Don't Just Insure, Invest: Introducing WealthGen – tax-efficient life insurance
August 15, 2023
To grow and transfer wealth tax-advantaged, the ultra-wealthy often use something called “permanent life insurance” to secure their future and build their legacy.
At Arta, we want to help more people understand the value of permanent life insurance. That's why we're excited to announce WealthGen, access to permanent life insurance policies for Arta members.
This article aims to present a simple view of how permanent life insurance works without getting into too many technical details. Inevitably, there will be jargon, but we’ll try to explain it in a way that is easier to understand.
Benefits of WealthGen Permanent Life Insurance
Permanent life insurance provides coverage for your entire lifetime as long as premiums are paid. A portion of each premium payment (the money that you pay) goes toward the policy's cash value - think of this like an investment account in a Roth IRA. This portion can be invested in various assets, such as stocks, bonds, mutual funds, or even alternative assets, depending on the policy type. Permanent life insurance is similar to a Roth IRA in that it is funded with after-tax dollars, and the policy's cash value does not incur any capital gains or income taxes as it grows over time.
Permanent life insurance policies offer a significant advantage: policyholders can borrow up to 90% of the policy's cash value tax-free as a policy loan, at any age, and for any reason. The interest rates on the loan are generally low or zero, depending on the insurer or the timing of the loan. In addition, policyholders can withdraw cash if needed (although withdrawals may be subject to taxes and fees).
In the early years of the policy, there can be penalties for cancellation, called surrender charges, so keep in mind that this is an illiquid product even though your money is accessible.
Why Arta’s WealthGen Insurance is a financial superpower
Get protected: Protection for your loved ones in the case of untimely passing
Access cash when you need it: Cash value grows tax-free and can be accessed while you are alive via policy loans.
Invest flexibly: There are a variety of investment options ranging from guaranteed fixed rate to public market funds, and for qualified purchasers, alternative investment funds like hedge funds and private credit.
Pass on tax-free benefit: If the cash value is not fully used while the policyholder is alive, a lump sum is paid to the beneficiaries upon the policyholder’s passing, income-tax-free in most cases, which can also be structured to be estate-tax-free via a trust.
Minimize cash out-of-pocket: You can finance the premium, like a mortgage, allowing you to maximize your wealth by investing the money that you would have used to pay the premiums into higher-yield investments.
If you’ve read this far, you’re probably wondering, why haven't you heard about this product before. Is it too good to be true? There are many reasons why permanent life insurance products have lost out to mutual funds and other investment options since the 90s. Product complexity and the insurance industry’s slowness to respond to technology are definitely one of them. But the other reason has to do with financial services industry silos - most financial advisors are not licensed to sell insurance products (most permanent insurance requires dual securities and insurance licensing) and may not recommend them for fear of “AUM leakage”. And licensed insurance agents have used pushy sales tactics to sell higher commission but lower yield whole life insurance products for decades, turning off many suitable buyers. At Arta, we have thoughtfully and deliberately built our offering to remove these silos and misaligned incentives.
It's your choice
Choose how you grow your cash value with one of five permanent life insurance types. All of them offer insurance coverage, which is one of the main benefits of investing in permanent life insurance:
Whole life insurance: This is the most traditional type of permanent life insurance. It offers a fixed premium and a guaranteed death benefit. It also includes a cash value component that grows over time, and you can borrow against it or withdraw money if needed. Because of the low yield of these products, this may not be a suitable product for most people.
Universal life insurance: This type of insurance offers more flexibility compared to whole life insurance. It allows you to adjust your premium payments and death benefit within certain limits. It also accumulates cash value over time, which can be withdrawn or used to pay premiums. As with a Whole Life policy, due to the low yield of these products, this may not be a suitable product for most people.
Indexed universal life insurance: This type of insurance links the cash value growth to a stock market index, such as the S&P 500. The cash value has the potential to grow based on the performance of the index, but there is a cap on the maximum growth, usually 10-12%, and a floor, typically 0, to preserve cash value growth during stock market volatility. Essentially, one can participate in stock market gains by giving up some of the upsides but have peace of mind that their cash value will not decline due to poor market performance. For those with an otherwise highly market-correlated portfolio, this can be an attractive diversification option.
Variable life insurance: With variable life insurance, you have more control over how your cash value is invested. You can choose from a range of investment options, such as stocks and bonds. The cash value and death benefit will vary based on the performance of your investments. Unlike the indexed product above, you have no cap on your upside, but no downside protection either. For high-income-tax bracket individuals living in high-tax states like California and NY, this is a way to invest in the public markets while minimizing tax leakage.
Private placement life insurance (PPLI) for qualified purchasers. PPLI is a specialized form of life insurance that is available only to individuals or entities with a high net worth, often exceeding $5 million in investable assets. PPLI offers additional benefits and customization options that are not available in traditional life insurance policies. The cash value within the policy can be invested in a wide range of alternative investments which are otherwise tax-inefficient, such as hedge funds, private equity, real estate, and more. This type of policy is institutionally priced and designed to maximize and transfer tax-advantaged cash value growth.
Who should consider permanent life insurance?
High-income tax bracket individuals looking for tax-advantaged investment vehicles beyond 401(k)s and IRAs along with life insurance coverage
Qualified Purchasers looking to diversify into alternative asset classes along with life insurance
Those looking to provide income protection and inheritance for their families, with the optionality to use some of the funds during their own retirement
Those with substantial estates looking for estate-tax-efficient wealth transfer solutions
What do I need to consider before buying a permanent life insurance policy?
It’s worth noting, adopting this strategy calls for a mindful approach and the insights of a seasoned industry professional. When you're ready to learn more about how Arta’s WealthGen Insurance can help you build and transfer generational wealth, schedule your call with Sam Malik, our insurance expert with over two decades of experience. Sam can answer all of your questions and help you determine if WealthGen Insurance is a good fit for you. Sam is available to assist in the following states: CA, NY, NJ, CT, TX, IL, FL, DE, WA.
Ready to start building your legacy? Simply, schedule your call through your Arta app - we’re ready to help.