What type of Life Insurance can you use to Leverage and Invest?
We often get asked by new clients if they can use their existing Life Insurance Policy to leverage and invest.
Most likely, if you’re asking, the answer is probably no.
This is because you need to have the right type of policy set up in the right way. And most of the time you would be made aware of this when you set up the policy.
Today we are going to be discussing the types of Life Insurance out there, which type is the best for investing, and why it is the best.
Types of Life Insurance
There are two major types of Life Insurance, Term, and Permanent Life Insurance. At Safe Pacific we set up both of these kinds of policies all the time.
They are different and serve different purposes, but both are an important part of a solid financial plan.
The main difference between term insurance and permanent insurance is the time length of the policy coverage and the fact that you can build cash values in a permanent policy and you can’t inside a term policy.
To begin with Term Life Insurance lasts for a set period of time, likely 10, 20, or 30 years.
Since these policies cover you for a shorter amount of time, they much more affordable.
You have them for a certain period of time and it’s usually to cover something specific. They also don’t build cash value.
On the other side we have Permanent Life insurance which covers you for the rest of your life.
The main type of Permanent Life Insurance we set up to leverage and invest is a Participating Whole Life Insurance policy. There are also universal life policies that have some similar features.
As you pay premiums on this type of policy, you build cash value inside. In the participating whole Life policies we set up this cash value so it grows with a dividend paid from the Insurance Companies Participating account. We also set it up to max out the cash value that you can build.
To Leverage your Life Insurance Policy to Invest you need a permanent Life Insurance policy that is designed to grow big cash values fast.
That means a Term Life Insurance policy will not work.
This does not mean your policy is bad, Term policies are great for affordable coverage, they just aren't built for leveraging.
Why Participating Whole Life Insurance?
The two biggest reasons we recommend a Participating Whole Life Policy for leveraging and investing is that it builds a cash value, and provides a dividend.
The third reason is that they are simple and don’t have a lot of moving parts to maintain over time like universal life policies.
The most important component of leveraging your life insurance policy is the cash value.
This is because it's the cash value of your policy that you are using as leverage for a loan.
The bigger cash value, the more money you can take out in a loan to invest.
One of the benefits of Participating Whole Life Policies is you can build the cash value fast.
We do this by overfunding the policy and putting as much cash in the policy as allowed under the tax rules. The cash value grows through both the cash that you deposit, and a dividend from the Life Insurance Company’s participating account.
This dividend is beneficial not just because of the growth it provides your cash value inside of the policy, but because it allows you take less risk in your outside investments.
Since you are already earning on your money inside of the policy, the percentage of earnings you need to make in your outside investments in order to reach your ideal rate of return, can be lower.
Can you Transfer a Term Life Insurance Policy into a Participating Whole Life Insurance Policy?
Although they are not intended to be used for Leveraging and Investing, you are able to convert some Term Life Policies into Participating Whole Life Policies.
Not all life insurance companies let you add the additional cash into the policy when you convert so that’s why we’d have to see it first before saying a definite yes or no.
If you can, you need to also be sure that you are still within the term conversion period - or the time set out on your policy in which you can convert it.
If both of these things line up, you can convert your policy, and the process is easy.
The benefit of converting an existing term policy is that you don’t have to go through another Life Insurance Medical exam, or the underwriting process. This is really important for anyone who’s had a change in health since setting up their policy and might not be able to get a new one.
Obviously because you’re converting to a Permanent Life Insurance policy your premiums will go up.
Call us or talk to your advisor to see what your conversion options are and if you can add the extra cash to overfund the policy for leveraging.
Contact Us
At Safe Pacific Financial, we specialize in helping Canadian business owners, incorporated professionals, and investors structure life insurance for maximum wealth protection, tax savings, and business growth.
If you would like to discuss whole life insurance or investments, we’re happy to chat and see if we can be a good fit to work with you. Fill out our contact form and we will get back to you within 24 hours on business days.
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