new parents looking at their new baby

The living benefits of life insurance

October 26, 2017 | TS Prosperity Group

For this blog, we interviewed Paul Ludacka with Northwestern Mutual. Paul and his team office out of Omaha, Nebraska and focus on Integrity, Relationships, Excellence, Purpose and Impact for their insurance services. Today, Paul discusses the living benefits of life insurance.

1. What is an important aspect of life insurance that you wish the general public knew and utilized when purchasing policies?
We wish more people understood that policies are more than just ‘Life Insurance,’ but are a great way to provide a lasting legacy benefit for future generations. There are enormous tax benefits and equity-building aspects of permanent cash value life insurance. This is incredibly beneficial and arguably the most overlooked aspect of most financial plans.

It’s also important to understand that there are many ways to design or structure a life insurance policy. Most permanent life insurance policies are designed solely for providing a death benefit. The reality is that these “base” policies have a high upfront cost of insurance, are low-yielding and have little to no flexibility in funding. This is very inefficient in terms of equity buildup. We design our policies to achieve the maximum tax benefit and cash value growth at the lowest cost of insurance for our clients.

2. How have you used the living benefits of life insurance to create prosperity in your own financial plan?
The measure of a person’s advice is in his/her willingness to take it himself. That said, my wife and my largest contribution for retirement is made into Northwestern Mutual’s cash value life insurance policies. Due to Northwestern Mutual’s long history of financial strength and safety, these policies provide a safe, consistent element to our retirement plan.

We utilize these policies as a superior fixed income or cash alternative. I like to maintain a significant amount of opportunity or emergency capital “just in case,” and my permanent life insurance policies allow me to warehouse that capital in a AAA-Rated, safe, consistent and tax-free environment. In our current interest rate environment, cash is a low-yielding, highly-taxed asset which is inefficient. While cash may seem “safe”, in reality it presents significant inflation risk. As inflation continues to grow at 2-3 percent, you’re earning next to zero on your capital, effectively losing 2-3 percent per year. The Fed has essentially made cash a “risky asset.” If we can reposition those dollars into an environment with better yield, less tax and less risk, that's a win-win-win. While cash paid next to 0 percent, my life insurance policies grew at 5 percent and 13 percent respectively last year, with no income tax.

3. How have you seen life insurance have an impact on your client’s financial & legacy plans?
Our goal is that our clients look back in 20 years and say that working with my team was one of the best decisions they ever made. The products we offer and our holistic approach to financial planning are designed to help clients create a lifetime of financial security.

One area where life insurance has had a significant impact is in conjunction with the estate planning we do; by using life insurance to provide liquidity for estate taxes due at death.

Currently, assets in a person’s estate over the federal exemption limit of $5.49M are subject to a 40 percent “estate tax” at death. Further, the IRS stipulates the estate tax return must be filed within nine months of the decedent’s death.

We’ve found many instances where wealthy families will have a majority of their wealth tied up in illiquid assets, such as: the family business, farm ground, real estate, or other assets that are not easily sold or “liquidated” in a short amount of time. At their death, this results in an unfortunate but necessary “fire sale”, where these illiquid assets are typically sold at a deep discount to provide cash to settle the estate tax liability with the IRS. As you can imagine, this creates enormous strife and resentment between surviving family members and beneficiaries. Our goal is to avoid that; family harmony is absolutely paramount.

By “pre-purchasing” the estimated future estate tax liability through an insurance policy, we’re able to not only provide the necessary liquidity for surviving family members to pay estate taxes due, but we’re also able to do at an 80-90 percent discount (total NPV of premiums vs. taxes as a percentage of net worth). This allows those “illiquid” assets – the business mom and dad started, the farm ground that’s been in the family for 100 years – to stay in the family, and ultimately allows us to avoid much of the anger, bitterness and resentment that can otherwise occur.

Another area we’ve seen a major impact is the use of cash value to secure bank loans through collateralization. A valuable benefit of life insurance is that a bank will typically collateralize cash values dollar-for-dollar, unlike an investment account which is typically 50 cents on the dollar at best. Clients have used their policies as leverage they otherwise wouldn’t have, to secure loans for purchasing real estate, business ventures, starting franchises, and many other opportunities that require a significant amount of upfront cash.

In 2009-2010 at the height of the real estate / financial crisis, one of our clients who is in commercial real estate relied heavily on their cash value life insurance policy. Without the leverage this gave them with the bank, they would have inevitably gone bankrupt as so many others did. However, the buffer the life insurance policy provided allowed them to “ride out” the economic downturn, stay in business and eventually begin to thrive again.

4. Life Insurance and its living benefits are not a common financial tool used. What information is important for people to know when considering this type of investment in their financial plan?
A good friend and mentor of mine, one of the top financial planners in the country, once told me that a “financial plan” with no life insurance is just an investment portfolio. A wise, prudent financial plan has elements of both insurance and investments. Most “advisor’s” goal is to simply sell their clients the latest, greatest mutual fund. That’s not holistic financial planning. We want to be a resource for our clients in all areas of financial planning; and typically, permanent cash value life insurance is a part of that overall plan.

Clients often ask what is the downside to permanent life insurance. I’ll explain it in two ways:

  1. Cost of insurance within the policy; a small part of the premium contribution must go toward paying for death benefit. However, because of our efficient policy design, this is typically in the range of 3-5 percent. When faced with the option of paying 3 percent in cost of insurance vs. 30-40 percent in taxes, it becomes very clear to our clients the value and purpose behind using permanent life insurance as a long-term capital accumulation strategy as part of their overall portfolio.
  2. While we strive to minimize upfront cost and make the policies as efficient as possible; all permanent life insurance policies have some level of upfront cost. As a result, we often tell clients “5-7 years or not at all.” If you’re looking at this as a short-term investment (less than five years), permanent life insurance is not a good idea. However, seven years or longer, it’s an extremely useful tool and frankly, one of the very best assets you can own, for the reasons listed above. We’ve found that each client desires two things as they get older, accumulate more wealth and become more successful: less risk and less income tax. There’s simply no other asset like permanent life insurance that can accomplish both of those objectives for our clients. Although any textbook would probably say otherwise; the one thing all our clients say hindsight they wish they would have done more of is the life insurance.

Questions? Contact Paul Ludacka at 402-891-2304. Paul offices out of Embassy Tower in Omaha, NE.

At TS Prosperity Group, we IGNITE PROSPERITY® by helping our clients do more with their money. Whether it’s saving a little extra cash each month or accomplishing a long-term strategy, our goal is to help you transform your financial life. Call and schedule an appointment today, one of our team members would love to help you do more with your money at TS Prosperity Group. TS Prosperity Group is based in Council Bluffs, Iowa, with clients across the midwest. For more information visit or call 844-487-3115. #igniteprosperity


*TS Prosperity Group does not provide insurance services. Consult an advisor.