8 Unconventional Uses for Life Insurance

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8 Unconventional Uses for Life Insurance

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8 Unconventional Uses for Life Insurance

Explore unconventional uses for life insurance through the lens of industry experts who shed light on strategies for investments, wealth-building, and tax efficiency. This article unveils practical insights on leveraging life insurance beyond its traditional scope, including estate planning, business succession, and securing loans. Gain a competitive edge with expert advice on making life insurance work harder for financial goals.

  • Leverage Life Insurance for Real Estate Investments
  • Shelter Profits with Life Insurance
  • Use Life Insurance for Wealth-Building
  • Tax-Efficient Retirement Tool with Life Insurance
  • Equalize Inheritance Using Life Insurance
  • Secure Business Loans with Life Insurance
  • Unlock Cash with Life Settlements
  • Plan Business Succession with Life Insurance

Leverage Life Insurance for Real Estate Investments

One unconventional use of life insurance I’ve encountered in my career, which I found particularly interesting, is leveraging cash value life insurance policies as collateral for real estate investments. In essence, policyholders build up a cash value over time and can then borrow against this accumulated value to finance real estate investments.

This carries a dual benefit: First, the borrowers may continue to enjoy the death benefit coverage despite the loan being serviced. Second, unlike traditional methods of raising capital for real estate investments, this approach does not affect credit scores or expose personal assets as the insurance policy itself is the collateral. I had a client who applied this strategy to secure a residential real estate investment, successfully minimizing risk while capitalizing growth. Though this method requires careful evaluation and professional guidance, it can serve as an innovative financial tool for diversifying investment portfolios and achieving financial goals.

William OdomWilliam Odom
President & CEO, Deerfield Advisors


Shelter Profits with Life Insurance

One unconventional use of life insurance that I find really interesting? Using it as a powerful financial tool to help business owners shelter profits and create a tax-efficient pool of money they can access down the road.

Here’s how it works: Instead of letting idle cash sit in a corporate account, where it’s exposed to high taxes and inflation, business owners can structure a permanent participating life insurance policy to hold and grow those funds tax-efficiently. By choosing the right face value of insurance, they determine how much they can shelter inside the policy while keeping it off the radar of corporate taxes.

The real magic happens with the Enhanced Dividend Option and Paid-Up Additions (PUAs). This setup not only grows the cash value faster but also allows them to pull money out strategically through policy loans—giving them access to funds when they need them, whether it’s for business expansion, retirement income, or even an emergency.

Another cool angle? If the business owner has an Op-Co and a Hold-Co, they can structure the policy to flow funds between entities, helping with tax planning and ensuring a smooth business transition when the time comes.

And let’s not forget the Capital Dividend Account (CDA). Upon passing, the death benefit can be paid out tax-free to shareholders, making it one of the most efficient ways to transfer wealth to the next generation without IRS taking a big chunk.

Bottom line-life insurance isn’t just about protection. When structured right, it becomes a powerful financial asset that helps business owners grow, protect, and eventually pass on their wealth in the most tax-efficient way possible.

Steffen DeGraafSteffen DeGraaf
Insurance Professional, AEC Benefits


Use Life Insurance for Wealth-Building

One unconventional use of life insurance that I’ve found particularly interesting is utilizing a permanent life insurance policy as a tool for wealth-building through its cash value component. This strategy often appeals to individuals or families looking to balance financial protection with long-term financial planning. Here’s how it works and the potential benefits:

Permanent life insurance policies, such as whole or universal life, include a cash value component that grows over time. Policyholders can borrow against or withdraw from this cash value for various purposes, such as:

  • Funding a child’s education
  • Supplementing retirement income
  • Starting or expanding a business
  • Covering emergency expenses

Potential Benefits:

Dual Purpose: Protection and Growth

  • The policy provides a death benefit to your beneficiaries, ensuring financial security for loved ones.
  • Simultaneously, the cash value grows tax-deferred, creating an additional financial asset.

Access to Liquidity

  • The ability to borrow against the cash value at a lower interest rate than traditional loans provides a flexible financial cushion without needing to sell other assets.

Tax Advantages

  • Withdrawals from the cash value are often tax-advantaged, and the death benefit is typically tax-free for beneficiaries, adding a layer of financial efficiency.

Stable and Predictable Growth

  • Unlike riskier investments, the cash value in many permanent policies grows at a guaranteed rate, offering stability in a diversified financial strategy.

Considerations:

  • Borrowing against the cash value reduces the death benefit if not repaid.
  • Premiums for permanent policies are higher than term policies, so it’s crucial to ensure affordability over the long term.
  • Consult with an insurance advisor and financial planner to tailor the policy to your specific goals and ensure it aligns with your broader financial strategy.

This unconventional use of life insurance showcases its versatility beyond traditional protection, making it a valuable tool for those looking to integrate financial security with long-term planning.

Rob RoughleyRob Roughley
Senior Advisor | Commercial & Personal Lines Broker, Roughley Insurance Brokers Ltd.


Tax-Efficient Retirement Tool with Life Insurance

One unconventional use for life insurance (Participating or PAR policies in particular) is to create a tax-effective retirement tool that is held in your holding company. This allows the policyholder to not pay personal tax on dollars going into the policy that you are going to use for retirement—the corporate tax is still paid but this is a much lower amount. The other benefit is that if you choose to access the cash in the policy via a policy loan, you will pay interest on the money vs the personal tax and/or capital gains on the growth if you were to terminate the policy to access the cash.

One item of interest for anyone thinking to use this for a retirement tool is that all of the cash within the policy still grows at a compounded rate via dividend payouts even after you take out a policy loan against the cash whereas an IRA depletes as you access the cash and will eventually run out of money.

The hidden feature in a PAR policy is that the entire death benefit is transferred into the holding company’s Capital Dividend Account as credits as well as whatever cash is left over after paying off the policy loan. This allows you to take additional money out of the company tax-free via Capital Dividend credits. Allowing the surviving shareholders the opportunity to sell assets and draw cash tax-free from the holding company—assuming the initial policy owner maximized the policy loan feature of the PAR policy.

Jared Probe
Senior Advisor, Navigate Benefit Solutions


Equalize Inheritance Using Life Insurance

The nature of a client’s assets can create potential issues in the inheritance. For example, if the inheritance includes a home or a business, it can be challenging for more than one heir to share it.

Life insurance can be used to divide inheritance equally between each heir. It can allow the client to provide the asset’s monetary value in cash to one heir while leaving the asset itself for the other. As a result, you won’t have to worry about liquidating the asset to distribute it equally or risk any potential conflicts in the future over sharing the same asset.

This way you can work out the complexities typically associated with financial planning. It clears up a lot of things for the client and helps them better organize their future.

Chris McDermottChris McDermott
Certified Life Care Planner, Intercoastal Consulting & Life Care Planning


Secure Business Loans with Life Insurance

One unusual way to utilize life insurance that interests me greatly is the use of it as collateral for a business loan. For business owners, this can be a smart way to secure funding for expansion or other operational needs without jeopardizing the future of the company.

In the event of the owner’s death, the life insurance payout can be used to repay the loan, which ensures that the business can continue without placing a financial burden on the family. It’s a way to protect both the business and the loved ones, offering peace of mind. I think this is a creative and strategic use of life insurance in the world of entrepreneurship.

Gary HemmingGary Hemming
Owner & Finance Director, ABC Finance


Unlock Cash with Life Settlements

In my opinion, selling a life insurance policy through a life settlement is an often-overlooked way to unlock immediate cash when financial needs change.

Instead of letting a policy lapse or surrendering it for a lower payout, policyholders can sell it to a third party for a higher return. This can provide much-needed funds for medical expenses, long-term care, or even a more comfortable retirement.

The new owner takes over premium payments and eventually receives the death benefit, making it a practical solution for those who no longer need their coverage. It’s a smart option for seniors looking to free up cash without sacrificing other assets.

For anyone seeking greater financial flexibility, a life settlement can turn an underutilized policy into a valuable resource.

Nick EspositoNick Esposito
Founder, NYCServers


Plan Business Succession with Life Insurance

An unconventional use of life insurance that I find interesting is using it as a tool for business succession planning, particularly through a buy-sell agreement. In situations where business partners want to ensure a smooth transition of ownership in the event of a partner’s death, life insurance policies can be an effective strategy.

For example, I’ve worked with clients who use life insurance to fund buy-sell agreements. Partners each own a policy on the other, and the proceeds allow the surviving partner to purchase the deceased’s share from their estate. This ensures that the business remains operational and ownership transitions seamlessly while providing financial security to the deceased partner’s family.

Having been involved in structuring such agreements, I emphasize the importance of setting clear terms and adequately valuing the business. This proactive approach can save significant legal headaches and potential financial losses, underscoring how life insurance can play a critical role in maintaining business continuity.

Whitney Sorrell, JD, CPA, MBA, LLMWhitney Sorrell, JD, CPA, MBA, LLM
Tax Attorney, Sorrell Law Group


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