Whether it is due to the “recovering” economy, the increase in mergers and acquisitions activity, the substantial financial success of a number of different industry sectors (tech, agriculture, health care, etc.), or a combination of all these factors, we are seeing a considerable increase in the number of clients who have a new found abundance of liquid assets. This influx of capital often stems from the sale of a business, an inheritance, cashing in appreciated stock options, or other liquidity events, and clients are exploring the various alternative ways to put the funds to work.
While there are countless different options, ranging from investment back into their private company to commercial real estate, hedge funds, stocks, commodities, etc., it may be useful to consider the wisdom behind a popular saying: “Pigs get fat, hogs get slaughtered.” Or, “You can’t score while you’re standing on the sidelines, but you also can’t get crushed by a 300-pound lineman.”
Families in such a cash-rich position may want to consider permanent cash value life insurance, an often-overlooked financial instrument, for a portion of their funds. Advantages of allocating dollars to a life insurance policy include:
- Gains for heirs – Life insurance death benefits lock in your gains and provide a competitive return – typically a tax-equivalent internal rate of return around 7-9% at life expectancy – without added market risk
- Deferred taxes – The tax-deferred growth of cash value and the tax-free nature of death benefits are some of the costliest expenditures for the federal government – which means they are the most advantageous for taxpayers
- Liquidity for estate taxes (which may end up being capital gains taxes) – Families often struggle to come up with the funds to pay taxes due upon death and are forced to sell off assets, often at a deep discount; death benefits can ease the burden
- Flexibility/access to cash – Properly designed, the policy may have cash value that is accessible for loans/withdrawals while the client is still living
- Creditor protection – In many states, life insurance is protected from creditors
- Potential to avoid probate/privacy – With properly named beneficiaries, your death benefit will pass on to heirs without the risk of a will contest, giving you privacy (everything that goes through probate is public information)
- Longevity diversification/hedging – Should you live well past your life expectancy, your investments will benefit from compounding returns; if you pass away prematurely, life insurance can make up for the abbreviated investment time frame
- Ease of ownership – Investments such as commercial real estate may provide attractive returns, but they require considerable time and effort on the part of the owner; life insurance is simple to own, requires very little of your time to manage, and does not require a level of expertise to liquidate upon your passing.
Put It In Practice: For clients who find themselves with a substantial liquidity event, facing a decision as to how to allocate those dollars, a cash value life insurance policy may be an appropriate alternative to explore. Ash Brokerage can help you start the conversation.