What Is Cash Value Life Insurance? Explained

Are you looking for a way to build wealth while protecting your family's financial future? Have you ever wondered what is cash value life insurance and how it can benefit you?

In his book Money. Wealth. Life Insurance., Jake Thompson explores the power of cash value life insurance as a financial tool. This comprehensive guide will help you understand how this type of insurance works and why it's favored by the wealthy and major corporations.

Keep reading to discover how cash value life insurance can potentially transform your financial strategy and secure your family's future.

What Is Cash Value Life Insurance?

What is cash value life insurance? It's a powerful financial tool that combines life insurance coverage with a savings component. This type of policy has been used by wealthy individuals and corporations for decades to accumulate and protect their assets. But what exactly makes cash value life insurance so attractive?

The Historical Reliability of Life Insurance

Cash value life insurance isn't a new concept. In fact, it dates back to ancient Rome and has proven to be a stable financial instrument throughout history. During the Great Depression, when many financial institutions were crumbling, life insurance companies remained strong. Policyholders continued to see profits year after year, a trend that continues to this day.

How the Wealthy Use Life Insurance

You might be surprised to learn that influential figures like Walt Disney and JC Penney used life insurance as a savings mechanism. They recognized its potential to safeguard their economic well-being and build significant wealth. Today, major corporations and financial institutions in the United States continue to use life insurance policies strategically.

Bank-owned and Corporate-owned Life Insurance

Many Fortune 1000 companies, including banks and corporations, use what's known as Bank-Owned Life Insurance (BOLI) and Corporate-Owned Life Insurance (COLI). These policies serve as essential tools in their fiscal strategies, often providing retirement benefits for high-ranking executives.

The Tax Advantages of Cash Value Life Insurance

One of the most significant benefits of cash value life insurance is its tax advantages. Let's break down some of these benefits:

Tax-free Growth

Unlike many other investment vehicles, the cash value in your life insurance policy grows tax-free. As long as you keep the policy active, its value will continue to grow without any tax implications. This growth is considered a premium refund, which is why it enjoys tax advantages.

Tax-free Death Benefit

When you pass away, your beneficiaries receive the death benefit tax-free. This means they can inherit wealth directly and quickly, bypassing probate expenses and income tax payments on the inherited amount. It's an effective way to preserve your hard-earned wealth within your family.

Protection of Social Security Income

Cash value life insurance can also help protect your social security income. The income derived from the cash value of your life insurance policy isn't factored into the calculation for social security tax. This can help you avoid potential increases in social security benefit taxation.

How Cash Value Life Insurance Works

Now that you understand some of the benefits, let's look at how cash value life insurance actually works:

Guaranteed Growth and Returns

Unlike market-based investments, cash value life insurance offers guaranteed growth. Your policy's cash value is guaranteed to increase, providing steady growth regardless of the insurance company's ability to pay dividends. Some policies have shown average annual returns exceeding 6%, outperforming many stock market investments in recent years.

Accessing Your Cash Value

One of the great features of cash value life insurance is the flexibility it offers in accessing your funds. You can take out loans against your policy, often at lower costs due to the lower inherent cost of capital. Many people prefer loans over withdrawals because they allow your invested capital to keep growing and maintain the full life insurance payout.

Building Wealth Through the Death Benefit

The death benefit in cash value life insurance isn't just about financial protection; it's a powerful tool for creating a lasting legacy. As your policy's cash value grows, so does the death benefit, increasing the monetary legacy for your beneficiaries.

Creating a Cash Value Life Insurance Strategy

If you're interested in leveraging cash value life insurance as part of your financial strategy, here are some steps to consider:

1. Find a knowledgeable and trustworthy insurance agent who can craft a strategy tailored to your individual needs.

2. Choose a mutual insurance company with a strong rating (at least A or above). Companies like MassMutual, Guardian, New York Life, and Northwestern Mutual are considered reliable options.

3. Consider different investment strategies. You could make regular investments, start with a lump sum followed by regular contributions, or make a one-time investment.

4. Integrate your life insurance policy with your overall financial plan. You can use policy loans to improve other investments or as part of your business and retirement planning.

Remember, cash value life insurance is a complex financial tool. While it offers many benefits, it's important to thoroughly understand how it works and consult with a financial professional to determine if it's the right choice for your specific situation.