To many, the term cash value life insurance might not mean much. We hear people say all the time that they don’t need to include cash value life insurance as part of their estate planning because they can do a better job of investing their money. However, for those that understand the complexities of this product, it can be truly rewarding. Consider the following example:
If $1 doubles in value each year for 20 years, how much will it be worth in 20 years if you had to pay income tax each year on the gain at the following tax rates?
0% (tax free)
20% (capital gains)
40% (state & federal combined income-tax rates)
If you have ever studied the principles of finance, you’re probably well aware of the power of compounding interest. In fact, perhaps you remember from your school days when you were learning about Albert Einstein who said “the greatest invention of mankind was compound interest.” To put actual numbers to this theory, check out how much you’d have at the tax rates described above:
The results of compounding interest are truly amazing but what’s even better… compounding interest without taxes!
Sometimes you can make more money by saving taxes as opposed to making more money. Life insurance can help avoid the erosion caused by taxation. Cash values grow tax-deferred, and the death benefit is always more than what you paid in premiums, which are generally pennies on the dollar. Properly arranged, the proceeds are income and estate tax free. There is also no market timing risk – the proceeds are payable at precisely the time the cash will be needed the most – at the death of the insured.