Permanent life insurance is often viewed as a passive asset. But it can unlock opportunities for policyholders who want a convenient line of credit.
People often seek out loans or lines of credit to invest in their business or the market, carry out a home renovation, or meet other financial needs such as creating a source of retirement income. A permanent life insurance contract provides that flexibility.
These contracts can help generate significant cash surrender value. Policyholders can use the cash value to secure a line of credit and “activate” the cash inside their permanent life insurance contract.
Why should advisors educate their clients about this option? The best time to borrow money is when you don’t need it. That way, it’s there and ready to be deployed, allowing clients to be nimble when the right opportunities to invest or spend arise.
A life insurance contract can be the chassis of a financial plan. It provides a framework that makes other strategies possible. Insurance lending is one of those strategies.
Some advisors see this solution as complex, often because they focus their practice on insurance and/or investments. Lending isn’t always top of mind. The process is actually pretty straightforward. We confirm a client’s personal and/or corporate income, it goes to underwriting, and approval can be in hand in roughly three weeks.
Unlike the commonly known policy loan, this isn’t a term loan. It’s a revolving facility, so people can use the funds as they want without applying each time they need money. As they pay it back, the proceeds of the line of credit become accessible again and again.
If the line of credit is completely repaid, it costs the client nothing in interest, but they still have access to low cost financing whenever required.
The minimum commitment is interest only, and current interest rates are competitive, often 1–3% less than some borrowing alternatives. People pay interest only on the funds they borrow, not the approved limit.
Tax and cash flow benefits
Depending on how the money is invested, the interest paid on insurance lending facilities may be tax deductible. Since the insurance lending facility isn’t directly attached to the life insurance contract itself (as is the case with a policy loan), there’s less potential for tax issues.
Some insurance lending solutions can help advisors make the full insurance recommendation. Consider a situation where you assess a client’s insurance needs, and they say they can make better use of the premium amounts elsewhere.
Here, insurance lending can help minimize the impact on the client’s cash flow and allow them to deploy the capital into, for instance, their business or investment portfolio. That’s the best of both worlds.
For corporate clients, insurance lending can help reduce the impact of an insurance premium on their cash flow. The contract itself can then create a capital dividend account, which brings with it many tax advantages.
Tapping into the cash surrender value is also a popular strategy in retirement. In many instances, the monies drawn from these insurance lending solutions have some great tax advantages. So a permanent life insurance contract with cash value can be viewed as another pot from which to draw retirement income.
If a client is using insurance lending as a tax strategy, always recommend that they contact their tax professional for advice on structuring the loan and proper use of the funds to ensure tax strategies are efficiently maximized.
Add value for clients
There are opportune times to discuss insurance lending with clients, but at a minimum it should be part of their annual review process.
Insurance lending is a complementary piece to permanent life insurance. There are common misconceptions about it, and we’ll outline those in the next installment of this series. We have a team of insurance lending specialists ready to assist with all of your questions, so that you can make the right recommendations to your clients.
For advisors, having the right knowledge about insurance lending is another tool in the box. It offers a value-add for clients by giving them timely access to cash in a valuable but often overlooked asset – their permanent life insurance contract.
To learn more about Manulife Bank’s insurance lending solutions, visit the Manulife Bank Advisor Portal.