With federal regulations remaining out of sync with state repeals of prohibition, it’s tricky to find a retirement plan that doesn’t care about the fund’s source. That makes retirement options for marijuana business owners more difficult than other types of businesses.
Global Atlantic recently opened up their life insurance policies for owners of cannabis-related businesses with some caveats on income.
The strategy explained here is one of the best-kept secrets in tax-free retirement planning.
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A little-known strategy for retirement planning involves fully funding an indexed universal life policy focusing on cash value growth.
It neatly sidesteps taxes because a loan against the cash value doesn’t incur taxes.
Tax Options for Retirement
Typically, you have three types of tax situations for retirement accounts – with their common examples.
- Taxable – investment accounts, bank accounts
- Tax-Deferred – 401(k)/IRA/SEP
- Tax-Exempt – Roth IRA
Hopefully, your business is bringing in too much money to qualify you for a Roth IRA. A 401(k) can be tricky for cannabis business owners to set up with the current federal legal situation. Then taxable accounts are, well, taxed.
This is where an IUL creates a massive advantage for never outliving your wealth.
You don’t pay taxes.
Technically, withdrawing cash is a loan. You don’t pay taxes on loans. This means that the expenses for an IUL versus other retirement options are significantly lower. With any of the other three options, you pay the account expenses (usually around 1.5% per year) plus taxes.
After expenses, taxes, and retirement withdrawals, other accounts quickly start nosediving toward $0. Your IUL keeps growing.
Uncommon Solutions for High Net Worth Entrepreneurs
Most retirement advice is for the average person. That’s how you sell the most books, classes, seminars, planning packages, etc. Volume sales.
But people with high net worth – particularly business owners – have a tax problem rather than a retirement savings problem.
We aren’t even talking about people making millions a year. Most retirement advice is for people making $30k a year. If you’re making over $60k, you’re an exception. This strategy applies to you.
Most retirement options will still have a tax component to them, often called tax-deferred plans.
But what wealthy people are doing to prolong their retirement accounts and (legally) avoid sharing a huge chunk with Uncle Sam are taking out indexed universal life (IUL) policies.
These are tricky.
Most insurance agents have no idea what to do when you say you want an IUL. So they do what they’ve always done and suggest you get the most life insurance you can afford for the smallest premium.
That makes sense if you’re looking for a life insurance policy. But this is a retirement strategy. The life insurance just has to be there to make the SEC happy.
You want the absolute lowest amount of life insurance for the largest premium.
Hear me out.
Life Insurance as a Retirement Vehicle
It sounds a little strange, but many business owners supplement their retirement planning with a cash value-focused life insurance policy.
“Use your life insurance” – it’s not something you generally hear in retirement planning. Most people would rightly raise an eyebrow at the statement. However, families in the top 25% of income earners regularly use the cash value in their life insurance policy to supplement their income streams during their golden years.
The type of policy matters. You can’t use a term policy for this or even whole life. The entire strategy revolves around a customized indexed universal life (IUL) insurance policy.
How it Works
IULs focus on building cash value more than the death benefit. The technical classification of life insurance is a convenient way to make your retirement income tax-free. The IRS classifies borrowing money from your life insurance as a loan. In short, no taxes.
Indexed universal life policies rapidly build cash value by tying the cash value growth to an index, like the S&P500. Then they add a floor feature, so you never lose money.
Instead of spending years trying to recover after a nasty hit in the market, your policy’s cash value stays the same. You even build on the locked-in amount.
For example, if you had $100,000 invested directly in the market and it plunges 10% one year, then grows 6% the following year, you have $95,400. If you had that same cash value in an IUL, your cash value would remain the same during the plunge, then grow 6% of the locked-in value to $106,000.
Now imagine never having to recover from losses over 30 years. Your cash value would put to shame an equivalent amount directly invested in the market.
Also, don’t forget the lack of account management fees. 30 years of the 1.5% annual brokerage fee digs into your growth potential.
How Do I Use It?
When you’re ready to retire, you start taking loans from the policy. This requires a lead time to build the cash value – at least 15 years.
You have the option of never repaying these loans. Why? The insurance company deducts the amount from the death benefit when you pass away.
If it were an advance on your death benefit, the IRS would treat it as income and want their cut. But insurance companies know exactly what they’re doing. It works out just fine for both you and the insurance company to leave it as an outstanding loan.
The loan requires interest. That interest also gets deducted from the death benefit, so the insurance company comes out ahead in their book. You have a tax-free income stream. Plus, since you can’t take it with you, it’s a win/win for both parties.
Why Haven’t I Heard of This Before?
IULs are less profitable for insurance agents to sell. They aren’t profitable at all for financial planners. Finally, it’s not a financially feasible option for people who aren’t in the top 25% of the country’s income earners. That’s anyone making over $60,000 a year.
An IUL is not an investment, even though it builds tax-free cash. The premiums to get the cash value snowballing are hefty in the first years of the policy. Plus, other wealth-building and retirement vehicles should be explored first – 401(k)s and IRAs for a start.
These were designed for retirement.
However, as a cannabis business owner, life gets more complicated. Even with the cannabis-friendly companies, finding life insurance in the marijuana industry involves some extra hurdles.
The correct way to design an IUL involves paying as much in premiums as possible for the legal minimum death benefit. It sounds wrong, but the more premiums go into the cash value, the faster it grows.
That cash value growth ties to (is not invested in) an index. It’s usually the S&P500, but companies vary in their options. Another type of policy (variable universal life) directly invests the cash value into an index, which means you can lose money.
Indexed universal life policies have a growth floor and a ceiling. The floor typically sits at 0%, although some companies have it between 1% and 2%. Then there is a ceiling of 12% – 14%. Meaning if the index grows 15% that year, the insurance company will only credit your cash value the maximum the cap allows.
Now, here’s how they protect and grow your money. The numbers vary slightly between companies, but this gives you a general idea of the behind-the-curtain mechanics. The insurer invests 95% in something super safe, with a guaranteed growth rate to get the value back to the original amount. The other 5% goes into something extremely high risk. But you know how it goes, high-risk means high-reward.
Tying the cash value growth to an index generally reflects how well the company’s investments did. (A good year for the market generally means a good year overall.) Plus, it’s a transparent number, so you know exactly how much the insurer should credit toward your account. There are no mystery numbers, like dividend growth for whole life policies.
Common IUL Myths
Indexed universal life insurance policies are not your standard life insurance. They are legally used for life insurance purposes, but clever financial whizzes can use them to their advantage during their life.
They’re complex policies that must be tailored to each individual by someone with experience in IULs. Otherwise, you risk losing money in a policy that isn’t doing what you need.
Remember, there isn’t an insurance agent degree from an accredited university. Most expertise is learned independently. To pursue this strategy, you must find someone who has done this before many, many times. Ask.
FYI … Yes, the owner of Marcan Insurance owns an IUL and knows how to design it for your maximum benefit.
Myth 1: IULs are extremely risky
Indexed universal life policies carry some risk. But they have a floor that deflects any damage to your accounts from market bubbles or crashes.
The primary risk is not shopping around for an agent. A poorly designed IUL policy can be a liability to you. They take experience to put one together.
Ask any agent you’re considering what type of policies they own. If they understand indexed universal life policies, they probably own one.
Considering all types of permanent life insurance, look into variable universal life if you want high-risk policies. It makes IULs look like storing gold in your safety deposit box.
Myth 2: It’s better to put money directly into the stock market.
If you do even a basic google search of indexed universal life insurance, you will find many bloggers hating on the product.
They’ll mention things like they don’t count dividends or they have participation limits. (Although, you’ll notice they don’t say they also have floors when they talk about the growth ceilings.)
Here’s the thing. Having a well-rounded portfolio is vital to securing your wealth. An IUL is one part.
Your IUL will never lose money because it has a floor. Even when the stock market inevitably tanks, it won’t take all your built-up wealth with it.
The other huge benefit is when you withdraw money from a traditional portfolio to use, you don’t get interest on that money anymore.
In an IUL, your cash value grows based on the total value – not the total amount minus your loan. Even the money you withdraw still contributes to the growth of your account.
Myth 3: IULs are a get-rich-quick strategy.
If only. But no. IULs are a long-term game. It’ll take several years before you start seeing the sort of growth that will allow you to live comfortably in your retirement.
The cash value in an IUL depends on the magic of compound interest. That takes time to accumulate.
Global Atlantic’s IUL
Global Atlantic offers business owners the Lifetime Builder Elite policy. It’s a growth-focused account to assist families focused on wealth building for their financial security.
Lifetime Builder Elite focuses more on cash growth while covering your family for life insurance. It’s the opposite of other types of life insurance, like term, that focuses primarily on the face amounts.
Statistically, you won’t need to use your life insurance until you are 80 or older. So turning it into a retirement vehicle works well for many business owners.
You can choose from 3 different benefit options:
- Level Death Benefit
- Increasing Death Benefit
- Return of Premium
The second option (increasing death benefit) is the growth option. You’ll always pay your insurance premiums, but the increased death benefit (aka face amount) increases the loan available for funding your retirement.
The face amount is the pool from which you can draw cash. The bigger the pool, the more it compounds. The more it compounds, the more secure you are.
Lifetime Builder Elite also has several options for taking out the loans. These are best discussed with your insurance agent and financial planner.
One of the features we love about this is the guaranteed account value enhancement. It’s the life insurance equivalent of a preferred customer. Starting in year six, you get an additional 1% interest on your account value every year for life.
Finally, rather than many companies offering a floor of 0% growth, Global Atlantic has a floor of 2%.
You can customize your policy further with riders. These will depend on your family situation as well as desires for what you want your life insurance to do.
- Wellness for life – offers discounts for regular doctor visits and maintaining a healthy weight
- Spousal insurance rider – covers your spouse for a fixed amount
- Child rider – covers children for a set amount
- Critical illness rider – pays out a portion of the face amount upon diagnosis of certain chronic, critical, or terminal illnesses
- Disability insurance rider – helps you maintain your life insurance if you cannot work
- Lapse protection – prevents your policy accidentally lapsing if you borrow too much
Companies change their underwriting guidelines all the time, with no warning. Here is the current information as of the post update.
Even though Global Atlantic opened up this policy to cannabis business owners, they won’t count the income from the cannabis business. You will need to show other income sources for the policy.
Global Atlantic also requires the following when underwriting this policy:
- Cover letting including: business overview, year established, if it has a bank account or cash only
- Insured’s role within the company
- Purpose for seeking insurance
- Assurance that the business will not be party to the policy
- Premium payment source that’s not comingled with business funds
- Drug questionnaire – yes or no on use, why do you/ don’t you use your company’s product
- 2 years of tax returns
If you’re looking for key man insurance or buy-sell to shore up your business, there are better options.
Life insurance cash value can create a tax-free retirement income – potentially outperforming other retirement vehicles.
Indexed universal life insurance isn’t for everyone, but as a business owner, it’s a good idea to fund your retirement. Your business is your nest egg, whether you’re looking to grow and sell or hold on to it until you’re ready to retire.
IULs offer a unique way to ensure that you never outlive your money – regardless of what life might throw at you.
Global Atlantic is one of the first companies to open up an IUL to marijuana business owners. Just remember you need other sources of income to quality.
An IUL policy requires an experienced agent to set up and have some risks like any other wealth-building strategy. However, the advantage here for marijuana business owners offers a no-questions-asked approach to funding retirement plans.
How Marcan Insurance can help
At MLI, we want to break the stodginess of the insurance industry. So we keep tabs on how life insurance companies are slowly changing their underwriting guidelines to reflect the times. It’s not a fast process, nor do companies announce their changes to the world.
We’ve helped marijuana business owners find all types of insurance for their businesses and their teams – from disability insurance to buy-sells. We’ve helped both recreational smokers and medical patients find coverage to protect their families when other companies turned them down.
If you find yourself needing some insight into retirement options, give us at 888-987-8447. We’re here to help, and there’s never any obligation to move forward.