Optimize Your Business Growth by Borrowing from Your High Cash Value Whole Life Policy for Tax-Savvy Asset Purchases
- martyblackmon
- 6 days ago
- 5 min read
In today’s competitive market, every dollar counts. Finding clever ways to finance your business growth is key to achieving success. One unique strategy is to tap into your whole life insurance policy. By borrowing funds from this well designed whole life policy to invest in your S corporation, you not only fuel your business's expansion but can also enjoy certain tax benefits. For example, if you borrow at a low interest rate of just 5.3% and lend that money to your business at 11%, you're creating a win-win situation. In this blog post, we'll explore how this strategy works and why it may be right for you.
Understanding High Cash Value Whole Life Policies
Whole life insurance is more than just a safety net; it’s a financial asset. This type of policy offers a death benefit and allows you to build cash value over time. When you pay your premiums, a portion goes toward this cash value, which grows at a rate—often anywhere between 4 to 6% per year. This cash can be used as collateral to borrow against, giving you access to funds without triggering a taxable event and at the same time allowing your cash to grow inside this policy uninterrupted for decades. Albert Einstein coined uninterrupted compounding of interest the 8th wonder of the world.
For instance, if your cash value is $50,000, you might borrow up to 90% of that amount. This makes whole life policies a flexible and powerful tool for both personal and business finance. Essentially, you're banking on yourself and leveraging your own resources for significant investments.
The Benefits of Borrowing from Your Whole Life Policy
Low Interest Rates
Loans from your whole life policy generally come with lower interest rates than traditional bank loans. Currently, you'll find a simple interest rate of 5.3% when borrowing. For comparison, mainstream banks may charge between 7% and 10% or more. This lower cost means you can keep more money in your business for other uses. Simple interest through these loans also saves you money unlike traditional banks and credit cards using compound interest and even longer term loans and mortgages which use amortized interest with most of the interest paid up front in the first few years of the loans.
Higher Loan Returns for Your Business
By lending the cash borrowed from your policy to your S corporation at a stronger rate of 11%, you achieve a profit margin of 5.7%. Suppose you borrow $50,000 and lend it out at this higher rate. You could generate an additional $2,850 in interest over a year. In a dynamic business environment, that kind of return can be a game-changer, helping you navigate expenses or seize new opportunities.
Tax Savings
While interest paid on whole life loans is not tax-deductible like traditional loans, having a business and structuring your loans carefully can provide significant tax breaks. Your S corporation can deduct the interest it pays to you, which reduces the households overall tax liability. For instance, if your business pays you $3,000 in interest, it could lower your taxable income substantially, allowing you to reinvest those savings.
Steps to Implement This Strategy
Assess Your Whole Life Policy
First, take a close look at your whole life policy. Understand how much cash value you have built up and what your borrowing limits are. Consulting with your insurance agent or a financial advisor can clarify the details and potential impacts of borrowing against your policy. If you do not have a high cash value whole life policy, contact us here at BlackFin Wealth Group to have someone design one specifically for you and your business needs.
Calculate Potential Growth Opportunities
Next, evaluate your S corporation's financial needs. Determine how much you need to borrow and how that money will be utilized. For example, if you invest $30,000 in new technology, calculate the expected increase in revenue. If that technology improves productivity by 15% and generates an additional $12,000 annually, the investment pays for itself quickly.
Secure the Loan from Your Whole Life Policy
Once you've decided how much to borrow, reach out to your insurance provider to start the loan process. Ensure you understand the terms, including how the loan will affect your cash value and death benefit. These loans are simple, one piece of paper or some providers offer online paperless forms. There is no need to pull business and tax documents to get the loan, simply fill out the one pager and submit with your banking information and you will either get a check in the mail within 5 to 7 business days or have it deposited directly in your bank account in 2 to 3 days.
Lend to Your S Corporation
After obtaining the loan, lend that amount to your S corporation. Draft a clear agreement that outlines the interest rate, repayment schedule, and any other terms. Having a written contract helps establish a formal record and keeps everything transparent for you, your business books and most importantly the IRS.
Monitor Your Progress
Stay vigilant about your business's performance and financial records. Track how the investment is performing and the status of loan repayments. Keeping accurate records will help you maximize your tax savings and assess the success of this strategy.
Potential Risks to Consider
Policy Loan Obligations
It is essential to understand that any outstanding loan will reduce your policy's death benefit. If your business does not achieve your projected goals, you might face financial obligations requiring repayment from personal funds. In the worst-case scenario, a significant outstanding balance could impact your financial legacy. The simplest way to approach policies loans is to treat them like you would if you borrowed from any bank or lender, make steady monthly payments back and in the words of Nelson Nash, "be an honest banker"
Interest Rate Fluctuations
While the 5.3% rate currently seems appealing, pay attention to market trends. If interest rates rise, it could change the attractiveness of this borrowing method. Stay informed to make informed decisions about your financial strategy. Work with a large insurance provider that only changes rates once per year and make sure you understand the contract as some providers offer a guarantee that your loan rate will never be higher than your annual dividend rate paid to you. This lowers the overall delta between your cash growing and your loaned dollars interest paid which makes moving interest rates not all that important as they fluctuate.
Final Thoughts
Using cash from your high cash value whole life policy to invest in your S corporation offers a unique approach to fueling business growth. Lower borrowing costs, higher investment returns, and possible tax benefits can create a stable foundation for your finances.
Before embarking on this process, engage in thorough research and consult with your financial advisor. With informed choices, you can take full advantage of this strategy and position your business for sustainable success.
By adopting these techniques, you can redefine how you finance asset purchases and business growth. Take charge of your financial future, and watch your business thrive.
Visiting www.BlackFinWealth.com, you will find a wealth of resources to help you navigate the complex world of finance. From informative blog posts to potential classes for financial literacy, they have everything you need to make informed decisions about your money. If you're ready to take control of your financial future, consider signing up for their email list to receive valuable insights and tips straight to your inbox. Whether you're a seasoned investor or just starting out, BlackFin Wealth Group has the tools and knowledge to help you succeed. Don't leave your financial future to chance. Trust the experts at BlackFin Wealth Group to guide you towards a brighter tomorrow.
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