I would like to thank our guest essayist, William Hall, for sharing this valuable information with us.
William Hall comes to us with 20 years of experience in financial services. Upon graduating St. John Fisher College with a Bachelor degree in Business Management and minor in Economics, he worked his way up to becoming the youngest VP at JP Morgan Chase in Rochester, NY. He decided to leave the bank to pursue a more hands on practice with people to help them create and maintain inter-generational wealth. After trying a couple outside firms, he decided to start his own firm. This allows him more time and dedication to his core philosophy, which is to make sure people of color and all disenfranchised people have an advocate to provide them them with all the tools necessary to grow wealth, and make sure we leave a legacy. His firm, Dedwin Financial Services, specializes in complex life insurance strategies designed to build wealth for the living, get education for and on death benefits, and how to use insurance to multiply assets.
This is a great article because it really delves into one of the lost ways to grow some money with some extreme tax benefits. Life insurance falls under tax code 7702. This dictates how the cash value in a life insurance policy can be taxed. The beauty is you can have access to the money with no taxes and no penalties, as long as the plan is set up properly. You also have the added benefit in the unfortunate event that if you die prematurely, your family will get the death benefit of the life insurance. This is important because this guarantees a positive return on your investment.
One of the best places to put long-term money is in the market. There are two options for invested money; qualified and unqualified. Unqualified money has an opportunity for all types of growth and income depending on the type of investment vehicles you choose. What happens if you need this money in the short term is you will either pay a capital gains tax, or regular income tax above cost basis. The other option is qualified money. These include 401k, 403b, IRAs, etc. These solutions allow you to save money in a tax advantaged position which allows more growth, or as it is called, triple compounding. The disadvantage of these vehicles is if you need the money in the short term. If you take money out before age 59 1/2, you are going to pay both taxes on the money, and fees for early withdrawal. So for people who are looking to save money but have more access to it, traditional investing can present some obstacles.
So where does life insurance as an asset come into play? Well it has many benefits for the cash value and the death benefit. These include; a tax free death benefit, tax free access to cash value, creditor protection, and the cash value does not show on the balance sheet for college assistance. The goal of using life insurance as an asset, especially for business owners, is the ability to access the cash value with limited restrictions and fees. In effect, a business owner could set up his or her own bank using the life insurance plan.
In summary life insurance has the ability to create a safety net in the untimely event the owner dies prematurely. The owner’s business/family will receive the assets necessary to either maintain the business, or give leverage to sell the business under favorable conditions. Of equal importance is the ability to gain cash value. This grants the owner a “savings” account that grows tax advantaged, but with more advantaged access. Life insurance is an asset class, and is too easily forgotten and not used properly enough.