Most business owners maintain a reserve account or an emergency fund. It’s the money they’ll use if the business truck needs a new transmission or the building needs a new roof. It’s the money that they hope they never have to touch, but that they are thankful to have if they ever do. Saving the money is a smart first step, but what do they do with it? Where should it go? It’s generally for emergencies, so it needs to be safe and it needs to be readily accessible. For a lot of small business owners, this means that it goes to the bank, in either a savings account or a money market account. It’s safe and it’s liquid and it’s probably earning less than one half of one percent, but that’s the price you pay for safety and liquidity. Or is it?
There is another option that provides safety and liquidity while also making your client’s money work smarter–participating whole life insurance. Let’s walk through the solution… First, a single premium whole life policy can be structured to provide better than 97 percent of the single premium in cash value at the end of year one. Since whole life has no surrender charges, the client has access to every dollar of that cash value. In many cases, the cash value in the whole life policy exceeds the premium paid by the third policy year. Second, whole life not only guarantees the cash values, it guarantees that the cash values will grow each and every year at a rate that far exceeds the rates that you can get in a money market account right now. Non-guaranteed policyholder dividends are available in addition to the guaranteed increases. While dividends are not guaranteed, once they are paid they can actually increase the guaranteed cash value and the guaranteed death benefit beyond what is guaranteed in the original contract. As an aside, when is the last time that you saw a policy do better than illustrated on the guaranteed side of the ledger? If you’re not selling whole life, you probably never have. Third, your client’s reserve account now has a guaranteed death benefit! This where their money starts working smarter because it’s doing two jobs instead of one. Should an emergency arise, there is cash available. If something should happen to the business owner, that same cash has purchased a guaranteed, tax-free death benefit that may be many times larger than the emergency fund itself. That’s money the business can use to continue operating and paying employees. That’s an emergency fund to cover all emergencies.
Let’s take a look at how this can work for your business owner client and for you. Our client is 45 years old and has owned his own business for about 10 years. He has built a reserve account of around $60,000 which, thankfully, he has not had to use. It’s at his local bank and he hasn’t thought much about it because it’s only for emergencies. Like many business owners he may have some life insurance, but probably not enough to protect his business if something happened to him. And his focus right now is on building back up after COVID-19, not on life insurance. How can you help him? By making his money work smarter and do two jobs instead of one. We are going to use $50,000 of his $60,000 reserve account to purchase a competitive, participating whole life policy from a highly-rated company and structure it for maximum early cash value. On day one his death benefit is $180,000, almost four times the amount of his single premium. His guaranteed cash value at the end of the first year is almost $48,000 and he has access to every dollar of that money. At the end of the second year, his cash value is more than $49,000. By the end of year three his cash value is more than $51,000, which is more than he will have in his interest bearing account earning one half of one percent. By year 10 his cash value is more than $66,000 and he still has a tax-free death benefit of more than $180,000.
So, have we met the client’s expectations? As we said at the beginning it’s his emergency fund, so he wants safety and liquidity above all else. Is his money safe? Absolutely! His whole life policy provides guaranteed cash value and guaranteed cash value growth every year. Is his money liquid? Absolutely! Whole life has no surrender charges, so every dollar of cash value in his policy is available to him if he needs it. And while his money is growing and accessible, it’s also providing him with a tax-free, guaranteed death benefit that helps protect the business that he has worked so hard to build.
The best part of this solution is that no one has ever likely talked to this business owner about this option. That’s a conversation that can open up a lot of doors. To get started, all you have to do is take a new look at an old friend–participating whole life. Happy selling!
