What is it? In its simplest form it’s an exchange of one source of money to another – cash in a bank to a mutual fund, a mutual fund to a stock or bond, or a CD to an annuity, and so on.
Arbitrage is an exchange of money from one source to another and keeping as close as possible the same account value of the transferred money to the new account.
Life insurance can be a great capital transfer vehicle. Yes there are various fees and surrender charges but properly funded, even in the first years, the insurance cash values will be closed to the transferred funds (i.e. an arbitrage exchange) that is used to pay the premium. The high early cash value is accomplished by using a special ride or in the case of Whole Life, policy dividends.
A concept called ‘over funding’ de-emphasizes the insurance death benefit (but still qualifying as life insurance) and can generate high early cash values. This can also be very beneficial to a business purchasing life insurance with ‘charge to earnings’ concerns.
It can also be an excellent ‘perk’ which can be used in an ‘Executive Bonus (or Controlled Bonus) insurance plan. The business “bonuses” the premium to the insured (the executive) and the premium (i.e. the bonus if reasonable) is a deductible expense for the business. It‘s taxable to the executive but that can be minimized by also bonusing the tax.
Policy values can be used as a life insurance retirement plan to supplement other retirement income through a sequence of cash value withdrawals and tax favorable policy loans.* And, there’s still a death benefit and if sufficient, could payoff any policy loans.
A special one time single premium insurance policy having early cash values is also designed for funding long term care benefits for nursing homes, assisted living facilities and other options..
And in its purest form as a death benefit, life insurance is a significant, very cost effective financial vehicle when a ‘capital transfer’ is made into it. There is no other plan like it. And in many States, depending on the owner/beneficiary setup, life insurance is also creditor proof.
* Insurance policy cash values are not guarantees of future performance. Not FDIC insured. Contact your own legal or tax advisor for issues as may be applied to your own personal or business situation.
