Leveraged life insurance is a non-traditional strategy for investing money and creating wealth with strong potential for growth. Although similar to other cash value life insurance strategies, leveraged life insurance differs in its approach to growth.
Rather than relying solely on the dividend growth of a cash value policy, leveraged life insurance capitalizes on low interest rate loans to invest in wealth building opportunities. By leveraging against cash value at a low interest rate, investors can improve growth of current investments or create additional growth by investing in additional permanent life insurance policies.
In this guide, we will explore what the leveraged life strategy is, how it works, and how you can implement it in your financial life to help grow your wealth and increase financial security. We will also explore secondary uses for this strategy when combined with assets like real estate, equipment leasing, or starting a business.
Table of Contents
Understanding Leveraged Life Insurance
Leveraged life insurance is not a particularly difficult concept to understand. Although there are some nuances in how the strategy is used, the base concepts behind this strategy is fairly simple.
Permanent life insurance policies typically come with a built-in cash value component. Unlike term life insurance, which has no cash value, these permanent policies offer a place where capital can earn a dividend and be borrowed against.
Leveraged life insurance is a strategy where you purchase a cash value life insurance policy that earns a dividend. You take a bank loan against the policy’s cash value at an interest rate that, historically, has been lower than the dividend earned by the policy. This is called a spread, where your earnings from dividend growth are higher than your loan interest rate.
You then use this loan–leverage–to invest in assets or use this capital to buy more life insurance and repeat the cycle.
Permanent life insurance policies have some key attributes–like a individual death benefit maximums and cash value growth time–which may limit the overall outcome for this strategy.
However historically, this approach to leveraging life insurance has been a profitable one–often reaching double-digit growth potential.
This strategy can be executed by purchasing a whole life insurance policy or an indexed universal life insurance policy–with whole life insurance policies being the most common option.
However, variable universal life insurance and other variable options are typically not an option.
At its core, this strategy uses bank loans, called CVLC loans, to succeed. Let’s look at these loans and how they work.
The Role of Cash Value Line of Credit (CVLC)
A CVLC, or cash value line of credit, is a common policy loan given by banks against cash value to policy holders, typically in a whole life insurance policy. Because whole life insurance cash value is considered essentially cash, banks offer this line of credit with little to no underwriting or approval process.
It is a variable, low interest rate loan determined with the London Interbank Offered Rate, or LIBOR–the benchmark index banks use when giving loans.
CVLC loans are safe, easy to acquire, and often the borrow will be paying interest at a low rate which makes them the ideal option for taking advantage of the opportunity to grow their money with leveraged life insurance.
Leveraging Life Insurance Against CVLC Loans
Using a CVLC policy loan to leverage your permanent life insurance policy is the key to this strategy.
Life insurance, more specifically cash value whole life insurance, earns a non-guaranteed annual dividend from the life insurance company.
The annual dividend is paid based on growth within the life insurance company’s investment portfolio containing diversified assets. These assets include investments like real estate, bonds, and corporate debt.
For many large, mutual life insurance companies, this growth is historically competitive. One major life insurance company had an average of 7.58% growth from 1996-2017.
But for the purpose of the leverage life insurance strategy, the dividend rate isn’t as important as the spread–or the difference between the dividend rate from the life insurance company and the bank’s CVLC loan rate. Historically, this spread is around 2%.
That 2% spread becomes the basis for the leveraged life insurance as a wealth building strategy. Thus far we have only discussed using one policy to earn a spread, the strategy comes into play when leveraged is applied.
Adding Leverage
We’ve established that when you borrow and earn a spread from your cash value life insurance policy against a bank loan, historically you could earn 2% on that spread.
But there is a problem. You have cash in hand–the loan amount–and you need something to do with it.
This is where the “leverage” in the leveraged permanent life insurance strategy comes from. You have a loan leveraged against your life insurance policy which gives you the opportunity to reinvest into something productive.
Options for Using Leverage to Grow Wealth
There are many different options here, so let’s look at what they are and how they work inside this strategy.
You have capital from your CVLC loan, and it needs to be invested productively.
Let’s start with the primary strategy for leveraging life insurance, which is buying more cash value life insurance.
Leveraging Life Insurance Into More Life Insurance
The primary strategy for those leveraging life insurance is the obvious one, utilizing your loan to buy more life insurance and repeating the cycle.
By using CVLC loans to buy more life insurance, you build cash value in a new policy and take out another CVLC loan on that second policy.
Each time you leverage another life insurance policy, you effectively increase your earnings by another 2% historically.
- Fund Your Policy
- Take a CVLC Loan Against the Cash Value
- Use the Loan to Fund a New Policy
- Repeat the Process as Sufficient Cash Value Becomes Available
This is how, overtime, a strategy that started with an individual life insurance policy earning a few percentage points, can reach double-digit returns without a lot of risk.
Now let’s look at another option for utilizing your leveraged funds.
Leveraged Life Into Investment Opportunities
Once you have cash value in a life insurance policy earning a dividend, you can leverage against this for many different opportunities.
It really doesn’t matter what these opportunities are, the benefits of leveraging cash value life insurance to make the investment are the same.
That means investing in options like real estate, equipment rentals, collectibles, stocks, and even buying or starting your own business works for this strategy.
As long as those opportunities are productive and earn the necessary returns needed to pay back the CVLC bank loan, any investment could be improved by leveraging life insurance to make the purchase.
Pros and Cons of Leveraging Life Insurance
Now, let’s look briefly at some of the pros and cons of this strategy that are important to understand before making any investment decisions. Let’s start with some of the primary benefits, and then look at the downsides.
Benefit #1 – Improved Earnings
The first benefit is the improved earnings from this strategy. Because historically life cash value life insurance dividends have earned 2% more than the bank loan rate, strategies like investing in real estate would be further improved by that 2% spread. That means, a 5% earning from real estate appreciation would now be improved to 7% earnings because of the additional earnings from the spread.
And for those who use the leverage life strategy to purchase more life insurance, the potential for double-digit returns will likely be more effective compared to many traditional investment and retirement account options like mutual funds, stocks, 401ks, etc.
Benefit #2 – Tax Advantages
This strategy also comes with tax advantages which will likely reduce the overall growth an investor will pay taxes on.
Cash value life insurance grows without income-tax liability, and if you die with life insurance policies still active, funds will transfer income-tax free–as death benefit–provided you are under federal and state estate tax limitations. As always, if you have specific questions about estate sizes and benefits, consult a registered tax-advisor.
On top of this, any interest paid on loans taken against a life insurance policy for investment purposes will be tax-deductible. An even further improvement on the overall earnings when using leveraged life insurance as part of an overall investment strategy.
This helps reduce overall income-tax liability on policy growth, and gross taxes paid over your lifetime on assets and investments.
Benefit #3 – Life Insurance Benefits
There are also benefits that are unique to cash value life insurance policies. Benefits like government and state protection, bankruptcy protections, and no-loss provisions give additional reasons to consider using it. These may not be a primary benefits for using this strategy, but should be considered.
You’ll also likely have an increased amount of overall death benefit in the early years, so if something were to happen to you, the amount of death benefit transferred to your family or beneficiary would be significant.
That doesn’t mean death benefit is important to the decision to leverage a life insurance policy, but is simply another added benefit.
Also, life insurance can offer benefits during retirement and provide additional retirement income to those who build cash value appropriately.
This supplemental retirement income benefit can also be a substantial for those who use this leverage life strategy to generate tax-free income and add to their retirement nest-egg.
Benefit #4 – Reduced Market Risk
One additional benefit, and often the reason individuals look for alternative investments in the first place, is the reduced market risk.
Many retirement assets like 401k and IRAs don’t offer much protection from market risks. Often, these assets cannot be adequately diversified to protect against major downturns and “black-swan” events.
Leveraging life insurance offers a way for individuals to get funds out of Wall-Street and traditional retirement accounts and put capital to work in a place where it is growing, and accessible, to purchase any good investment options as you see fit.
This is generally the same principle that the Infinite Banking Concept operates on.
All of these benefits make leveraged life insurance an interesting option compared to traditional investment options. However, that doesn’t mean leveraged life insurance comes without downsides.
Let’s look at the limitations on this strategy and some of the downsides.
Risks of Leveraging Life Insurance
Here are some of the downsides and risks to be aware of when leveraging life insurance and buying additional life insurance policies.
- Time: This is not necessarily a quick process. The initial insurance costs for a policy means that as you pay premiums, only about 50% of that capital will be accessible cash value. And it can take 7 or more years for your policies accumulated cash value to break even. Because of this, building this strategy can take longer than simply putting capital in, taking a loan, and continuing the cycle to maximize the full value of this investment.
- Interest Rates: Secondly, interest rates may be unpredictable. Since this strategy is based on dividends, if for some reason dividend rates are higher than the loan rate, this strategy may not work out as expected.
- Accessibility: Because life insurance policies take time to accumulate cash value, much of your capital may be inaccessible, especially in the early years. If for some reason you need to withdraw funds for emergencies or other reasons, you may be limited to the amount available.
- Health: This strategy uses life insurance. For those in poor health, this strategy may be less effective. Having an individual in good health to put the life insurance policy on may be necessary to achieve the desired results.
- Expert Implementation: Lastly, these life insurance policies must be set up properly. An expert life insurance agent must do this properly, or it could have negative consequences.
These risks are important to keep in mind for those considering leveraging cash value life insurance as a strategy.
Maximizing Investments
Accordingly, leveraging life insurance, particularly through a permanent life insurance policy, is a powerful and versatile strategy for financial planning and investing. This approach improves upon traditional investment methods, offering a unique blend of benefits that significantly amplifies overall returns, and allows you options to go at your own pace.
As we have seen, this is simply a unique investment tool, and there are many practical applications to help improve a wide range of investment goals and scenarios. From real estate investors to business owners, the potential to maximize returns and achieve financial objectives is significantly heightened with this approach.
By understanding and utilizing this strategy, you improve on every investment you make.
About Wise Money Tools
Wise Money Tools is a non-traditional wealth management company known for its expertise in helping clients expand and safeguard their wealth. Founded and led by Dan Thompson–who started as a financial advisor and stock broker before discovering the Infinite Banking Concept–the company stands out for its personalized approach to investment strategies. At Wise Money, we cater to a diverse clientele that includes professionals in their working years as well as those nearing or in retirement.
At the heart of Wise Money Tools’ philosophy lies a commitment to non-traditional methods that focus on growth, safety, tax advantages, and cash flow.
Contact us today for more complete details about our strategies or to set up a free strategy session and see how Wise Money Tools can help you change your financial future.
