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The Secret Income Stream You Probably Haven’t Heard Of Yet

Life insurance is often thought of as only providing a benefit to those receiving the proceeds on the death of the insured. The truth is, insurance policies can be structured to provide an additional source of cash flow. 

This guide is courtesy of David Rubin, Estate & Insurance Advisor.

What Is Insurance Income?

  • Whole life policies have a cash value component—the money that would be returned to the policyholder owner if the policy is cancelled.
  • If the policyowner keeps the policy in force, the cash value can be accessed in a number of different ways.
  • The policyowner can have access to the cash value by:
    • A policy loanthis is a contractual right available to policyowners.
    • Surrendering a portion of the coverage while keeping the policy in force.
    • Pledging the policy as collateral for a line of credit at a financial institution.
    • Being paid a cash dividend on participating policies that generate a dividend.
  • Each method could have different tax implications for the policyowner, and should be reviewed with a tax advisor.

What Are Some Examples of Insurance Income?

  • John has a policy from ABC Insurco with a cash surrender value of $500,000. John can borrow up to 90%, or $450,000 at a maximum interest rate of 6%, as defined in John’s policy. As long as the loan balance outstanding never exceeds the 90% maximum, John is not required to make any loan repayment. The loan balance would be deducted from the proceeds of the policy upon John’s passing.
  • Mary has a policy from this same insurance company. The policy initially had a face value of $1,000,000, but has grown, by virtue of the annual dividends the policy has earned, to have a death benefit of $2,000,000 and a cash surrender value of $350,000. Mary is able to surrender or “strip” portions of the additional $1,000,000 each year, lowering the death benefit and cash value with each piece surrendered.
  • Mary decides she still needs the higher death benefit, so as an alternative she pledges her policy to Big Bankco, who agree to provide an income stream of $30,000 annually for a period of 10 years. 
  • John’s policy has been paying a dividend of about $20,000 annually. The dividends have been used to purchase additional insurance coverage each year. John feels the death benefit has grown enough for his estate planning purposes, so he directs the insurance company to pay the annual dividend to him in cash rather than purchasing additional insurance. 

What Are the Pros of Insurance Income?

  • Insurance income can allow the policyowner to use funds against their policy ahead of passing.

What Are the Cons of Insurance Income?

  • You may require the assistance of a dedicated tax advisor, as each method can have different tax implications.
  • This income stream method does not adjust with inflation.
  • You must qualify, both medically and financially.

Insurance is a vital part of a comprehensive, diversified portfolio. The strategies mentioned above are best suited for individuals with surplus cash flow who are seeking diversity in their wealth plan in the most tax efficient manner. Unlike the other income streams discussed within this series, insurance income is the only investment strategy that requires qualification—both financially and medically. When executed properly, the benefits of this income stream are extraordinary, and this income steam lies in a class of its own. 

This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.

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