Insurance Understood: Cash is king
By Medicine Hat News on August 12, 2017.
The saying “Cash is King” is a common phrase when it comes to analyzing the value of a business or an investment, the idea being that cash has great value.
The same holds true for insurance policies. Does your insurance policy have cash available for you? Over the years I have found many people do not realize that their policy does have the ability to provide cash. Not every policy does though, so how can you know? Well, I have spoken before about the two main types of life insurance and compared them to renting and home ownership. Term is like renting since there is no equity built up. Permanent is like home ownership which builds up equity over time. The insurance industry term for this is cash surrender value (csv). When csv is present there is opportunity for cash. If you have had a permanent policy for some time you may not have realized how much csv has accumulated and how you can access the cash.
In general there are four ways to get cash: direct withdrawals, policy loans, dividends in cash or a third party bank loan. Each one should be discussed with your insurance advisor in detail to determine the best approach but I will give some brief talking points for each.
Before taking a direct withdrawal consider the tax consequences. Your advisor can request an estimate of the unrealized capital gain of your desired withdrawal amount. There may or may not be one and if there is, it does reduce over time. The second method of taking out a policy loan is fairly simple and does not trigger tax. However, like any loan there is an interest rate charged. Most insurance companies charge a rate of approximately 6-8 per cent on policy loans. You can pay this regularly or have it compound (be careful of compounding).
The third method of taking dividends can have some tax consequences but could produce some great returns as compared to a GIC.
Lastly, and one that I have spoken of before is obtaining a third party bank loan. With this method you are using the csv of your policy as security for a bank loan. There is no tax and the interest rate is usually lower than taking out a policy loan. Plus, your csv can still be growing in the background, which will allow you to have greater capacity to access more cash in the future.
I have had clients utilize each of these four methods for various reasons in their life. Every situation is unique so the above methods should be explored in more detail with your insurance advisor and coordinated with your professional team.
Steve Meldrum B.Mgt. CFP¨ CLU¨ is the founder of Swell Private Wealth Ltd. For over a decade he has specialized in helping individuals and businesses expand protect and perpetuate their wealth. For further information or tailored advice, contact him at 403-487-0490, steve@swellwealth.com or connect on social media.
