Legacy Banking: Rethinking Debt Payoff for High-Net-Worth Investors

One of the topics we’re often asked about is how to invest using life insurance. While there are many options, one that isn’t considered as frequently is real estate, despite its popularity as an investment vehicle.

If you’ve ever wondered, “How fast does cash value build in life insurance?” you’re not alone. Let’s explore the factors and considerations involved in building wealth through legacy banking, which is the discipline of using life insurance cash value as a personal, continuously-compounding bank. When you leverage the power of a dividend-paying mutual whole life insurance policy, you can build cash value immediately!

It's both a fun and challenging question to consider “When is the best time to buy cash value life insurance?” We get asked this often and there is, unfortunately, no single answer applies to all readers. However, certain considerations do come up when beginning legacy and retirement planning, whether you are considering insuring a child or are in your late 60s.

Understanding Tax Deductions A tax deduction reduces your taxable income, which in turn lowers the amount of taxes you owe. It's essentially a way to reduce your tax bill by subtracting certain expenses from your income. Here are some common tax deductions many people can use: Student Loan Interest: You can deduct up to $2,500 (as of June 2024). Mortgage Interest: Interest paid on your mortgage can be deducted. Contributions to Health Savings Accounts (HSAs): Contributions to HSAs are tax-deductible State and Local Taxes: Up to $10,000 can be deducted (see IRS Topic #503). Charitable Contributions: Donations to qualifying charities are deductible. Self-employment Expenses: If you're self-employed, you can deduct various business-related expenses. Are Life Insurance Premiums Tax Deductible? The Answer: It Depends Whether life insurance premiums are tax-deductible depends on several factors, including the type of entity purchasing the insurance, the purpose of the insurance, and who owns the policy. For personalized tax advice, it's always best to consult your CPA. As a general rule: C-Corporations: Most life insurance premiums are tax-deductible for C-corporations, including Key Man Insurance, Nonqualified Deferred Compensation (NQDC) plans (like SERPs), and Life Insurance within a Cash Balance plan Pass-Through Entities (LLCs, Sole Proprietorships): Generally, life insurance premiums for these entities are not deductible, except in specific cases like when whole life insurance is purchased as part of a defined benefit plan Split-Dollar Arrangements: These are usually not tax-deductible for either C-corporations or pass-through entities Key Man Insurance: Premiums for Key Man Insurance are generally not deductible, but the insurance itself can be a valuable tool for businesses to secure capital and protect against the loss of key personnel What Are the Tax Benefits of Life Insurance? Life insurance offers several significant tax benefits, making it a versatile tool in financial planning: Tax-Free Growth of Cash Value: The cash value within a life insurance policy grows without being taxed, allowing for compounded growth over time. Tax-Free Dividends: If you purchase a dividend-paying whole life insurance policy, those dividends are also tax-free. Tax-Free Loans: Policyholders can take out loans against their policy's cash value without paying taxes on the loan amount. Income Tax-Free Death Benefit: The death benefit from a life insurance policy is generally not subject to income tax, making it an excellent tool for estate planning, leaving a legacy, and providing liquidity for heirs. Bankruptcy and Creditor Protection: While not a direct tax benefit, life insurance policies are protected from creditors and are considered bankruptcy remote. Charitable Giving and Legacy Planning: Life insurance can be used to leave a tax-free legacy to charities or heirs. Are Life Insurance Death Benefits Taxable? Simple Answer: No Life insurance death benefits are income tax-free. This feature makes life insurance an attractive option for offsetting estate taxes, providing liquidity to retain assets like real estate or private stock within the family, and other strategic long-term financial planning. However, there are important considerations: Estate Tax Considerations: While the death benefit is free from income tax, it could be subject to estate taxes if the deceased person’s estate exceeds the federal estate tax exemption limit. To avoid this, some people set up an irrevocable life insurance trust (ILIT), which keeps the death benefit out of the estate. Interest Payments: If the insurance company pays interest on the death benefit (for example, if the payout is delayed), that interest is taxable and must be reported as income by the beneficiary. Policy Loans and Cash Withdrawals: If the policyholder took out loans against the policy or withdrew cash from the policy’s cash value, and the total exceeds the premiums paid, the excess amount could be taxable. Group Life Insurance: If the death benefit is from a group life insurance policy provided by an employer, and the coverage exceeds $50,000, part of the benefit may be taxable under certain conditions. Non-U.S. Policies: Life insurance policies issued by foreign companies may have different tax implications, so it’s important to consult with a tax professional if dealing with a policy from outside the U.S. How Is Life Insurance Cash Value Taxed? Tax-Free Growth The cash value within a life insurance policy grows tax-free. Policyholders can enjoy guaranteed growth, and in some cases, dividends that are also tax-free. Many savvy investors and families use their life insurance cash value as collateral, allowing it to continue growing tax-free while taking out loans against it. Work with Experts to Optimize Your Tax Strategy We work with investors, business owners, and wealthy families to enhance their financial plans and reduce taxes through properly structured, dividend-paying whole-life insurance from a mutual life insurance company. Whether your goals involve planning, banking, investing, or optimizing cash flow, we work closely with you to achieve your specific objectives. 👉Ready to explore how life insurance can benefit your financial strategy? Contact us today to schedule a consultation and plan for a tax-efficient future.  The information provided is for educational purposes only and does not constitute legal, tax, or financial advice. Life insurance policies and tax laws can be complex, and their applicability depends on individual circumstances. It is recommended that you consult with a qualified financial advisor, tax professional, or legal expert to determine how these concepts apply to your specific situation. The content is based on current tax laws as of the publication date and may be subject to change. We are not responsible for any errors or omissions, nor for the results obtained from the use of this information.

Wealth management isn’t just about savvy planning; it requires a strategic, integrated approach. This means considering options beyond the typical stocks and bonds. One of the most compelling alternatives? Life insurance.

They say it takes a village to raise a child. You know from experience that the same holds true for growing a business. Success comes from surrounding yourself with the best talent available. And then creating an environment where everyone can thrive. Of course, that also means avoiding unexpected disruptions. Enter key person insurance.

To grow and safeguard your wealth strategically, you need to seize every chance to maximize pre-tax deductions. An often-overlooked opportunity lies in cash balance plans, tailor-made retirement savings vehicles for business owners.

Put simply, life insurance is one of the most effective ways to build wealth. Note we’re not just talking about protecting wealth, as in securing your legacy and paying out your policy’s “death benefit” to your beneficiaries. We’re also talking about the built-in features of life insurance that allow you to grow your wealth during your lifetime.

You’ve spent your entire career building your legacy and preparing for the retirement of your dreams. The last thing you want is for someone else to determine who gets what after you’re gone. That’s where your estate plan comes in. Although estate planning can sound complicated, it really boils down to your answering the question, “Where do I want my assets to go after I’ve passed away or become incapacitated?”