The average person may think of life insurance in terms of its most basic usage: coverage for death. Many may believe life insurance isn’t necessary until you reach a certain age, get married, or have a family. Some may think it’s a luxury but not a necessity. However, many people are ill-informed when it comes to life insurance and all of the benefits it provides.
For instance, according to one study, up to 80% of people overestimate the cost of maintaining a life insurance policy. Alternatively, 64% of people don’t purchase life insurance because they believe it is too expensive or that they cannot afford it.
While a recent study shows that 84% of Americans believe that “most people” do need life insurance, only 68% think they can benefit from it. Moreover, an even lower percentage of people–59%–state that they own a life insurance policy.
However, life insurance is can be more than death insurance, life insurance can build cash for any use.
The beauty of life insurance is that some plans–particularly permanent life insurance plans–offer the policyholder so much more than death benefits, such as increasing cash value and tax benefits.
For small business owners, this added advantage can be the difference between just barely keeping your head above water in the competitive market and making waves in your respective sector.
So how do you take advantage of it? First, you’ll want to take out a permanent life insurance policy. Permanent life insurance comes in several different forms, each with its unique benefits.
The most common forms of permanent life insurance and those most often purchased by business owners are whole life insurance, variable life insurance, and universal life insurance. Here’s a breakdown of what each of these offers:
Whole Life Insurance
- Fixed premiums
- Guaranteed death benefit
- Cash Value component
- Opportunities to end dividends (with participating policies)
Variable Life Insurance
- Variable death benefit
- Investment account options
Universal Life Insurance
- Flexible premiums
- Option to guarantee a death benefit
- Cash Value component
Both whole life insurance and universal life insurance offer cash value components to their plans, meaning that in addition to the death benefit your beneficiaries would receive on your passing, you also grow your savings and accumulate wealth while living.
The Insurance Information Institute indicates that whole life insurance policies are the most commonly purchased policy. Whole life policies last for your entire life, as long as your premiums get paid when due. Another feature is the fixed premium. A fixed premium means that even as you age, you don’t need to worry about increases in your monthly cost.
Universal life insurance policies provide more flexibility, with the ability to alter your premium payments; however, paying less than the target premium or missing payments can be a detriment to the cash value. Besides, because of variable interest rates, the cash value growth could be lower than with a whole life policy.
The benefits of an insurance policy’s cash value are numerous, both on the personal and the professional level. For your individual needs, the ability to grow savings and borrow against a policy–all the while ensuring your loved ones have the security they need should something happen–are priceless. Also, for your business, the benefits are just as rewarding.
Increase in Financial Stability
One of the essential elements of a successful business is maintaining future funding. Permanent life insurance policies, with their guaranteed cash value accumulation, help to provide a steady wealth stream for your business.
Besides, taking out life insurance policies on key people in your business can help to assure your clients, partners, and creditors that your business will have the stability needed moving forward if something were to happen to any key individuals, such as yourself or a partner.
Because the cash value of a life insurance policy grows tax-free, many businesses rely on permanent life insurance to help provide funding for day-to-day operations and long-term growth. Who doesn’t love a tax-free way to increase their income?
Manage Cash Flow
Any company, no matter its size or profile, can run the risk of something financially incapacitating happening, from a product recall to a national economic downturn. Having liquidity from a life insurance policy can help revitalize your cash flow in times of trouble.
Provide Employee Benefits
Attracting and maintaining top-notch employees is often the number one priority (and sometimes a struggle) of small business owners. Having accessible and growing cash value can allow you to provide your employees with a more significant benefits package, thereby helping you to retain them.
Funding Your Business with Preferred Rates
and No Income Qualification
Another benefit of whole life insurance’s ability to provide you cash value is that it allows you to “borrow from” and not “borrow against” yourself. This policy will enable you to borrow from this money at any time without having to demonstrate your income, prove your creditworthiness, or justify your need for cash; additionally, you get a terrific interest rate.
You may wonder why you would need any interest rate at all to “borrow” your own money, but the cash value from an insurance policy acts as collateral in the same way that a car or a home function as collateral for car loans or mortgages.
Often referred to as “infinite banking,” this means that with a whole life insurance policy, you can take out a loan for your business without any explanations needed or questions asked, and frequently at a much better rate than you might be able to get elsewhere.
Moreover, while you are expected to pay back the loan with interest, there isn’t a set monthly rate; as long as you pay it back before it exceeds the value of your policy, you have flexibility in payments. Additionally, the IRS doesn’t recognize the loan as income, which means it isn’t taxed.
What if the insurance company’s interest rate is still too high? Some recommend using your life insurance policy as collateral at a bank when taking out a loan, with the possibility of a net gain if your interest rate is lower than or equal to the rate at which your policy’s cash value is growing.
If you chose to go this route and happened to pass away before paying back the loan, your beneficiaries would receive the death benefit laking the remaining loan balance.
Since 2010, Peter Green Insurance Agency LLC (PGIA) has provided businesses and individuals with “Asset Protection and Financial Security”™ by selectively using insurance coverages as a hedge against inherent financial risks.
Peter W. Green is the managing member of PGIA and a Certified Insurance Counselor (CIC). CIC is an internationally recognized designation awarded by The National Alliance for Insurance Education and Research to those who wish to advance their insurance knowledge with specialized classes. The investment in days and study time to gain a level of expertise rarely found in insurance agents.
Need answers to an insurance question? Have a specific insurance concern? Would you like a review of your policies before renewal? Call our office, 714-258-2800. Would you like to understand life insurance policy specifics? Call and ask for Peter. If you rather, contact Peter by email. Our agency offers a unique level of customer service rarely found today. Let’s talk.