Millionaires know how to use life insurance to build wealth – but only a particular kind of policy will do. We’ll explain why whole life is the preferred financial vehicle for becoming your own banker and providing a financially secure retirement.
First, let’s talk about whole life insurance. It covers you for your entire life, unlike a term policy. Because it’s a form of permanent coverage, it also builds cash value. That’s the key in terms of how to use life insurance to build wealth.
Think of cash value as a savings account tied to your policy. Every time you make a payment, the insurer breaks up that payment to cover different expenses. First, they deduct the cost of your coverage. Next, they pay any account admin fees. Finally, anything left over goes into your cash value account.
With whole life policies, your cash value account gets credited with a flat, guaranteed interest rate set by the insurer when you buy the policy. That guaranteed rate is why whole life is special. Other types of permanent policies also have cash value and interest crediting programs, but they’re variable and not guaranteed. Only with whole life is your cash value guaranteed to earn and compound in a predictable manner you can take advantage of later.
Cash value takes time to build, since it’s funded by only part of your payments. When you’re talking about building wealth using life insurance, it’s not a method that works in months or even a few years. This is a long-term strategy that requires commitment and patience.
Once it’s grown to an amount that makes sense to start accessing it, there are multiple ways to do so:
To build wealth, you want to focus on the policy loan option since it’s the only option that won’t deplete your cash value when you use it. If you want to know how to use life insurance to build wealth, the key is to keep and grow your cash value – not to deplete it by pulling it out to use.
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To take a policy loan, all you do is request it from your insurer. Most insurers allow you to borrow up to 90% of your cash value. These loans do incur a small amount of interest, but it’s offset by the interest your cash value continues to earn. It’s a private loan, so it will never appear on a credit report. And although it’s called a loan and is intended to be repaid, you technically don’t have to. If you don’t repay a loan, you’ll continue to accrue interest charges.
If a policy loan is outstanding when you pass away, the insurer will deduct what you owe from the death benefit before it gets paid to your beneficiary(ies). If your beneficiaries truly need that death benefit, you have to evaluate the pros and cons of leaving a loan unpaid.
When you take out a policy loan, you’re not removing that money from your cash value account. That’s the key to building wealth. That cash value continues to compound and earn interest even while you’re using its equivalent to make more money out in the world.
Entrepreneurs and investors use policy loans to make short-term investments. The goal is to make more money than you used in the policy loan, and pay it back with a portion of your profits. There are no restrictions how that loan money can be used. You can use it to invest, to start a business, or for any other reason you see fit.
Rather talk to a real person about how you can use policy loans to build wealth? Call us at (800) 521-7873 and we’ll answer all your questions. Or start comparison shopping with a free term life quote – just click the button below!Get a Free Quote Now
There’s another reason investors and entrepreneurs use whole life insurance to build wealth. It’s the presence of dividends, paid by mutual companies to their policyholders. Mutual companies often have “mutual” in the name – think MassMutual or Mutual of Omaha, for example. These companies are owned not by shareholders but by policyholders. When their profits surpass their goals, the company pays out the surplus to policyholders.
Dividends aren’t guaranteed. But when they happen, you can use them in multiple ways. You can take the cash, or you can use it to buy what’s called paid-up additions. A paid-up addition is extra coverage, a policy within a policy that earns its own cash value. It’s a way to use free money – the dividend – to earn even more cash value.
Adding to your cash value with multiple dividends is one way to increase the value of your whole life policy. The more cash value you grow, the more policy loans you can take out for other investments and financial strategies. Remember: dividends are only paid on whole life policies offered by mutual companies. If you’re interested in this strategy, your life insurance agent can help you buy a policy that’s best suited for these wealth-building strategies.
Rather talk to a real person about how to use life insurance to build wealth? Call us at (800) 521-7873 and we’ll answer all your questions. Or start comparison shopping with a free term life quote – just click the button below!Get a Free Quote Now