How The Ultra-Wealthy Utilize Life Insurance

2023-10-03 Joseph Fisher

You have probably seen everyone and their dog talking about IUL or to the everyday person it is more commonly known as an Indexed Universal Life insurance policy. An IUL is a life insurance policy that is tied to the stock market. For the longest time the ultra-wealthy of the world have used life insurance to enhance their life. One thing that most people understand is that life insurance is to help protect them if anything were to happen to them. That being said, one thing that I want you to get from this, is the understanding that life insurance is not just for your death. It is called LIFE insurance and is made to benefit your life in ways you might not know.

So, let's talk about the ways that life insurance can be used while you’re alive! One of the main reasons we use it for our clients is to create another retirement account that doesn’t get affected by down years. Everyone knows that the market goes up, but the market also goes down and when it goes down it can plummet! What an IUL does is it lets you participate in the upside of the market but has a floor of 0%. So, if you saw your IRA or 401k drop by 25% last year if you would have been looking at an IUL you would have slept just fine knowing it couldn’t drop below 0%. This is one reason that it appeals to the ultra-wealthy. That isn’t the only benefit during your life either.

Another big reason that the ultra-wealthy utilize life insurance as an investment is that it helps them grow their businesses. One benefit that can be used within a life insurance policy is that you can borrow against the policy tax free. This will not be covered at a very high level in this article but be on the lookout for another post about this whole system in a later article. Now for an example, let's say you contribute 1 million dollars and you want to figure out how you can have that money last forever. Well, this is what you would do hypothetically: you would take the 1 million and put it into a life insurance policy. That policy would then grow, on average, by 7% annually. Let’s say you want to borrow from that policy $100,000 to improve your business. You will borrow that money at a smaller interest rate of potentially 3-5% so if your policy grows at 7% but you borrow anywhere from 3-5% you in turn become your own bank. Some of the large businesses that have done this to create growth are Disney's founder Walt Disney (as he funded his famous amusement parks) and McDonald’s founder did the same thing to fund the marketing campaign for Ronald McDonald. If it wasn’t for life insurance, those companies wouldn’t be what they are today. These are a few examples in the real world, but everyday entrepreneurs are using their life insurance to grow their businesses as well! It would be pretty cool to be your own bank, wouldn’t it?  Now let’s talk about the TAX-FREE component of life insurance.

Yet another benefit of life insurance is building a TAX-FREE retirement. Have you ever gotten annoyed when you look at the taxes on your paycheck.... or if you’re a business owner when you pay that massive check in April. I’d imagine you get sick that your money is getting taken away from you, if I’m correct in that assumption, then this might be for you. One solution could be building a life insurance policy starting at 40 years old and continuing to build it for 25 years until you are 65 years old. Then you can start taking tax-free distributions from that policy while the policy continues to grow year over year. For example, for someone that is 40 years old and if you were to contribute 50,000 a year into an IUL until you retired, you could withdraw $253,644 tax-free from 65 years old until you die. The key to know is that it is all tax-free, unlike a traditional 401k or IRA. These numbers used are for illustrative purposes only and should not be construed as specifics for what a life insurance policy would look like for your personal situation.

 As I am a wealth advisor, I believe that having IRAs, a 401k, and other investment accounts is great, and they truly are all great tools. What life insurance can do for you is create more diversification in your overall assets. If we can diversify among accounts as we do with your portfolio it will further benefit your overall growth. If you have seen anything on these products and are interested in how they could help you and your portfolio, please reach out to me.