Why is life insurance a key component to wealth and succession planning?

This type of life insurance will protect one throughout their life and transfer wealth upon death at an advanced age. All of these policies will allow for cash accumulation to fund the policy for life, and some will create enough value to create a tax-free retirement asset class. All permanent life insurance proceeds will result in a tax-free wealth transfer for the beneficiaries in the U.S. and most countries in Latin America and Europe.

• Universal Life (UL) Insurance policies provide permanent coverage with affordable and cost-efficient premiums. UL life insurance is flexible with premium payments, allowing to increase or reduce payments to accommodate diverse economic cycles. These policies have a cash value component that grows in multiple ways, ranging from fixed rates to benefiting from a stock market index, such as the S&P 500. The cash value in the Indexed Universal Life (IUL) policies have bottom protection from market downturns and participate in the upside when the market recovers.

• Whole Life Insurance is a type of permanent life insurance that guarantees a death benefit payout in exchange for the contractually agreed premium payments. The cash value in Whole Life Insurance has historically grown every year with capitalizing interest and dividends, allowing for robust cash accumulation. The cash in these policies can be accessed tax-free, for any reason such as health, income during one´s retirement years, or capitalized to increase the beneficiary’s payout.

• Term Life Insurance provides a death benefit that pays the beneficiaries of the policyholder during a specific period. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the policy to lapse. These policies do not accumulate cash, are usually purchased for a specific life cycle risk and several also provide access to cash in life for extreme health reasons.

This strategy is for a unique group of individuals that have the net worth to pay for the premiums directly and qualify for the loan. The bank will pay for the premiums while the policy cash value is used as the main collateral. Throughout the loan period, the client will make a reduced portion of the payments relative to the scale of the strategy and be able allocate capital to ventures that can outperform the cost of capital.

Historically, using premium financing as a mode of payment has resulted in a profitable and healthy asset class, creating significant tax-free cash for use in life and a robust tax efficient wealth transfer. This strategy has multiple variables and additional risks that need to be analyzed.