Family Banking Revolution...
….The how and why of it!
Indexed Universal Life (IUL) Insurance and it’s role in your family bank creation
There are many instruments that can be used as a vehicle to “fund” your bank. Anything that can act as a collateral and grow in value can serve that purpose. So why should Indexed Universal Life Insurance be considered for your family’s bank core? The reasons are many!
First consider the necessary elements to build your bank. It must possess each quality, or it will be flawed and not function with the highest level of efficiency. The core investment must provide liquidity, control, tax advantages, asset protection, and uninterrupted compounding interest accrual.
Liquidity
Liquidity is essential in that it improves your cash flow. When you need to access funds, you don’t need to jump through the hoops of applying for a traditional bank loan. Simply request a policy loan from your insurer and funds will be made available to you. IUL’s provide extreme liquidity compared to other asset classes such as stocks, bonds, 401(k)’s or IRA’s.
Control
Indexed Universal Life insurance provides very low risk and offers a great deal of control. Being linked to an index provides uninterrupted compounding interest gains but offers protection against the volatility in the stock market, unlike a 401(k). Indexed Universal Life contracts have guaranteed floors that prevent your capital from taking on any loss. Remember Warren Buffet’s first rule of investing: Never Lose Money. This contractually guaranteed floor protects the capital you have contributed to your account, while still allowing you to take advantage of the gains in the broader markets.
This control can be classified as tax advantages and asset protections.
One of the main reasons that IUL’s are ideal for Family Banking is the IRS treatment of insurance policies under IRC 7702(a). In addition to tax-free policy loans and tax free growth of interest inside your policy, the death benefit of an IUL is tax-free to your beneficiaries and is often exempt from estate taxes as well.
Asset protection is another feature of an IUL policy. These protections can and often do vary from state to state, but can include protection from asset searches and seizures, protection from judgements and protection from creditors. Plus, any policy loans you utilize don’t affect your credit score!
Protection against volatility
IUL’s are indexed to the broader markets such as the S&P 500, which can be especially volatile. But unlike placing your funds directly into an index, you are contractually guaranteed a floor for your capital. If the market slides 20% and causes others to add years of work in order to retire with their 401(k) funds, you are protected with a contractual guarantee. These floor limits vary from company to company, but generally range from 0 to 2%. In a year like 2020 or 2022, while everyone is losing 30-50% of their capital, you will be guaranteed and experience no loss. The average annual historical interest gains for IUL products is at a healthy 8.9%. When compared to the average savings account, money market, bonds or CD’s, you can see why the IUL is a clear winner. Once you average out 401(k) gains and then reduce for income tax, it’s again a clear winner.
Now let’s look at other guarantees. Not only is capital preservation guaranteed, but your death benefit and your premiums are also guaranteed. These properties are the reason why a properly structured IUL is perfect for setting up your Family Bank.
When compared to other assets, such as a 401(k) or an IRA, there are even more benefits. In the event you pass away with money left in these accounts, the remaining funds will be passed to your beneficiary, but they will first be taxed. You cannot be certain what these :qualified” plans will leave to your loved ones due to future tax rates. Do you really want your retirement connected to a blank check from Uncle Sam?
These IUL policies build cash value first and foremost, and because it is funded with after tax dollars, you don’t have to concern yourself with future tax rates. And accessing policy loans to fund your retirement means no income tax loss. The policy loans are simply deducted from the death benefit at the time of your passing.
You won’t have to be concerned with running out of money for retirement. Because your funds will be shielded from market downturns, your cash flow will not be affected or at risk of loss. For these reasons, some individuals redirect funds from other qualified plans and rely solely on their Family Bank for retirement.
Generational Wealth
Family Banking with IUL’s is a proven method for creating a legacy and building generational wealth. In large part, this is due to the tax treatment of death benefits as they are tax free and generally not subject to estate taxes.
With a comprehensive plan utilizing proper trusts, your trusts can be named the policyholder or beneficiary of your policies. This will ensure substantially more of your wealth is transferred to your future generations.
Pre-requisites
Though the Family Bank strategy is highly effective, it is at its core a life insurance policy. You must be able to qualify for a life insurance policy, which is based on your health and attained age. However, with the events associated with Covid, health background checks have been streamlined and it is possible to qualify now more than ever even for those with attained ages of 55+!
Costs associated with permanent life insurance can be higher than the term counterparts. You have to have a long term financial plan in place and have the means to see it through. This can be as simple as deciding how much you can comfortably save each month to pay your premiums. Bear in mind that you are not just paying for insurance, as you are commiting to setting aside a set amount to savings inside your insurance policy to be used by you whenever you choose while still earning uninterrupted compounding interest.
The most important factor when building a Family Bank with an IUL to remember is that the death benefit is not the primary concern. It’s the living benefits. The added bonus is that there are financial benefits for your loved ones in the event something happens to you. The motivation is to protect your wealth from bank interest rates and financing, market volatility, creditors and taxes. A properly structured IUL maximizes the CASH VALUE, not the death benefit. This distinction is huge. If the death benefit is too high, it will eat up your premium contributions and will not be efficient for this purpose.
You have to have the mindset of a good banker. When you take a loan from a bank, you place a high importance on paying the bank back. Why should you place any less importance on paying yourself back? Does your money have more value when you pay it out to others? It shouldn’t! Pay yourself first, not last!
The benefits of Family Banking are largely dependent upon how the tool is utilized. It requires financial responsibility. The main idea is to fully fund, and even “over fund” with Paid Up Additions Riders, right up to the point of it becoming a Modified Endowment Contract (MEC). When using Paid Up Additions Riders, you rapidly increase your cash value and your death benefit, thereby increasing the power of your Family Bank. The higher your cash value, the more interest accrual you will experience which further increases the fund availability of your bank.
How to Get Started
Family Banking Design is here to help clients by providing the proper tools to build out your Family Bank. This takes special education and trained life insurance agents that understand the process and the importance of cash value over death benefit. Not all agents are prepared for this, as they may have much higher incentive to increase the cost of your insurance as it increases their commissions. Don’t be fooled. Make sure you are speaking with a fully informed agent like those with FamilyBankingDesign.com! Setting an appointment is easy! Simply fill out the following form and we will get back to you within 48 hours. You don’t have to worry, as your contact information isn’t shared, rented, or sold. You will not receive a hundred calls from dozens of insurance companies. You will only get one call from one of our highly experienced professionals ready to build your bank!