What type of value does permanent life insurance have? Most clients – and many advisors, for that matter – tend to view such insurance as a passive asset. It can be far from it.
The prevailing view is understandable. After all, clients know that their life insurance will serve to provide income protection or a death benefit. The policy already fills that essential purpose.
As for advisors, their focus is on making sure their clients have the insurance solution that meets their needs. Yet the conversation may not go further, regarding how permanent life insurance can serve another objective in the living years.
The reality is that permanent life insurance can become a valuable investment and cash-flow planning tool right now. That makes them beneficial in another, often overlooked, way.
Permanent life insurance policies build up a cash surrender value (CSV). Clients can arrange to tap into that, if required. That can be indispensable, as the life insurance product also becomes a lending product.
Cash value doesn’t have to sit idle
When needs and opportunities arise, it can be prudent to employ this strategy. Here’s why borrowing against a policy makes sense.
With permanent life insurance, the cash value is growing and just sitting idle. But it doesn’t have to. Once lending arrangements are put in place, accessing that value is relatively cheap. When clients use the policy as a line of credit, the commitment is interest only – with rates usually lower than some other borrowing alternatives.
Insurance lending provides convenient liquidity. If cash is required, there’s no need for clients to withdraw from their investment portfolio, for example (which may involve surrender charges or capital gains), or to sell off properties. So those assets remain intact for now and can possibly be left to beneficiaries.
Depending on the requirement, insurance-related lines of credit can offer great flexibility. Clients can access funds and pay down as needed. Ultimately, the death benefit will still be paid out with whatever value remains.
In the meantime, clients can use the funds for immediate needs, whether to invest, purchase an investment property or for any other purpose. They can also use the cash surrender value to give a loved one a gift. Doing so during their lifetime can be quite desirable and advantageous to policyholders, and to their beneficiaries too.
Some individual and corporate clients may have large life insurance policies for tax planning and other purposes. When premiums are large, having a line of credit secured by the policy’s CSV can also help reduce financial stress and improve cash flow.
To whom are these solutions suited? Any client who has a permanent life insurance policy with built-in cash surrender value can benefit from insurance lending. There are various forms of CSV lending solutions, from an Access Line of Credit to an Insured Retirement Program to an Immediate Financing Arrangement. It’s worth discussing the options with your permanent life insurance clients to see what might suit them best.
Permanent life insurance has a core objective. The life insurance aspect is always primary. Beyond that, insurance lending is among the least expensive lending options available. One way to look at it is that clients are essentially borrowing their own money. It’s an ideal way to turn what many imagine to be a passive asset into an active and highly useful one.