Leveraged Life Insurance for a Tax-Savvy Retirement

By R. J. Kelly, AEP, CAP, CEPA, ChFC, CLU, MSFS, RICP, WMCP | Wealth Legacy Group®, Inc. | San Diego, CA

Mike sold his practice last year at 58 with the goal of retiring. Then he discovered what 80% of business owners face within 12 months after the sale of their business – he was really sorry he had done so. (By the way, 75% of the 80% profoundly regret the decision to sell, just like Mike!)

Luckily, Mike is a cheerfully optimistic person, and he immediately started work on a new plan. But building a new business from scratch requires capital, and he didn’t want to sacrifice his first retirement income. 

So, he gave us a call, effectively saying, “R. J., I want a tax-efficient retirement income, estate planning flexibility, asset protection, and cash to put into my new business when needed. Is that even possible?” (He was not quite that concise, but we got there eventually!)

Now, had Mike planned ahead of the sale of his business, there would have been a few additional strategies available to him. You can watch our interview on one strategy here.

But in this case, especially with the asset protection concern, we introduced Mike to the concept of leveraged life insurance, where he could build a cash reserve, use it as he wishes (after a time), and it’s protected against creditors…Imagine That™! 

Quick Review of Investment-Grade Life Insurance

Leveraged life insurance typically involves Indexed Universal Life (IUL) contracts combined with a concept referred to as “premium financing.” IUL contracts offer growth potential linked to market indexes but with crucial downside protection. 

If you really want to know the “nuts and bolts” skip down to “How Premium Financing Enhances Leveraged Life Insurance Strategies.”

Variable Universal Life (VUL) is a product that invests directly into the market using various mutual funds. 

IUL, on the other hand: 

• Shields policyholders from the potential major market losses by using indexes instead of direct mutual funds. 
• Has a floor under which investors cannot fall. (Normally, this is a 0% return, so even if the market is down 18%, as in 2022 overall, that year an insured using an indexed product would have received a 0% return for the year, not a -18%.)  
• Typically outperforms Whole Life by balancing strong cash value growth with greater flexibility.

Why High-Net-Worth Individuals Invariably Choose Leveraged IUL Today

Leveraged IUL contracts uniquely align with the needs of affluent individuals and their families. Here’s why:

• Tax-Free Retirement Income: contractholders can access accumulated cash values by leveraging those values into a fixed-rate loan, generating tax-free retirement income without affecting other investments.
• Preserving Your Portfolio: Premium financing allows individuals to keep more capital invested in higher-yielding assets, amplifying overall wealth growth.
• Estate Planning and Wealth Transfer: Trust-owned IUL contracts can provide significant liquidity to cover estate taxes, facilitating smooth intergenerational wealth transfer.
• Asset Protection: In many jurisdictions, life insurance cash values enjoy protection from creditors, shielding wealth from legal claims and market volatility.

Advanced Features and Riders in Leveraged IUL Contracts

Today’s IUL contracts come with several innovative features enhancing their appeal for high-net-worth individuals:

• High Early Cash Value Riders: These riders provide immediate high cash values, reducing collateral requirements significantly and improving financing terms.
• Performance Multipliers: By enhancing contract returns during positive index performance, multipliers significantly boost long-term cash accumulation.
• No-Lapse Guarantees: These guarantees ensure your contract remains in force, offering peace of mind despite economic uncertainty or fluctuating markets.
• Special Loan Features: Fixed-interest indexed loans (typical net effective cost of 0.25% or 0%) allow contractholders to borrow against their contract cash values at predictable, competitive rates, mitigating interest rate risk.

How Premium Financing Enhances Leveraged Life Insurance Strategies

Premium financing is a sophisticated strategy allowing contractholders to borrow funds from lenders to cover insurance premiums, paying only for the cost of interest. 

While entry-level premium financing programs exist to serve moderately affluent clients, custom financing arrangements offer greater flexibility, tailored terms, and larger financing scales ideal for high-net-worth folks and their families. Regular reviews and ongoing management ensure the strategy adapts effectively to changing financial landscapes.

But the best part? You get to use “other people’s money” or OPM to boost the cash value growth on your life insurance! The long and short of it is you’re borrowing the money at an attractive rate from the lenders, and using leverage, we’re able to make that money work harder for your benefit. 

Lenders love this approach because while it’s not sexy, it gives them a stable return on their assets. Or, in bankers’ language, “pass go and collect $200!”

Key Features That Matter

We tailor contracts with specialized riders and structural layers to align with high-net-worth goals:

1. High Early Cash Value Riders
   Designed for premium-financed cases, these riders deliver robust cash values in early years. For example, some companies may offer 80–90% of premium as early cash—minimizing collateral needs.
2. Performance Multipliers
   Add-ons from others can boost indexed returns. We’ve seen long-term projected returns increase by 1–3%—evocative of that growth needed to maintain arbitrage. (Literally, this past year in my own contract, the performance multiplier offered 4-5x the indexed return because of the performance enhancement rider.)
3. No-Lapse Guarantees (NLGs)
   Given financing horizons of 10–15 years, NLG riders help ensure the contract remains intact, protecting against cash-value dips or “margin calls” where the insured has to pay unexpected additional premiums because of contract underperformance.
4. Trust Ownership & Legal Structuring
   Sophisticated strategies for high-net-worth families often involve using so-called “Irrevocable Life Insurance Trusts” (ILITs) or insurance partnerships. These provide estate-tax benefits, creditor protection, and can also serve as a non-recourse borrowing conduit—another layer of protection beyond the contract itself.

But There Are Risks Too…

Leveraged life insurance contracts require careful management and planning. Contractholders must consider:

• Interest Rate Fluctuations: Rising interest rates can affect financing costs, highlighting the importance of managing borrowing structures carefully. (However, some lenders have been willing to offer a fixed rate for a certain period of years.)
• Contract Performance Risks: IUL returns vary with market conditions. Conservative projections and annual contract reviews help manage expectations and risks.
• Loan Repayment Strategies: Robust contingency plans are critical. Clear exit strategies or backup liquidity sources mitigate risk and enhance outcomes.

Determining When Leveraged Life Insurance is Right for You

When you’re thinking:

• “I prefer keeping my principal invested in (or available for) other opportunities.”
• “I want to create a reliable income stream that is non-taxable–using other people’s money.”
• “I want my heirs to receive cash that is free from estate tax.”
• “Protecting assets from legal or market risks matters to me.”

And you have:

• Significant leveragable wealth or annual borrowing capacity (typically $100k+).
• A strong financial profile (net worth, liquidity, credit).
• A willingness to commit to 10 – 15 years of monitoring and management.

That’s the intersection where leveraged IUL shines.

Revisiting Mike’s Story

Mike partnered with us to implement a customized leveraged life insurance strategy, utilizing premium financing and the latest IUL contract features. Given the volatility of the stock market over the last five years, Mike has been increasingly pleased (and relieved) that a portion of his estate is in a financial instrument that has stability, significant growth, and ultimately will provide him a non-taxable income stream…no matter how his new business plays out…Imagine That™!