What is Leveraged Life Insurance –

Does This Life Insurance Cure Underfunded Retirement Savings?

A whole life insurance policy is a type of permanent life insurance that provides coverage for the entire lifetime of the insured, as long as premiums are paid. It typically includes both a death benefit (paid to beneficiaries upon the insured’s death) and a cash value component, which accumulates over time. The cash value portion of a whole life policy grows at a fixed rate and is tax deferred.  

Leveraging Life Insurance to Increase Cash Value 

What if you could get more coverage than you imagined with a little help from the bank? This type of coverage is referred to as a leveraged life insurance policy. Officially, “Leveraged insurance plans” refers to a financial strategy or product that uses borrowed funds in conjunction with a life insurance policy. The purpose of this approach is to enhance the policy’s benefits or returns. In this instance, the collateral for the borrowed funds is the policy itself.  

How Leveraged Life Insurance Works 

For leveraged life insurance, or L.L.I., you would take the same principle that you plan to invest. Now, however, you would enhance your contribution with premiums from a bank to accelerate the growth. The financial institution will use the cash value and death benefit as the collateral to loan the policyholder premiums that are deposited into the insurance account.  

Instead of a few thousand dollars of premiums in the first few years, you and the lender contribute a larger number, like say several hundreds of thousands of dollars. The interest accrued on the “overfunded” value offsets the interest rate on the loan. Meanwhile, the cash value has exponentially grown, and the lender has been paid back from policy values. The funds are now available to provide tax-free income to the policy owner. 

One L.L.I. Example: The 5 Year Plan 

We offer a life insurance policy in which the policy owner pays the premiums for the first five years of the annuity. The bank holding the policy funds pays the next 10 years of the premiums on the policy owner’s behalf. For late plan contributors, this type of investment can turn an underfinanced retirement plan into a robust retirement lifestyle. It is a unique investment vehicle because of the ability to partially finance it by a bank.  

It’s a Popular Tax-Free Investment Vehicle 

This life insurance product has become popular because by leveraging the premiums against the policy itself, policy owners can substantially cut the long-term cost of the policy. Meanwhile, they are  boosting the Tax-free income it provides. The method is little different than using a mortgage to buy a larger home than you would purchase with cash. Of course, the amount of retirement income you can generate varies depending on your age and investment amount.  

Leverage to Increase Returns 

In finance, “leveraging” typically refers to the use of borrowed money (debt) to increase potential returns on an investment. Leveraging allows investors to control a more substantial asset base than they would with their own funds alone. In insurance this means you could buy a larger investment to provide your tax-free retirement income and lifestyle boost. 

The leverage effect here describes the effect of debt on the return on equity. In other words, additional debt can increase the return on equity for the owner when the total return on the policy is higher than the cost of the additional debt. Because this type of investment is also an insurance policy, the return is more secure than that of leveraged stock purchases. 

Talk to a Financial Professional  

This type of policy is not for everyone. There are minimum policy and income levels that must be considered to avoid creating hardship today. Also, keep in mind that specific details and features of any financial product, including insurance policies, can vary significantly between different providers. If you’ve found an intriguing financial product or concept, seek more information directly from your financial consultant or financial advisor.