Experienced investors know the benefit of being fully invested, coupled with prudent diversification to insulate against market ups and downs. That’s how generational wealth is built; not by shying away from risk, but by meeting it head-on with tools and techniques that tame its impact.
Whereas many risks can be adequately addressed by diversifying among investments, some risks require investors to take a broader view that diversifies beyond investments, particularly when planning for taxes and their own mortality.
Of course, the go-to tool to neutralize terminal tax and preserve estate value is life insurance. Still, even an investor convinced of this need may be hesitant to divert profit-minded investment money into protection-oriented insurance premiums.
But what if insurance could also earn investment returns, and tax-sheltered returns at that?
A technique that can be used to reposition dollars from investment into insurance – and pave the way for a return to investment – is a leveraged loan.
To be clear, there is no tax deduction for money borrowed for life insurance premiums. However, if a policy’s cash surrender value (CSV) is used as loan collateral, that interest may be deductible.
CSV life insurance is also known as exempt insurance. Extra deposits to such policies are technically prepayments of future premiums, with the earnings on that excess (up to legislated maximums) being exempt from tax while within the policy, and also being exempt from tax when paid out on death of the life insured.
The key to this strategy is the order of the steps taken, with the original source for the insurance premiums being either existing investments as outlined above, or new cash from time to time.
Either way, the established policy is pledged as collateral for a loan that is used to earn investment income, which allows for the interest deduction.
A lender may lend up to 90% of the CSV –
which itself generally grows, again tax-sheltered –
and then on death the insurance proceeds are used to retire the investment loan, leaving the excess to be used for its original insurance need.
