Is Leveraging a Life Insurance Policy Right for You?
Life insurance is often seen as a safety net for loved ones, but did you know it can also be a powerful financial tool during your lifetime?
Whether you're planning your estate, managing corporate obligations, or simply looking to enhance your financial flexibility, leveraging a permanent life insurance policy could be a strategy worth exploring.
What Is Life Insurance Leveraging?
Leveraging involves using the cash value of a permanent life insurance policy as collateral for a loan from a third-party lender. This allows you to access funds while keeping your policy intact - potentially unlocking long-term financial benefits without disrupting your estate plan.
Why Consider Leveraging?
A life insurance leveraging strategy can offer several advantages:
Tax-free death benefit: Your beneficiaries receive the insurance proceeds tax-free.
Tax-advantaged growth: The cash value within your policy grows on a tax-deferred basis.
Interest deductibility: If the borrowed funds are used for eligible investments, the loan interest may be tax-deductible.
Capital Dividend Account (CDA) credits: If the policy is owned by a corporation, the death benefit may generate CDA credits, allowing tax-free distributions to shareholders.
Who Might Benefit from This Strategy?
Leveraging isn’t for everyone. You may be a good candidate if:
You need permanent life insurance coverage.
You have liquid capital to fund the premiums.
You’re in a high tax bracket (personally or corporately).
You’re comfortable with borrowing and understand the risks.
You have access to strong tax and legal advisors.
How Does It Work?
Here’s a simplified overview of how a leveraging arrangement typically unfolds:
Fund the Policy: You (or your corporation) make deposits into a permanent life insurance policy.
Secure a Loan: The policy is used as collateral to obtain a loan from a lender.
Invest the Loan Proceeds: If the borrowed funds are invested in eligible assets, the interest paid may be tax-deductible.
Premium Deductibility: In some cases, if the borrower and policy owner are the same, a portion of the premiums may also be deductible.
Repayment Upon Death: When the insured passes away, the death benefit repays the loan first. Any remaining proceeds go to your beneficiaries.
Note: If the policy is corporately owned but the borrower is a personal individual, additional tax and legal considerations apply.
Final Thoughts
Leveraging a life insurance policy can be a smart way to enhance your financial strategy—providing liquidity, tax efficiency, and estate planning benefits. But like any financial decision, it’s important to consult with qualified advisors to ensure it aligns with your goals and risk tolerance.