Using Life Insurance for ROI

Case Study – Temporary Needs

Smart investors know that a diversified portfolio can be the key to a successful investment strategy. Using life insurance policies for their return on investment (ROI) potential can be advantageous.

Our valued clients have a liquidity gap over the next 10 years and need a policy that provides liquidity in the short term. When faced with a temporary need for life insurance, most people consider term coverage as a solution. However, if a client is looking for ROI, permanent coverage should be considered for temporary needs. While more expensive, there is more opportunity to receive a return on premiums that are used to fund the policy. In the graphic below, we have outlined three scenarios: (1) an unexpected mortality while the policy is needed, (2) surrendering the policy after it is no longer needed, or (3) gifting the policy to charity after it is no longer needed.

Unsurprisingly, unexpected mortality has the greatest ROI of the scenarios. The death benefit paid to the beneficiary is income tax-free and can be estate tax-free if the policy ownership is properly structured. This boosts the ROI further, since the death benefit can be distributed directly to the beneficiary and retained entirely. However, most policies placed for temporary purposes do not pay out a death benefit, so we must weigh the most appealing exit strategies for each client.

In this case, surrendering the policy after the allotted 10-year window can yield a good ROI at 7.16%, based on an illustrated rate of 6.00% and current charges. Unlike other investment vehicles, the cash value can grow tax-free inside the policy while the death benefit is available. Our valued client would have a $30M death benefit available during the 10-year window with the option to surrender the policy for an estimated 7.16% ROI in policy year 10. Cash value in subsequent years is illustrated to increase for an even greater ROI. The policy owner would have to pay applicable taxes on any gains, which is accounted for in the graphic below.

The final option that appeals to this client, charitable giving, lowers the amount of the taxable estate. The policy is donated when the policy owner is changed to the charity. The benefits of charitable giving aren’t as ROI-driven as surrendering the policy. The donor can take an initial tax deduction for the value of a policy gifted to charity (in the example case, an estimated $6M). The charity can access cash value immediately to use for an endeavor while the donor is living or wait to receive the death benefit for a large project, such as an annual scholarship or dedicating a building in the donor’s name, expanding the donor’s legacy.

Contact us with any questions or opportunities to help you or your clients achieve identified goals. This is what we enjoy doing for only a select number of families, businesses, and charitable institutions each year, and we look forward to hearing from you.