We often hear about the benefits of borrowing the cash value inside your life insurance policy to use for capital purchases, long term care or college funding and so on. But, that’s not exactly how the process should work if you want to maximize the policies full potential. In reality, you utilize the cash value portion of your life insurance policy as collateral to borrow money directly from the insurance carrier at generally attractive interest rate and with good loan terms. Depending on your goals , you may not ever have to pay the loan back either.
However, there is a much lesser known strategy which can be a major tax advantage for business owners. Collateralizing the cash value via a loan from a third party, such as a bank.
Using Insurance Policy as Collateral
The value proposition is clear. Collateralizing policy cash values for a bank loan allows policyholders to access their cash value without tax incidence, just like a policy loan. Third-party lenders i.e. banks can execute a draw on a line of credit secured by cash values, depositing money into your account immediately. Life insurers have the contractual right to delay payments for up to 6 months, banks don’t have that luxury.
Policy loan interest is clearly not tax deductible, however interest on bank loans collateralized by cash value used for business purposes may be tax deductible just like any other business-related debt. In those scenarios, borrowing against the cash value with a third-party loan is substantially cheaper than a policy loan even if the headline interest rate is the same. Talk about a double tax advantage! Not to mention that these loans don’t show up on a clients credit score.
This strategy opens up the potential to collateralizing policies which are not typically suitable candidates such as Guaranteed Universal Life (GUL) without jeopardizing the viability of the policy. Most GUL products have little to no cash value, but some companies have GUL products with significant cash value accumulation capabilities. Most policies with cash value that are inaccessible to the policyholder without imperiling some other benefits are a prime candidate for cash value collateralized loans. It’s a way to double dip, essentially.
Third-party loans collateralized by cash values open up a vast number of unique opportunities for business owners that don’t exist with a standard life insurance policy. There is no reason for any policyholder with a significant amount of cash value to not have an open cash value collateralized credit line even if they don’t use it. It provides a huge amount of flexibility and optionality for policyholders. Collateralized cash values are no less valuable than non-collateralized cash values.
Collateralized cash value life insurance turns cash value from a theoretical concept, to a practical store of capital.
We recommend working with experienced and knowledgeable insurance consultants when setting up these programs. At E&Y Insurance Agency, we provide personalized guidance to help you discover how life insurance fits your needs. Call us at (248) 362-1313 for a free consultation or complete the form below!
