How to use your Life Insurance Policy to Invest
Today is all about one of our favourite topics, how to use your life insurance policy to invest.
The five questions we are going to be answering in this blog are:
- What kind of Insurance Policy can you do this with?
- Why would you do this?
- How can you get the money for investing?
- What are the minimums?
- Who should and who should not do this?
What kind of Insurance Policy can you do this with?
We often get emails from people with existing Life Insurance policies asking if they can use their existing policy to invest. Most of the times the answer is, probably not because you need to have the right type of policy set up, in the right way.
The biggest thing is the policy has to be a Permanent Life Insurance policy that builds up big cash values. It's the cash value of your policy that you are using to leverage and invest.
That means a Term Life Insurance policy will not do the trick, that does not mean your policy is bad, it's just not designed for the strategy we're talking about.
You need to have a Whole Life or Universal Life Insurance Policy that is designed to grow big cash values fast.
Why would you use a Life Insurance Policy to Leverage and Invest?
First you can earn money twice off the same dollar.
The type of policy we use for this is a Participating Whole Life Insurance Policy. With these types of policies the cash value grows inside the policy with a dividend from the insurance companies participating account.
Right now, depending on which Canadian insurance company you're working with, this dividend is between 5-6%. So your money is growing one time here.
Next when we borrow against the cash value of your policy and you invest, given you make good investments and your money is growing. Your money is growing in a second place here.
Another reason you might do this is it allows you to take less risk in your outside investments as you're already earning in the policy.
Additionally, this strategy allows you to compound the money in your policy until you die. The reason why is because you never take the money out of the insurance policy, so the cash values that are growing with the dividend never stop compounding.
How can you get the money for investing? Where do you set up the loans?
There are two broad ways you can do this, through the insurance company you set your policy up with, or through a bank.
The insurance company is actually contractually obligated to give you the loan if you ask for it. Plus it's super easy, there's no credit check, no questions about what you want to do with the money, and all it takes is a one page form to request.
A loan from the insurance company is known as an unstructured loan, meaning you can pay it back on any schedule you would like.
Not all banks lend against insurance policies, but we work with the top banks in Canada who do this type of lending.
With the bank they will run a credit check on you, and they will not provide you an unstructured loan. Generally they loan you the money through a line-of-credit based on the cash value in your policy.
What are the Minimums?
This depends on where you are borrowing the money from.
From the insurance company you can get any amount you would like. They generally have basic minimum loans of roughly $1,000 because otherwise it's just not worth it for them to do the paperwork.
The insurance companies are generally going to lend you up to 90% of the cash value of your policy.
To do this you should generally be putting in nothing less than $1,000 a month premium, or $12,000 a year into your policy.
However for the banks it's quite different, and it's also different depending on the bank you are taking the loan out with.
The bank minimum is anywhere from $50,000 to $100,000 yearly premiums.
You can usually access any amount of money you want because the bank sets up a line-of-credit against your policy. However the fees on the lending vary from bank to bank.
Who should, and who should not do this?
This is a sophisticated strategy that's right for someone with good income, high cash flow, and is comfortable with leverage.
If any of the minimums we listed above seem scary to you, then this is probably not a good idea for you to do.
Ideally you want to be putting at least $50,000 per year into your policy for the next ten years for something like this to make sense.
If you are in debt, or if you don't have good, stable income or cash flow this is not a good strategy for you.
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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