Uncommon Banking is our term for using a guaranteed whole life insurance policy as your own personal bank by using the cash value of the policy. If you have been following our work, you have probably heard us mention it—often! It is a powerful tool in personal finance, but it can also be a powerful tool for business.
These days we are having a lot of conversations with business owners about how best to leverage the excess cash they have on their ledgers. We are writing a whole series about it and how a Corporate Treasury function in your business can help to manage and grow this excess cash.
One of the ways that growth can happen is through whole life insurance, aka Uncommon Banking. This can be something you utilize yourself as the business owner and also a part of the “key person” package that covers losses in the event a key employee passes away. In either situation, it can be used as a way to keep cash flow moving through a business, and much more.
So, as a tool for making the most of excess funds, how can you use Uncommon Banking to your business’ advantage?
Let me walk you through the basics of why we think whole life insurance is such a powerful tool for business.
Liquidity: When you fund a whole life policy, the cash value of your policy is liquid and can be used for whatever the business may need at any given time. So, instead of keeping a huge reserve of cash beyond 90-180 days of standard expenses, you can move those excess funds into a guaranteed whole life policy and the cash value is there to cover expenses during more challenging times, to implement a new expansion, or whatever your business needs it for. It’s there when you need it, protected and earning interest. Speaking of which, let’s talk about the interest benefits.
The owner of the policy which controls cash and can make changes to the policy on-going is the business and essentially you as the business owner. But the business entity owns the policy, so the cash-value remains on your corporate balance sheet.
The insured is you personally as the owner or executive of the business. We can also make the insured a valued employee like a CFO, COO, or family member working up the ranks.
The beneficiary is the business entity and if you were to pass away the business would receive the death benefit and be infused with a liquid pile of cash. The death benefit would be taxable to the business in most cases, but it leaves resources to function, find another business leader, and continue operations.
Loanable & Still Earns Interest: We’ve covered how the cash value is yours to use. You can use it as working capital or to make acquisitions for the business. Where do you usually go for a loan? The bank. But with Uncommon Banking, instead of getting a high-interest bank loan, you are borrowing from yourself with your whole life policy, and you are still earning interest on the full amount of your cash value. We can build a model for you to show you the benefit of financing equipment, vehicles, or real estate from a corporate-owned policy.
Death Benefit: Whether it’s you as the business owner or an employee, this is about what the insurance industry calls “insurable interest.” Since a business will definitely incur a loss as the owner dies and is vulnerable to financial loss if a key employee dies, insurance companies provide for “insurable interest” via the death benefit in a guaranteed whole life policy.
So, for instance, instead of paying an “employer match” into a 401(k) plan (that is inherently subject to market risk), you could open a whole life insurance policy for key employees. You can choose to assign the employee’s estate a portion of the death benefit as a beneficiary or name the company as beneficiary.
If you have excess capital, you can see how a whole life policy can put your money to work for you in so many ways. For all of these reasons and more, we find Uncommon Banking a valuable tool for individuals, whose principles are magnified as tools to keep your business on a solid footing. So, if you are wondering what to do with excess cash in your business, Uncommon Banking is a big step beyond savings that you should consider.
If you want to see a customized proposal for your situation of how life insurance might work as a corporate asset contact us here.