Life Insurance – Just A Policy to File Away or Powerful Planning Tool?

We recognize talk of life insurance does not typically gather a crowd around the water cooler at work, but as wealth advisors and planners, the proper use of this tool can be very impactful (in ways that are not always immediately appreciated too). In speaking with a long standing client the other day, we were reminded what a powerful tool life insurance can be. 

This “long story, short” involves dialing back the clock to a successful entrepreneur whose activities included roles as a developer and owner of commercial real estate.  In the late 70’s we did some estate and financial planning work for him with whole life as an integrated component. He carefully and thoughtfully evaluated the options available to him and came to the realization that, despite what he had always thought and been taught about whole life insurance, it was the right thing for him to do and appropriate resource to address some of his planning issues.  He was particularly impressed with the multiple benefits that it had during life and of course at death. As his estate grew and his needs changed, he actually purchased additional whole life policies. He diligently paid the premium every year and actually viewed it as a form of systematic savings that would allow him to accumulate funds outside his regular “go-to” investment of real estate.   

In the early 90’s the commercial real estate market took a bad turn. Rental roles and rental income dropped drastically and, of course, property valuations followed. In the midst of the turmoil in the commercial real estate market came the bank crisis. Bank lending options became very limited and in fact, many banks were calling their loans.  Thankfully, for this client, cash value had accumulated in his policies and was available as an alternative means 

from which to borrow additional capital. In a period of exceptionally tight credit, he borrowed almost all of the cash value available in his policies and was able to use it to maintain his properties until the real estate market recovered. Many property owners were not so fortunate. In the end, this client actually came out of the crisis, was able to repay the policy borrowings, and has flourished ever since.  He reminds us at every meeting that, though he had some hesitancy about the purchase of his insurance, it was one of the best financial moves he ever made. While this recount is certainly very specific, the point to be made is much broader. Comprehensive planning that integrates the requirements for your retirement, your business and your family should consider all available options and techniques. When approached simply as a “product,” life insurance is often pigeonholed. However, when implemented as part of a planning process, the benefits and utility of life insurance can be more fully understood and more creatively employed. 

In addition to having its cash value grow on a tax deferred basis, did you know that life insurance is a multifunctional tool that can: 

  • Be used by many companies as part of a selective benefit plans? 
  • Be employed as a financial management tool and help allow you to “be your own bank”? 
  • Supplement and help build your retirement income? 
  • Serve as an additional part of an investment portfolio?

Scott LaValley

Managing Director of Baldwin & Clarke Advisory Services, Inc