Today
we are going to go through
how small businesses
and corporations
use cash value life insurance
because this has been something
that has been used by corporations
for a very long time
north of 100 years.
And it's extremely effective
but the question
that always comes up is
how and why?
How are companies
using life insurance?
I'll begin with a story
that will relate directly
to what I'm about to show you.
Early on in my career
I was modeling a policy
for a construction company
so they were looking at policies
on their executives
the company would own the policies
and the owner of the company
made a comment.
He had owned
about 7 whole life insurance products
for north of 30 years.
And he said,
you know
other than the interest in my business
the company that I own
my whole life insurance policies
have been my best
performing assets.
I make a payment into 1 of them
of $12,000
and the growth this year
is north of $40,000.
Through 2008 that was consistent
it just keeps going up
I don't even have to think about it.
That was a major driver
to him
purchasing policies
for the company
to own on the executives.
So let's look at exactly
how companies
use these products
it's going to be some neat stuff
and hopefully
you can benefit from it as well.
So,
how corporations
typically set these plans up?
Is the company
let's say it's ABC incorporated,
ABC incorporated
takes out policies
on their employees
typically the executives
but the company
can take those policies out
on whoever they choose.
Let's say we take policies out
on Alex, John, and Liz
they are the insureds.
Meaning the company
is going to own the policies
the life insurance piece
goes on these 3.
So they may have to go through
a medical exam
they have to sign off on paperwork
saying yes
the insurance is on me
if they die
what happens?
A life insurance
death benefit is paid out.
The contribution
of these policies
is made by the company.
The company may elect
to pay in $50,000 per year
$1,000,000 per year
it really depends on
how much the company
wants to allocate
toward these policies.
The cash value
that builds up
in the products
is an asset
on the company's balance sheet
they have access
to that cash value
anytime they want.
These policies
are always designed
where you have very rich cash values
right off the bat.
The death benefit
in the event
1 of the employees dies
the death benefit
flows back to the corporation
ABC incorporated in this example
income tax-free
so sounds good
thus far for the company.
Let me ask this,
if you are Alex
or if you're Liz
you're 1 of the executives
and I say to you hey,
I'm going to take this policy out on you
it's going to benefit the company
I'm going to fund it
so you don't have to pay anything
but we're going to have cash value
in our balance sheet
we're going to continue to grow
with our growth mindset
sounds great.
Hey, but if you die
we get the death benefit too.
What are you going to think?
That sounds great for the company
what's in it for me though?
Like, are you going to kill me off
or something like that?
There's only a benefit for the company.
Here's the thing
I would say to you
if you're Alex,
John, or Liz
if you stay with me
for the vesting period
which could be 10 years
maybe it's age 65
perhaps it's performance-based
the company has complete control
of setting the terms
of this vesting period.
If you stay with me John
what's going to happen?
I'm going to pay you
a retirement benefit
and this benefit
is going to be $100,000 per year.
The benefit could be
any dollar amount
again this is determined by the company
and also the size of the policy
when we first started.
But I'm going to pay you
$100,000 per year
when you retire
let's assume age 65
until you die
or until age 90.
But this is a benefit
almost like a pension
if we want to use that word
that you're going to receive
for the rest of your life
after you retire, okay.
How's that sound?
Sounds good
sign me up.
Here's the catch though,
John if you leave the company
or if you do not meet
that vesting period
you don't get that
$100,000 per year
it's out the window.
So this creates
what we call in the industry
golden handcuffs
it locks the key employees in
and makes it very difficult
for them to leave
really it's a retention
and then reward strategy.
If you stay with me
at the company
and help us continue to grow
because as an executive
I don't want you to leave
because you're really driving
revenue for the company.
That's the advantage to me
as the business owner
as I look at key people
in my company for example
we want to retain them
but then at the same time
for the time
and effort they put in
yes, they get bonuses
pay increases
all that good stuff
but here is an additional reward
at the end
because you're committing
to stay with me
for the rest of your working years.
If you leave
to go work for the competition
to start your own business
whatever it might be
you walk away
from that retirement benefit.
And the older they become
the more experienced they become
the more likely it is
they can make it on their own
as they gain experience with time
it becomes more and more challenging
to walk away from that benefit
because they get
closer to retirement.
So a great retention
and reward strategy
to build some additional
awareness though
here are some questions
that often come up.
(1) The cash value
as a business owner
or corporation
am I just feeding these policies
and letting it sit there
and eventually going to use it to
pay retirement benefit?
That's the primary purpose
however,
the cash value is an asset
on the company's balance sheet.
Meaning the company
can access that cash value
can assign it as collateral
with a bank or a lender
to obtain a line of credit
that money can be used
to continue to grow
the business over time
opportunity cost
that's the most valuable thing
for a business owner
small or large business,
company, whatever.
So the cash value
is accessible all the way through
to the policy owner
which is the company.
Retirement benefit
John retires
when he retires
he's no longer driving revenue
for the company.
Do I want to pay him
from company profits
or company revenue?
Ideally not
because he's no longer
producing income
for the company.
So typically,
how a benefit is paid here
is paid from the cash value.
So I've built up
this big bucket of cash value
and specifically
what the corporation will do here
is they will take a distribution
from the cash value
to pay the retired executive
John in this case.
So,
when that distribution
is taken from the cash value
to the company
that can be a withdrawal or loan
not taxable to the company
but when they pay that retired executive
John in this case
it is booked
as a compensation expense
which does trigger
some tax deductions there
which is a nice feature.
Now the contributions however
are not tax-deductible
I do want to
be very clear on that.
But when that benefit is paid
that is paid from the cash value.
The death benefit
always paid out tax-free
and these plans are always set up
where we do not
drain the death benefit.
So when we are taking income
from the cash value
to pay that retired executive
John in this case
Alex, Liz, whoever,
I always,
always want to make sure
that a death benefit is left intact.
So let's say John kicks the bucket
at age 90
right, he makes it all the way to 90.
I'm going to make sure
that a death benefit is set up
to recover all costs.
What that means
is that the company paid
$100,000 per year
for 10 years
how much is that?
$1,000,000 total.
Now granted
they had access to the $1,000,000
all the way through and a lot more
because the cash value built up
but I wanted to make sure that
that full $1,000,000
is paid back to the company
through the form of a death benefit
which is tax-free
and I also want to account for inflation
typically 3% to 4%
is achievable
based on companies
present dividend rates
even a conservative dividend rate.
But I do want to
factor in inflation because
we're thinking long-range
with the eventual death benefit
coming back to the company.
And then 1 last question here
that comes up
what if John leaves?
What if he gets the vesting period
maybe it's until age 65
but he leaves at 55
because he says you know what,
I'm fed up
I'm going to go start my own company
or I'm gonna go work for a competitor
and I don't care
about the retirement benefit
because this happens.
So in a case like this
a company would (A)
have the option to
keep the policy on John
eventually when he dies
the death benefit
still comes back to the company.
But option (B)
a lot of people aren't aware of this
it's a really neat trick
it's not really a trick
when John is replaced
another executive takes over his role
we can actually
transfer that policy
to the new executive.
So for example,
if the new executive
is going to be Joe
Joe replaces John
because John leaves
let's say he leaves 10 years
after I start the policy
we can take that 10-year-old policy
and transfer it to Joe.
The cash value
10 years old
compounding
is transferred over to Joe.
Same thing with the
life insurance benefit
Joe has to go through
underwriting at that point in time
but we are not starting brand new
and we do not need to go through the
initial underwriting again
insurance expenses
none of that stuff.
I'm sorry we do need to go through
the underwriting
but not the initial
insurance expenses.
This is actually something
this transfer of insured Rider
is exercised with corporations
you see it done a lot
with professional ball clubs,
professional sports teams.
When they're trading players
when they trade a veteran
and they get a new rookie in
they can take a new policy out.
But what's the worst part
about any whole life insurance policy?
The 1st year.
Even with these policies
if we make a payment
if it's $100,000
I might see
90% to 95% of that payment
in the 1st year
but that's still a negative hit
on my balance sheet
no matter how I slice it.
What's the best part
about a whole life policy?
Every year after the 1st year
I get more
and more money back each year
relative to my premium
and PUA [Paid-up additions] payments
it's compounding between 3% to 5%
tax-free if you do it right too.
So I am much much better off
taking if he leaves
if John leaves
taking that 10-year-old policy
or however old it is
and transferring it over to Joe
now I don't lose time
and I can keep things moving forward.
So I hope you enjoyed that one
I hope you found it valuable.
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I hope this helps.
Hey guys Steve Parisi here.
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