Leveraged life insurance refers to the act of adding leverage to a permanent life insurance policy to grow cash value faster.
If you’re just beginning your research into leverage life insurance, sometimes called premium financing or enhanced funding, the most important thing to note is that permanent life insurance policies offer a wealth building strategy built in:
The cash value accrued above the premium earns tax-free interest from the Insurance Company.
For example, if your minimum premium is $1200/year, but you overfund it and send in $3500, you’d have $2300 more going to work for you gaining in cash value over time.
This cash value component accrues interest tax-free, and the Insurance Company provides guaranteed downside protection, just like the current higher-yield savings accounts, but better.
Add in your basic compounding interest principle and understanding that you have access to the cash, and anyone can see why investing in life insurance is a viable strategy.
If you added $2,300 in cash every year for 20 years (let’s say, from age 40-60), you’d nearly double your investment.
So, how does leveraged life insurance actually work?
You take the same principle outlined above, and enhance your contribution with premium from a lender to accelerate the growth.
Using the cash value and death benefit as collateral, a financial institution will loan the policyholder premium, deposited into the insurance account.
It covers the premiums and then some.
Now, instead of an extra $2,600/yr going in the first few years, you + the lender contribute (hypothetically) $500,000.
The interest accrued on the overfunded value offsets the interest rate on the loan.
In the same 20 year window, the cash value has exponentially grown, the lender has been paid back from policy values, and the funds provide tax-free income.
Many people purchase permanent life insurance policies exclusively for this benefit. Instead of purchasing the policy primarily for a death benefit, they are securing beneficial tax code that just happens to be in the form of a life insurance policy. They utilize it as a retirement vehicle in addition to their typical 401(k)s and IRAs.
The key to utilizing this strategy is doing your research. Just like any investment, consider all your options and ask a lot of questions. Work with agents and lenders you can trust that they know what they are doing.
Being that this should only be a piece of your larger portfolio, it's wise to discuss the ins and outs of it with your financial advisor(s), CPA and anyone else whose opinion you value.
I’m happy to answer any questions you may have on leveraged life insurance and other tax-efficient strategies. Please reach out: You can email me directly at jeff@enhancedfunding.com or call 773-318-9608.
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