Background: In a lackluster interest rate environment, it is not uncommon to have clients ask where they can find a safe place to save some cash and at least earn a little bit. Bank rates for Certificates of Deposit or Money Markets are exceptionally low and Bonds carry Interest Rate Risk – so if rates go up, the value of the actual bond typically goes down. So where should they turn?
Our Case: John and Jane Doe, long-time clients, have now fully paid the debt for purchasing their business. For the 18-month period following the payoff, extra cash had built up in the bank, earning next to nothing. The client had no mortgage. They were not comfortable putting more money into markets, as they already had substantial market investments in brokerage accounts and retirement accounts. They just wanted a safe place to put the cash but have it fully accessible if needed.
Both work for the family-owned business and draw nice salaries. They do not see immediate need to access this cash but wanted that flexibility. John and Jane are in their early 40s, healthy and do not use any form of tobacco. They have two kids, ages 10 and 12, and they’re committed to paying for their entire undergraduate education.
Utilizing a Cash-Accumulation Life Insurance policy with a Premium Deposit Fund (PDF), we were able to show a strategy for an environment for a savings return that would exceed the bank rates at that time. Provided the policy is designed properly, all accumulation inside the policy is free from current taxation. The interest earned is taxable each year for the seven years. It is designed to earn interest while sweeping premium payments. These funds are fully liquid; however, at withdrawal, all earnings are taxed, but then again, so is the bank interest! The added benefit here is that should either of them die, the death benefit payable to the spouse is entirely income tax free and will ensure funds are available for both of their children to complete their undergraduate college education.
The Results: The clients proceeded through underwriting and both John & Jane received a preferred underwriting classification. A single deposit to the Premium Deposit Fund is all they ever provide. This Premium Deposit Fund then transfers the premium annually to the insurance policy for seven years. At the end of the seventh year, the policy continues to earn interest and dividends as declared by the insurance company. The client has full freedom and flexibility at any time to remove any or all cash value from the policy. The Premium Deposit Fund can also be accessed; however, if this is accessed, all funds are required to be withdrawn.
Bottom Line: John and Jane were very happy to have a safe place to stash some cash and have the comfort of knowing college is funded for both children through the death benefit if either of them have an early, untimely death. While certainly an unconventional strategy, our creativity brought a unique solution to meet the client’s goals, plus more!
This is a hypothetical example for illustrative purposes only. The experience of this client may not be representative of the experience of all clients and is not indicative of future results. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as financial planner. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. Financial Planning and Investment Advisory Services offered through B & E Investment Advisers, Inc., a State Registered Investment Adviser, Business & Estate Advisers, Inc., B &E Investment Advisers, Inc. and B&E Pension Advisers, Inc are separate entities from ValMark Securities. (1) Names have been changed to protect the identity of the client.
Everyone Saves More and Gains Flexibility
