusted at anytime to meet the owners objectives. Like whole life, it is owning your insurance, but with more flexibility than whole life.

2. Which one is right for you? Everyone is different and has different goals. The main thing is to decide what the goal is of the insurance and then to maximize based on your goals. Often times our clients will use a blend of more than one to achieve multiple goals. For a free analysis, email vince@paramountlifeinsurance.com.

I recently got a comment from one of our blog entries about not explaining how to tap the cash value tax free.  I wanted to devote this entry to explaining how to use this valuable asset with out paying a penny of tax.  The key to the cash value is to building it by putting  money into it for a period of time.  Once you have built it up a little bit, then you can start pulling it out to buy whatever you want during your lifetime.  You pull it out as a preferred policy loan and all you have to do is bay the interest to the insurance company.  Typically the interest rate is like 6-7%.  The key to growing the cash value over time is to pay back the loan and pay it back above the insurance loan cost.  I like to pay back at about 10% and amortize over 4 or 5 years.  This money just goes back into your account and the spread above the insurance companies interest goes directly into your policy to turbocharge it.

In regards to tapping the money from the permanent life insurance policy for tax-free retirement, you should use this strategy.  Start by withdrawing from the policy up to your cost basis for initial income.  Since it is cost basis it is not taxable.  Once you withdraw the full cost basis, you start taking money out as preferred policy loans.    The policy loans come out of the policy tax-free and the only cost is the interest on the loan.

When setting up a permanent life insurance product as a supplemental retirement strategy, it is important to know how to use the cash value.  The cash value grows tax deferred and will not be taxed as long as the policy is in force.  If you were to cancel your policy and take the cash value out, you would have to pay taxes on the gain above the cost basis.

When you want to use life insurance as a supplemental retirement vehicle, you want to make sure your overfund it.  When I say overfund it, I mean to put money in above the premium amount.  There is a ceiling that has been put in by the IRS called the MEC limit.  The MEC stands for modified endowment contract and once it goes over the MEC level it no longer has the tax free treatment.  The government has put a limit on the amount you can shove into a policy because of the favorable tax treatment of life insurance.  Make sure to fund your policy under the MEC limit to keep the favorable tax treatment.

Once you get to a point where you want to start taking distributions from your policy, you want to start to withdraw the money from the cash value up to your cost basis.  Since it is money you contributed, there is no tax on that money.  Once you hit the cost basis, you should start taking policy loans as income and no tax is owed on this either.  It is to be noted, that whatever money is taken out of the policy, is subtracted from the death benefit.  A withdrawal can’t be paid back, but the loan can be  re-paid.  It is very beneficial to re-pay the loan as you are paying yourself back and a small interest charge from the insurance company.

Often times when we talk to clients they will be able to get all of the benefits that they are seeking, but they simply need to move around the money on their model.   For example, they want to optimize their life insurance protection, but don’t have a lot of additional money to spend.  We can often find lost dollars that can be moved towards the protection with no additional out of pocket costs.

One of our clients recently was in need of additional life insurance protection, but didn’t want to change their monthly outlay.  On top of that, they were very concerned about asset protection.   They had been sued in the past and wanted to make sure that they were as protected as they possibly could be.   We recommended that they visit with a good estate planning/asset protection attorney, but also to move part of a non exempt asset into life insurance.  They had over 200,000 in a money market and we suggested that they simply move a small amount of that money each month into a whole life insurance policy.  Not only was it going to purchase them permanent death benefit, but the policy would be overfunded.  Overfunding the policy would create immediate cash value and money that was into an exempt asset from creditors.     Obviously, if they were to be sued that 200k in the money market would be susceptible.  I asked them why they had that much in a money market and they said they wanted to have good liquidity.  Liquidity is a great thing and we explained that they would have that inside the life insurance cash value too.

You should make an investment in your child and buy them a whole life policy when they are young.  Your child will be locked into that mortality for the life of the policy and the premium will never go up.  On top of that you will guarantee your childs insurability for the future.  When they have kids of their own, they will want to have life insurance and they will have this great policy that you bought them.

Another great aspect of having the policy and buying it early is the longer period to accumulate cash value.    By the time your child has had the policy for 20 or 30 years there can be a significant amount of cash in the policy.  The cash value can be borrowed against for emergency funds, college funds, or for any type of opportunity.   A dividend paying cash value policy also has the feature of premium offset.  Premium offset is the ability to use the dividend to pay the premium and keep the policy going, with no new funds.  After a period of time, typically 10-15 years, a policy can build up a dividend that is substantial and big enough to pay the premium.  I prefer to continue to pay on my policy as the more I pay, the more I fuel and grow the cash value.   In fact, I put in extra money above my premium every month that goes right to my cash and buys pay up additions.

This is definitly a great present for a child that they will really appreciate when they get older.

Using the cash value on your permanent life insurance policy for emergencies, opportunities, and buying big tickets can be a great thing if done correctly.   Often, clients will  borrow from their cash value and say, “do we have to pay this back?”?   The answer is no you don’t have to pay it back, but it is to your detriment to not pay it back.    Most life insurance companies are charging an interest rate in the 5-7 percent range on loans to the cash values.   As a loaner, you always have first dibs on the money in the cash value.   Where does much of the money in the marketplace come from for loans?  The answer is life insurance companies.

As a policyholder and the owner of the contract, no borrower can ever stand ahead of you.   On top of that, the money in the cash value is highly liquid and easy to access.  You don’t have to get any approval or qualify to get the money as a loan if the money is in the policy.    The key is to pay your policy back and at a higher interest rate than you borrowed the money.   If you do this, you will restore the value of the cash value and turbo charge the policy.  It will all be to your benefit as you get the interest into your policy above the spread.  An example would be borrowing at 6 percent and paying yourself back at 10 percent.   Your repayment goes back to paying of the balance of the loan and growing and restoring the policy.  This will allow you to continue to go back to your own “bank” policy and keep re-using it for multiple purposes.

Should you wait to buy your life insurance until later?  That is a good question and gets to the fundamental purpose of the death benefit.   Of course, if you know that you will be healthy and/or still alive and able to qualify down the road than you certainly can wait.   The problem with that approach is that you never know what the future holds.    It can possible save you a few dollars in premiums for the few months that you wait, but it is not worth your families future.   The insured rights the small premium check and the client’s family would stand to get a big check.

The natural inclination is to put insurance off and sometimes buy it in a more reactive way.  For example, I hear from clients all the time that they decided to finally move on buying it because a friend died or got sick.  Another benefit to buying it is the benefit of locking in to your current age.    This is important for term insurance and tremendously important with permanent insurance.  With whole life insurance you buy in at whatever age you are and the premium remains level for the life of the contract.  Besides that, the sooner the policy gets started the more opportunity for the cash value to build up.

To receive a free quote go to www.paramountlifeinsurance.com.  Take advantage of your health if you have it.

When clients think about life insurance and think of it as straight cost, I certainly understand.  We are always bombarded with different types of insurance that we need to buy in our life and people feel “insurance poor”.   Clients are insuring their car, house, health, and even their blackberry’s now too.   If you don’t use those insurances you never see any benefit.

The truth is with whole life or universal life, is that it is beneficial to put as much money as you possibly can in them.   The IRS has put a ceiling on how much money you can put in a policy on an annual basis called the MEC level.   MEC stands for modified endowment contract and once a policy becomes a MEC it is taxed differently.   A MEC makes all of the growth in the policy be taxable.  If the client keeps the contract within the limits then the cash value will grow tax deferred.   The IRS put a limit on it for a reason.

Most clients struggle with the idea of paying more than the minimum amount.  While the minimum amount will generally suffice in keeping the policy going, it could be so much better.  How many financial tools do you have in your portfolio that increase in value everytime you put money in?  Not many right?  In fact, the more money you put in the better it will be.

This can serve as a large paradigm shift for a lot of folks.   If you can see more than cost, you may be able to see the beautiful possibilities.

Regular vanilla whole life insurance has taken a beating from some in the media that profess that it is too expensive and that you should always buy term.   I agree that term is often the best solution for some clients at that given point in time, but having whole life can be powerful vehicle.  Many times to meet large insurance needs  our clients will buy a majority of term and buy a smaller portion of permanent insurance.   This may be the only affordable way for the time being to meet that large insurance need.

Term life insurance is like renting and the premiums are usually much less expensive than whole life at first.  What happens at the end of the level term is the premiums skyrocket through the roof and most people drop the policy at that point.  The advantage to whole life insurance is that you lock into a premium amount and it stays level forever.  When the level term ends and the premium is skyrocketing, the whole life keeps plugging along at the same level.  If you select a good mutual life insurance company that consistently pays a good dividend, then you will also have built significant cash values.   The cash values grow tax deferred and can be used to help finance things during your lifetime while you continue to have permanent insurance.   For example, you want to buy a business at age 42 and you have accumulated a cash value of $56,000.  The business is going to require an initial investment of $37,500.    You pull the 37.5 out of the whole life and the insurance company charges a loan interest rate.  Let’s say it is 6% they charge and you pay the loan back at 10% interest.  Not only are you paying yourself back, but you are making a 4% spread on the money creating a turbo charge effect on your policy.  Four years later, after paying the amortization schedule for the business, you borrow money from yourself again to buy a new car.  Of course you pay yourself back once more.

The whole life cash value is guaranteed to get better no matter what.  There are not many financial vehicles that you can say that for.