Overfunded Life Insurance is Risky and Unnecessary!

But only if you are in it for the death benefit!

Unfortunately, life insurance is usually perpetuated by myths and not well-known facts. Many people think that the death benefit of any policy, especially overfunded life insurance, isn’t worth the monthly payments, but they aren’t aware of the advantages policyholders can utilize.

According to LIMRA’s study, as of 2022, about 52% of people in the United States possess life insurance. However, not all of them use it in the best way possible.

Table showing US life insurance ownership
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Overfunded life insurance is complex, but we’re here to help. In this article, we’ll answer the following questions:

  • What is overfunded life insurance?
  • Is overfunded life insurance the right choice for you?
  • What are the advantages and disadvantages of owning an overfunded life insurance?
  • How can you utilize overfunding life insurance for Infinite banking purposes?
Table of Contents

    What is Overfunded Life Insurance?

    An overfunded life insurance (OLI) maximizes cash value and minimizes a death benefit. In other words, you can pay higher premiums for your permanent life insurance policy with the idea of growing your cash value quickly and using that money later as leverage for a policy loan.

    Overfunding Term Life Insurance Policy Isn’t Necessary

    Speaking of regular term life insurance policies, the entire amount you pay goes towards the death benefit and the administrative fees.

    As the most affordable life insurance option, this covers a pre-determined period. If the holder passes away outside the term policy’s span, the policy won’t pay the beneficiary.

    Permanent Life Insurance Policies Benefit From Overfunding

    On the other hand, permanent life insurance policies cost more, but only a portion of the funds goes toward the death benefit and the administrative fees.

    At the same time, the rest is deposited into an incorporated savings account, also known as cash-value life insurance. This type of insurance covers your entire life and comes with living and death benefits.

    Why a Permanent Life Insurance Policy?

    One of the best things about overfunded life insurance is that you can use the cash value to get tax-free loans from your savings for different things.

    Depending on which insurance company you use, the payback of the loans can have lower interest rates and be partly modified to your requirements.

    These policies could also earn interest and potential dividends, ensuring cash value growth.

    Overfunding your life insurance isn’t straightforward or available for all policies, but the two most common types are universal life insurance and whole life insurance policies

    Universal Life Insurance Policy

    Universal life insurance has a set minimum payment that the policyholder must pay monthly for the death benefit and administrative fees. Any additional funds are deposited into the cash value.

    There are two different types of universals:

    • Indexed universal life insurance
    • Variable universal life insurance

    What you need to know about universal life insurance is that it is riskier to overfund compared to whole life insurance policies. The reason is that there isn’t a guaranteed rate of return.

    If you can’t meet the monthly payment, the deduction will be taken from your savings. If you do not violate the Modified Endowment Contract (MEC), the premiums you pay for universal life insurance are not primarily restricted.

    This is one of the most flexible insurance options, but not all universal insurance policies are the same.

    Whole Life Insurance

    The main difference between whole life and universal life insurance is that whole life insurance has established premiums the policyholder must pay.

    Using the paid-up additions rider, a unique feature of whole life insurance, to convert excess premiums to cash value allows us to quickly accumulate more funds.

    Whole life insurance policies aren’t as flexible for overfunding as universal ones, but they can be functionally manipulated, making them the best choice out of all overfunded life insurance policies.

    Not any whole life insurance policy can be used. It is important to get it from mutual life insurance companies (owned by policyholders) that will create a specific policy for you to access cash easily and use it for private banking later on.

    Like with Universal Life, you have to be careful not to violate the MEC when overfunding your whole life insurance.

    What is a Modified Endowment Contract (MEC)?

    Modified endowment contract explained in overfunded life insurance
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    In 1983, the IRS realized that people were using their cash-value life insurance policies exclusively for cash accumulation and as tax shelters.

    They would buy a life policy with a small death benefit. Instead of paying the annual premiums, they’d store a substantial amount of money in the policy’s cash value, thus enjoying tax benefits.

    What Did They Do?

    In response, the IRS changed their tax code to measure the amount of premiums paid over 7 years. Each policy has a different limit, but if exceeded, the policy becomes a modified endowment contract, which has much fewer tax benefits. In fact, it can become a tax liability.

    The limit is set based on age, health and the face value of the life policy.

    You can still overfund your life policy, but you need to be careful not to exceed the limit. The cash value growth will still be significant, while only a portion goes to the death benefit.

    Is Overfunded Life Insurance For You?

    Establishing an overfunded life insurance has plenty of benefits, but that doesn’t mean it’s adequate for everyone. The first question you must ask yourself is whether you require life insurance.

    Do you want to utilize it just for the death benefit? Or do you want to access the cash value?

    Table listing top 5 reasons for owning life insurance
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    Access Cash Value

    Technicalities regarding accessing the cash value depend on access time, so we’ll cover all four options here:

    1. Not accessing the cash value – Cash value is one of the main benefits of utilizing the overfunding of your policy. If you don’t have an objective to access that benefit, you don’t need to overfund your life policy. Instead, opt for term life insurance or universal life insurance if you still require the death benefit.
    2. Accessing the cash value immediately – In this case, opting for an overfunded life insurance policy may be the best idea. The policy you should be looking for is the Legacy High Early Cash Value (HECV). This policy grows slowly over time and is most effective in the first five years of its implementation.
    3. Accessing the cash value after ten years – If this is your plan, you should know that most policies don’t possess convenient benefits after the first year. Most have a higher cash value and lower death benefit during that first year.
    4. Accessing the cash value for retirement – Utilizing an overfunded life insurance policy for retirement income is best done if you plan on accessing the cash value early in the policy. However, if you don’t require the cash value immediately or if you’re 50-60 years old, we’d recommend choosing a traditional limited pay style policy.

    Check The Age of Your Policy

    Before overfunding your cash-value life insurance, check how old your policy is. Some senior policies, especially from the 1980s, retained benefits regarding cash accumulation that you can’t find today.

    If you want to add a paid-up additions rider to this policy, you may have to give up some of the current benefits.

    Reasons Why People Overfund Life Insurance

    There are two main reasons why policyholders overfund their life insurance.

    High Net Worth

    Policyholders like business owners and CEOs, with high net worth, utilize overfunded life insurance to accumulate retirement funds. In most cases, they either don’t qualify for a Roth IRA, have surpassed their 401k or delayed retirement planning.

    Savings Account

    Overfunding your life insurance and building up the cash value is an excellent way to establish a savings account. This way, your assets will be protected from the market and income taxes while you can still utilize the living benefits.

    Advantages of overfunded life insurance

    Possessing an OLI has plenty of benefits, and we listed them all below:

    Dividend Payments

    If you hold a whole life insurance policy, you’re likely to get paid dividends by the insurance company. You can utilize these to accumulate cash value and death benefits.

    Tax-favored Growth and Payouts

    One of the main benefits of OLI is tax advantages for growth and payouts. It’s simple to build cash value because the funds are tax-deferred, making them a superb alternative to regular savings accounts. Additionally, any withdrawals of the funds are tax-free.

    Death Benefit

    The death benefit is the primary goal of life insurance. One more benefit of an OLI is that the policy pays out tax-free to the beneficiaries of the policyholder.

    According to the Insurance Information Institute, insurance benefits and claims totaled $97 billion in 2021 alone.

    The institute has yet to release the data for 2022, but we expect this to be over $100 billion.

    Living Benefits

    If you have a qualifying chronic condition, you can access a segment of the death benefit as one of the living benefits.

    Early Policy Payoff

    Overfunding your policy enough means that your policy can never be defaulted on or denied by the insurance company, so your loved ones will be safe.

    Improved Investment Options

    Some types of OLI, like Indexed Universal Life Insurance (IUL) or Variable Universal Life Insurance (VUL), offer more flexible investment options by letting you store parts of your policy’s cash value in sub-accounts linked to the stock market.

    Protection From The Market

    Because you can choose the amount of cash value that goes into the sub-accounts related to the market, you don’t have to worry about losing everything when the market goes down.

    Whenever the market goes down, the cash value account is vested and protected by the OLI.

    No Contribution Restrictions

    Compared to some retirement plans, like the 401k, OLI doesn’t have significant restrictions on the money contributed. However, if you contribute too much in seven years, your policy may become a Modified Endowment Contract (MEC) and lose its tax-favored status.

    No Age-Based Restrictions

    Unlike a 401k or IRA, the funds from the cash value can be withdrawn before the policyholder reaches a certain age without any penalties.

    Protection of The Assets

    Depending on the state you live in, funds held in your OLI are protected from creditors and legal claims, unlike those in traditional savings accounts.

    The Downside of Life Insurance Overfunding

    Of course, not everything is perfect. There are a couple of disadvantages and dangers to overfunding your life insurance.

    Extra Fees

    Even though overfunded life insurance comes with many benefits, policyholders certainly have to pay for them. Even regular permanent life insurance has higher fees than the more affordable term life insurance, but the payments add up in addition to all the premiums you already cover.

    However, people usually overestimate the cost of insurance.

    Before you overfund, it’s important to do research on the insurance company to make sure that their fees are right for you. In some companies, the higher your cash value grows, the lower the fees’ impact on your funds, percentage-wise.

    The Danger of Policy Lapse

    If you want to take out policy loans from your overfunded life insurance, always check to ensure that you don’t take out as much money as you can. Your policy must be fully funded at all times or it will lapse, be canceled, and you will most likely be required to pay taxes on the policy loans.

    Modified Endowment Contract Risks

    The opposite of the disadvantage mentioned above happens when you contribute too much to your OLI, accidentally creating a Modified Endowment Contract (MEC), which doesn’t have tax benefits.

    There are also government-imposed penalties, such as paying a 10% tax penalty if you take out the money before turning 59½ years old.

    Frequently Asked Questions

    Now that you know more about overfunded life insurance, let’s explore some related questions you might have. We’ve selected four common ones:

    What Happens When a Whole Life Policy is Paid Up?

    Once the whole-life insurance is paid up, it can no longer lapse. In other words, the policy will remain in effect for as long as a policyholder lives. 

    Can You Cash Out a Life Insurance Policy?

    You can use the cash from your insurance policy before you die. This is the case with permanent life insurance policies. 

    How do I get out of my Whole Life Insurance Policy? 

    Provide written notice to the insurance company and potentially a copy of the death certificate. Different insurance companies may have different rules on giving up on your life insurance policies, and it is best to check with your insurer. 

    What are The Disadvantages of the Whole Life Insurance Policy?

    The whole-life insurance is more expensive than other policies, but it is the only one that you can use for lifestyle banking. 

    Use Overfunded Whole Life Insurance to Own Your Own Lifestyle

    As you can see, overfunding your life insurance is nowhere near risky, and it is more than necessary.

    In addition to the many benefits of overfunded life insurance listed above, one of the most significant ones is that you can use it to own your finances and become your own bank.

    We’re here to teach you about the concept of Infinite or Private Banking, or as we love to call it – lifestyle ownership.

    This concept can be used to help you secure your financial future and bring you additional benefits.

    To try private banking, you must own a whole life insurance policy and focus on overfunding it to extract more money from it – take significant loans to pay your debt or invest.

    To put it simply, Infinite Banking means being your own banker. With this method, you can use your whole life insurance policy in a smart way to make a banking system that will last forever.

    Owning a whole life insurance policy has many benefits, one of which is that you can borrow money from it using your policy’s cash value and repay it later.

    This way, you borrow money from yourself instead of a bank, and you pay it back at the rate of return, thus becoming your own bank.

    With this method, you can achieve your financial goals and gain complete control of your finances without dealing with banks and fees.

    Private Banking involves:

    1. Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company.
    2. Accumulation of Cash Value (tax-free) throughout the years you are a policyholder of your Whole Life insurance policy.
    3. Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.

    Assume Your Lifestyle Ownership With Wealth Nation

    Are you ready to assume your lifestyle ownership? We are more than willing to help you start your lifestyle banking journey.

    After testing this system and improving our lives, we helped other families generate more than $75 million in wealth.