You would never pay cash for your home. You put down 20%, then leverage the rest. You wouldn’t pay cash for a new car either. You make the downpayment and borrow the remainder.
Leverage leaves you with as much cash in hand as possible—more cash to invest at higher returns than the interest on the home loan or car loan.
Why don’t we do this with our retirement accounts? We wouldn’t consider an employment contract without a 401(k) match. But there is an ocean of difference between a 401(k) match and having a bank fund 75% of the principal for a retirement account.
We dive into detailed explanations to clarify the mechanics of the strategy. Skip ahead with the jump links below if you’re already familiar with the basics.
- Quick summary
- How to increase your retirement wealth by 60% to 100%
- Indexed universal life explanation
- How KaiZen adds leverage to an IUL
- Advantages of a KaiZen Policy
- What about the risk?
- Who should use this strategy?
- How Abrams Insurance Solutions can help
Leveraged life insurance lets you grow your cash value faster using the bank’s money. You put in 25%, and the bank adds the other 75%. You start out earning interest on the total without the risk of loss.
How to Increase Your Retirement Wealth by 60% to 100%
Cash value components of permanent life insurance bring tax advantages. The way insurers designed this product, you can use the cash tax-free.
When you combine this with a leveraging strategy to fully fund the policy, you get a unique alternative to traditional, safe-but-slow-growing retirement strategies.
In essence, you’re replacing or supplementing a lower-return investment with leveraged cash value. Think of it like the safety of a CD or bond, but with average returns closer to 8%.
The basics work as follows, and then we’ll dive into the details.
You and the bank pay for a massive indexed universal life policy. You pay 25% of the total premiums, and the bank pays 75%. After 15 years, the cash value builds up enough to repay the bank for its contribution and interest. Then you have a paid up life insurance policy to use however you want.
Financial products at this level are always complicated. If you have any questions about the following details on the policy mechanics, give us a call at 858-703-6178.
Indexed Universal Life Explanation
Indexed universal life (IUL) shines as a cash-value focused permanent life insurance policy. It lasts until you pass away or it matures at age 121. An IUL can build tremendous cash value over a decade compared to other forms of life insurance.
Cash value is a component of most permanent policies that build as you pay premiums. You can use the growing cash value while you’re alive. Some people chose to pay their premiums with it. Others borrow against it.
The flexibility in design allows your agent to customize the policy to precisely fit your needs. Plus, you can make alterations to the policy after the fact.
How the Cash Value Works
Part of your premiums pays for the life insurance. The other part funds the cash value accumulation. The way the cash value accumulates works differently for each type of permanent life insurance.
Term life insurance does not accumulate cash value.
Indexed universal life ties the cash value growth to an index, like the S&P 500. It is not invested directly into an index. In effect, if the S&P 500 grows 9% over the year, your cash value will increase by 9%.
IULs also have growth floors and ceilings. The growth floor typically sits at 0%. Some companies will offer a 1% or 2% floor, but that’s rare. The floor prevents any losses from your cash value. If that market has a bad year, you don’t.
The ceiling balances the growth floor. Most companies set their limits between 12% and 14%. While the principal of a growth ceiling can be irritating, the value of the floor outweighs it.
Let’s look at an example.
You have $100,000 in cash value in an IUL, and $100,000 in a 401(k). For this example, the 401(k) gain/losses will perfectly match the market index.
At the end of the 1st year, the market grows by 6%.
- IUL – $106,000
- 401(k) – $106,000
At the end of the 2nd year, the market dropped by 10%.
- IUL – $106,000
- 401(k) – $95,400
At the end of the 3rd year, the market rose an incredible 15%. In our example, your IUL will have a conservative 12% ceiling.
- IUL – $118,720
- 401(k) – $109,710
I’d take the floor and ceiling combo any day. You’re still ahead of the 401(k). The IUL is happily growing, secured against losses that can negate even great years.
How Indexed Universal Life Policies Optimize Cash Value for Wealth Building
People joke that the first rule to building wealth is “don’t lose money.”
There are wealth-building vehicles where you don’t lose money – like certificates of deposit. But the growth on ultra-safe vehicles could be called dismal. In effect, you’re trading growth potential for safety.
Even if you go with something like an annuity, you still have to pay taxes on your growth. The IRS does not consider a loan from your insurance company income. Therefore it’s not taxable.
That’s the thing about indexed universal life policies. You have that 12-14% ceiling on some indices. Some indices don’t have caps. But you can’t lose money, and you don’t pay taxes.
Now skeptical people will look at this and think, “yeah, but you still have to pay for the insurance.” That’s absolutely right. You do.
59% of Americans have life insurance. Most high-income Americans don’t start saving for retirement until their mid-40s. Which means they’d have to put 33% of their paycheck toward retirement to have enough wealth to maintain their current standard of living.
If you have the income and health to take advantage of a blend of strategies to supplement your other retirement plans, there are advantages.
- Money that would have gone to taxes in other investments can be passed on to your kids through life insurance
- You have life insurance in case something happens
- You have a safe way of supplementing your retirement income
Borrowing From Your Indexed Universal Life Policy
The insurance company doesn’t care about your reason for borrowing money. You can buy a new car, pay off a medical emergency, start a business, or buy that yacht that you have always wanted. However, most people use it as an additional source of retirement income.
When you go to borrow money against your policy, first ask your agent for an “in-force illustration.” It will look similar to the quote you got before filling out your insurance policy application.
It shows you how the loan and accumulated interest will build over time.
The rest of the process is “no-questions-asked.”
There is zero underwriting. You fill out the appropriate form. The insurer gives you the money. Easy.
Your insurance company doesn’t check your credit. They don’t care about your debt to income ratio. They only want the form with the requested loan amount and where to send it.
Why People Use Indexed Universal Life to Build Wealth
The most popular reason is a tax-free income stream. IULs also offer you a way to mitigate opportunity cost. Plus, in over half of the states in the nation, life insurance is immune to creditor seizure.
Typically, people purchase things in one of two ways. First, save up and pay cash. Second, borrow the money and pay it back in installments. Both of these strategies start and end in the same place – zero.
IUL offers a third option. No matter when or how much you borrow against your life insurance, the cash value keeps growing based on the total amount. To be clear, that’s not the full value minus the loan, but the entire cash value.
If you were to sell some stock to pay for something, you potentially lose the continued growth of that stock by selling it to pay for something else. An IUL just keeps growing.
Life insurance loans differ from an advance or a partial surrender. Advances and surrenders permanently reduce your death benefit. As such, the IRS considers them taxable income.
The IRS does not consider life insurance loans as long as they remain loans. You can take out a new loan every year without repaying a cent, and they’re still loans from the IRS’ perspective.
How KaiZen Add Leverage to an IUL Grow the Cash Value Even Faster
Leverage means you borrow money to get something that would otherwise be tricky to afford. We do this all of the time to get homes, cars, and college degrees.
The driving force behind KaiZen uses the principle of leverage to grow your retirement account. You’re just buying a more comfortable retirement.
Your 25% to the Bank’s 75%
KaiZen structures premium payments over ten years to fully fund the policy. Both you and the bank each contribute 50/50 to the premiums over the first five years. The bank pays 100% of the premiums for years six thru ten.
You will be responsible for paying the trust fee of $1,350 each year for 5 years. These 5 payments pay for the trust until the loan repayment at the end of year 15. The trust then dissolves, and you become the owner of the policy.
The bank will charge interest in funding your policy based on LIBOR and its margin, usually less than 2%.
The bank takes their loan plus accumulated interest out of the cash value of the policy. This does not diminish the total cash value of the policy. The amount available to you is just lower.
But it doesn’t matter much since the insurer will base the growth each year on the total cash value accumulation. It’ll grow even faster than an IUL you fund on your own.
Until you pass away, the insurer will keep crediting your cash value by the index’s growth percentage. The policy was fully funded by year 10. You don’t have to do anything with it, but let it accumulate until you decide you want to start taking loans.
For example, perhaps you take out a KaiZen policy at 45. When you are 60, the bank repays itself. You have another seven years of growth if you retire at 67.
Unlike traditional retirement plans, life insurance doesn’t require distributions. You can borrow money before you retire. You can borrow money well after you retire. If you decide to defer social security, you can borrow money for a few years and borrow a different amount when social security kicks in.
It’s flexible. You can adjust to your circumstances.
One of the most attractive parts of this whole strategy is that there is no extra underwriting for KaiZen over a normal IUL.
Typical life insurance looks at your age, sex, income, and health. The high death benefits on the policy trigger the medical exam requirement. The healthier you are, the fewer dollars go toward the life insurance portion.
The best part? There is no credit check. Your life insurance policy goes into a trust until the bank is repaid. The only financial examination looks at your income to qualify for a KaiZen policy. That’s it.
Advantages of a KaiZen Policy
The KaiZen strategy is not available to most people – only high-income earners. It’s unique to anything else you may find among conservative wealth-building strategies.
Never Lose Money
The cash value in an IUL never gets directly invested in any securities market. Therefore, it never loses money when the market has its inevitable bad years. The growth you see comes from the insurer crediting your cash value money based on the index’s growth that year.
When the market falls, your IUL cash value stays the same with the 0% growth floor. Many consider market losses a bonus to their IUL since the low becomes your new starting growth point.
Regular IULs are an excellent option for high-income earners. They offer tax advantages on top of a growth floor.
But why not get four times as much in cash value for the same amount of money?
The death benefit on a life insurance policy always passes on to the beneficiary untaxed.
You would never pay any taxes on your life insurance loan unless premiums don’t get paid. But with a Kaizen fully funded in the first 10 years, that’s virtually impossible. Compare that to more traditional investments that offer few, if any, tax advantages.
Traditional investments lose their growth base the moment you need to sell off something to access your capital. Traditional liquid assets don’t give you the type of growth that can happily fund your retirement at the same quality of living you have now.
With moderately high growth and the ability to access your assets without diminishing the growth, you can fund anything from higher yield investments to spending your golden years however you like.
What About the Risk?
Like all wealth-building strategies, this comes with risk as well. The market may have a streak of bad years within the first five that you’re funding the cash value. Even though it’s statistically unlikely, you can never predict market fluctuations.
Another risk is rampant inflation, which is also unlikely. The insurers stress-tested the life insurance plus leverage strategy through both of these scenarios. They performed better than a life insurance policy without leverage.
The biggest risk is not choosing the right insurance agent to design the policy for you. Look for someone with experience in designing indexed universal life policies. Even better, find someone with experience designing a leveraged indexed universal life policy.
Who Should Use A Life Insurance Plus Leverage Strategy?
Insurance companies put together this wealth-building strategy with executives in mind. It has two simple qualifications.
- Good health
- Annual income of at least $100,000
The right person would have at least some portion of their income already funding the traditional retirement strategies. They would be looking for ways beyond their high-growth investments to secure moderate growth with minimal risk.
There are similar strategies for estate planning, such as premium financing.
KaiZen’s life insurance plus leverage strategy can give you the growth of starting 20 years ago. It’s taking advantage of the same advantages we already use in buying real estate. It offers a safer alternative to other safe-but-slow-growing strategies.
How Abrams Insurance Solutions Can Help
We’re a small group of independent agents who believe that insurance is one pillar to building wealth on a stable foundation. While there are many strategies for building wealth, life insurance’s tax advantages offer a unique opportunity to high-income earners looking for low-risk, massive growth.
Since more advanced strategies require more customization, we’d love to hear from you. Give us a call at (858) 703-6178 to set up an exploratory meeting to see if this is right for your family.