How does cash value life insurance stack up?
You have three basic options when it comes to storing your money. You can save it, invest it, or use it for speculative ventures. About 99% of the time, when you are looking for a place to store your money, you will probably go with one of these options:
- checking account
- savings account
- cash under a mattress
- money market
- gold
- silver
- farmland
- real estate
- put back into your business
- mutual funds or exchange-traded funds (ETFs)
- stocks and individual bonds
- CDs
- cash value life insurance.
Deciding Factors
That’s a lot of options. To make the right choices about storing your money, it’s important to understand the factors that go into this decision. Here are the 4 factors we see as vitally important to consider as you look at where and how to store your money:
- Liquidity – will the money still be accessible if you need it?
- Safety – how likely are you to lose the money?
- Taxes – if you make money, how will it be taxed?
- Rate of Return – what is the expected return for putting the money in that vehicle?
How should you consider these factors? We like to run them through a filter in the following way:
Liquidity – A liquid asset is defined as something that can be turned to cash in under 90 days. When you apply that standard, of the bullet points listed above, real estate, farmland, and business do not qualify as liquid assets. The other forms listed above are liquid.
Safety – We want our money to be safe. You want to do business with reputable companies. If you are dealing with an accredited financial institution, all of those pass the safety test. The money under your mattress is as safe as the locks on your doors and whatever security system you might have. A dog would not hurt, either. Wow! Money under your mattress is a hassle. We do not recommend it.
Safety includes the following elements as well:
- Volatility – You want your money in a place where the value does not fluctuate wildly. You want at least the principal value of what you put in to be safe from volatility. With these criteria, we need to eliminate, stocks, bonds, mutual funds, and ETFs. These may meet other criteria, but safety is not one of them.
- Insured – This means in the event of theft or fraud, your money is safe. By that criteria, you need to eliminate cash under the mattress and gold or silver coins, unless you have them in an insured vault.
- Guaranteed – This means that the life insurance company actually guarantees three things, the premium, the death benefit, and the cash value.
Taxes – With most of these options, if you want to access the growth in your investment or savings vehicles, then you will have to pay tax on those gains. Real estate and cash value life insurance allow you to borrow against the growth of your earnings and not pay tax or you can transfer those gains post sale via 1031 and 1035 exchanges.
Rate of Return – We hear all the time that stocks are the best investment for a high rate of return. Others say real estate is the best for a high rate of return. But after you factor in fees, fraud, commissions, and taxes, the average rate of return on stocks OR real estate investments is somewhere between 2-8%.
How does a cash-value life insurance policy stack up as a viable option? When you look at the historical rate of return of cash value life insurance it is about 5-6%, and as stated above, a portion of your rate of return will be contractually promised.
And the Winner Is…
Several of your money storing options have 3 out of the 4 factors covered. But one of them gives you all four of the factors that create the ideal place to store money – Cash Value Life Insurance Policy.
This filter demonstrates that cash accumulated in a traditional whole life insurance policy could be a powerful asset and place to store your money. It is liquid, safe, tax-deferred, and you get a decent historical rate of return with very limited risk. To understand cash value life insurance in more detail, check out this article and as always, give us a call. We would love to help!