How to Use Whole Life Insurance to Create Wealth

If you hear a financial advisor talking about how to use whole life insurance to create wealth, they’re talking about growing your money through compounding interest. There are two main ways to do this with whole life insurance:

Overfunding your policy. Since whole life insurance’s cash value grows with a steady rate of compounding interest, having more principal means you earn more interest. To generate that interest, you can overfund your policy. By “overfund,” we just mean they pay more into their policy than their minimum payments require. They use the policy as a place to store money and have it grow, with interest, over time, tax-deferred.
Paid up additions. A second method of generating more cash value is to use “paid up additions,” which you can do if your policy pays yearly dividends and/or is issued by a mutual company. A mutual company will have “mutual” in the name, which means that policyholders are also part-owners of the company. These companies will redistribute profits above a certain benchmark among policyholders. When this happens, you can use a paid-up addition to purchase additional coverage – a policy contained your original policy that will have its own cash value. Now you have multiple cash value accounts growing with zero out-of-pocket expense, since you used the dividend or profit-share payout. This is a key factor in term of how to use whole life insurance to create wealth.

Later, when you need capital to make other investments, you can leverage your whole life insurance policy’s cash value to get either bank loans or policy loans (from your insurer) at rates that are ideally the same or less than what your money is earning in interest in its cash value account. That way, even when you take a loan using cash value as collateral, your overall cash flow is positive because of your interest earnings.

Strategy Outline for How to Use Whole Life Insurance to Create Wealth

Grow cash value until there’s enough to borrow against.
Borrow from your insurer at a low, simple rate of interest (around 5%, usually).
Invest that money in a way that generates more than what you’re paying in interest.
Continue to earn interest on your policy’s cash value in the meantime.
Repay the loan for the amount you borrowed, plus any interest charged – keep anything your investment earned over that amount.
Repeat.

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