When considering your business assets, you might start with the obvious: the physical location of your business, the product or services you sell, and the tools and equipment that you use.
With that said, there may be other asset classes that your business may be overlooking, life insurance being one of them. With cash value life insurance, you can turn corporate dollars into a unique, valuable asset.
What Is Cash Value in a Life Insurance Contract?
It might be unusual to consider life insurance an asset, but Patrick Devitt, founder and CEO of Generational Wealth Group, explains it astutely;
According to Patrick:
“An asset is simply a thing of value to an individual or corporation, and there is an expectation that the asset will have a future benefit of some sort. Cash Value Life Insurance is a perfect example of an asset: it increases in value for the contract owner and beneficiaries over time.”
Cash value in a life insurance policy, simply put, allows the policy to earn interest as well as other investment gains in a tax-exempt environment.
Is the Life Insurance Policy for Me or My Business?
The terms of the policy depend on your objectives. Many choose to opt for a corporate-owned policy.
“A policy for a business owner is typically owned and paid for by the corporation,” Patrick says. “In that case, the beneficiary would be the shareholders and family members.”
With your business as the owner of the policy, premium payments can now be made through the corporation. Those payments go toward:
- Insurance costs
- Portfolio management fees
- Broker commissions
While there are costs associated with Cash Value Life Insurance, the costs tend to represent roughly 20% of the growth in the contract. When compared to traditional investments paying between 26.5% to 53% in tax, the drawdown on Cash Value Life Insurance becomes very attractive as an asset.
Why Use a Cash Value Life Insurance Policy?
“Cash value life insurance is tax-exempt,” Patrick says. “As cash value accumulates and grows within the contract, no taxes are paid on the growth. Once a dividend is paid into the contract, the cash value is guaranteed to never decrease, unlike traditional assets like market securities or real estate.”
Essentially, your life insurance policy can become an incredible investment vehicle for your business, allowing you to grow your assets tax-free.
As an investment vehicle, for example, it’s possible to turn the small premiums into substantial gifts to foundations or charitable organizations.
Depending on the business objectives, this could result in tax savings during one’s life or at death on a terminal return.”
What Happens When The Policy Is Enacted?
“The death benefit is tax-free to a beneficiary and bypasses the estate. Basically, it creates a liquidation event right at the time most needed.” Patrick explains.
Or, if the policy is corporately owned, the death benefit flows through the corporation, creating a capital dividend credit.
“This is then paid out of the corporation, tax-free to the named beneficiaries, when the adjusted cost base is equal to or less than the net cost of per insurance.” Patrick adds.
A life insurance policy can also help with estate planning. Covering estate taxes will also allow a family to keep their assets intact as well as estate equalization considerations.
Can Contract Owners Access The Cash Value Early?
Contract owners are able to spend the cash value during their lifetime. Whatever the contract owner does not spend will be inherited by the following generation, tax-free.
There are a few ways to access the cash value of a policy:
Policy loans are Issued by the insurance provider, and won’t affect the growth of the cash value. In addition to that, loans equal to or less than the policy’s adjusted cost basis — the cost of an insurance policy for tax purposes — are not taxed.
Policyholders can surrender part of the cash value of a policy, but may be taxed. If 40% of a policy’s cash value is tax-free, then typically only 40% of the withdrawal will be tax-free.
More importantly, a withdrawal permanently modifies the insurance policy, reducing the death benefit by an amount equal to or greater than the amount withdrawn.
Third Party Loans
Third party loans are the most common among business owners. Third-party lenders, like banks, issue this type of loan.
Unlike policy loans, third-party loans do not create income, and typically do not affect the capital dividend account credit at death. With that said, if a policy is used as collateral for a loan taken to earn taxable corporate income, the policyholder may be able to deduct the loan interest from the corporate income.
Contract owners may also be able to deduct the lesser of premiums payable and the net cost of pure insurance.
With that said, It is advisable to speak with an insurance professional before considering a third-party loan, as outcomes might differ.
Learn More About Wealth and Insurance
If you’re looking to learn more about your business assets, and would like to gain insight on wealth and insurance practices from Patrick Devitt, founder and CEO of Generational Wealth Group, we are excited to announce a new, limited time, webinar series.
The first webinar: “Bolstering The Balance Sheet With Corporately Owned Life Insurance” will take place on October 15th at 1pm. Signups are now available here.
Don’t miss the opportunity and RSVP now!