Leveraging Life Insurance: Turning Protection into a Financial Strategy

Life insurance is often thought of as a safety net, something designed purely to protect your loved ones when you are no longer here. That is true, and it is an essential part of any financial plan. What many people do not realize is that certain types of life insurance can also become a financial tool you can use while you are alive.

One of the more advanced strategies is called life insurance leveraging. For the right person, it can open doors to liquidity, tax advantages, and greater estate planning efficiency.

What Does It Mean to Leverage Life Insurance?

When you purchase a permanent life insurance policy (such as whole life or universal life), it comes with two key components:

1. The death benefit: the guaranteed payout to your beneficiaries when you pass away.
2. The cash value: a growing, tax-advantaged savings component that builds inside the policy over time.

Leveraging means using that cash value as collateral for a loan from a bank or other lender. Instead of withdrawing from the policy directly, which could trigger taxes and reduce your death benefit, you borrow against it.

This allows you to:

• Keep the policy intact and protect your estate.
• Access funds while you are alive.
• Potentially enjoy tax benefits if the borrowed money is used for investment purposes.

Think of it as turning a safety net into both protection and an active part of your financial toolkit.

Why Consider a Leveraging Strategy?

A well-structured leveraging arrangement can provide several potential advantages:

• Tax-free death benefit: Your beneficiaries still receive the insurance payout tax-free.
• Tax-deferred growth: The policy’s cash value grows without being taxed each year.
• Access to liquidity: You can borrow funds without selling assets or disrupting your estate plan.
• Potential tax deductions: If the borrowed funds are invested in eligible assets, such as certain income-producing investments, the loan interest may be deductible.
• Corporate advantages: When a corporation owns the policy, the tax-free death benefit may create credits in the Capital Dividend Account (CDA), which can then be paid out tax-free to shareholders.

Who Is This Strategy Best Suited For?

Life insurance leveraging is not for everyone. It is typically best suited to individuals or business owners who:

• Already need permanent life insurance coverage.
• Have the means to comfortably fund the policy premiums.
• Are in a higher tax bracket, personally or corporately.
• Are comfortable with borrowing and understand the risks of using leverage.
• Have access to strong financial, tax, and legal advice.

A Simple Example

Imagine Sarah, a successful business owner in her 50s. She needs permanent life insurance for estate planning and decides to fund a policy with significant deposits over several years. The cash value inside her policy grows steadily, sheltered from tax.

Instead of withdrawing from her investments to fund a new business opportunity, Sarah uses her policy’s cash value as collateral for a bank loan. This way:

• Her investments can stay intact.
• Her life insurance policy continues to grow.
• The loan provides liquidity without disrupting her estate plan.
• On her passing, the death benefit repays the loan first, and the remainder goes to her heirs tax-free.

This is a simplified example, but it illustrates how a policy can do more than just sit quietly until death.

How Does It Actually Work?

Here is the general flow of a life insurance leveraging arrangement:

1. Fund the Policy: You, or your corporation, make deposits into a permanent life insurance policy.
2. Secure a Loan: A financial institution accepts the policy’s cash value as collateral.
3. Access Liquidity: You use the loan proceeds for business, investment, or personal needs.
4. Tax Opportunities: If invested properly, the interest paid on the loan may be deductible. In some cases, even a portion of premiums may qualify for deductions.
5. Loan Repayment: When you pass away, the death benefit first repays the loan. The balance is distributed to your beneficiaries, typically tax-free.

Important Considerations

While powerful, this strategy comes with risks. It is important to consider:

• Market risk: If borrowed funds are invested, returns may not match expectations.
• Loan obligations: Interest must be paid, and the lender could call the loan under certain conditions.
• Policy performance: Cash value growth depends on the policy type and underlying investments.
• Complex tax rules: Strategies must be structured properly with the help of qualified tax and legal advisors.

This is why leveraging is generally recommended only for individuals with both the financial resources and the professional guidance to manage it carefully.

Final Thoughts

Leveraging a life insurance policy can transform your coverage into a dynamic financial strategy. It provides liquidity, tax efficiency, and estate planning advantages. Done properly, it allows you to protect your family while also making your money work harder for you.

Like any advanced financial strategy, it is not a one-size-fits-all solution. The key is aligning it with your goals, resources, and comfort with borrowing.

Ready to Explore Your Options?

At Garrett Agencies, we help clients evaluate whether a leveraged life insurance strategy fits into their bigger picture. If you would like to explore this approach and see if it is right for you, we would be happy to have that conversation.

Contact us today to discuss how life insurance leveraging could work in your plan.