Kaizen -
So, what is KaiZen?" The word itself is derived from two Japanese words which when put together result in a combined word that means good change. While KaiZen is used in the business world, KaiZen is also a financial solution that combines life insurance and premium finance. The insurance that is used is a cash value policy with protections from market decline that is combined with a negotiated rate bank loan (without the hassles of a loan) that super funds the policy. KaiZen was developed 24 years ago by a company called NIW. The purpose of KaiZen was to provide death protection for those with a large need, while also providing the potential for cash value accumulation that might be used to supplement retirement income using tax-free policy loans and withdrawals1. The premium financing may allow for a larger policy and the potential for greater accumulation than might be done paying all the premiums out of pocket.
Why is this solution important? It is important to note that this is a tax-advantaged strategy that can be utilized in case of death of the insured or can potentially be utilized - if sufficiently funded - while still living, also known as living benefits. I think it is imperative for people to know that our current estate tax laws are set to expire at the end of 2025 and history has shown that we have been in higher tax environments. Simply put, we go back to previous tax laws if nothing is done come 2026. What is also important is the element of time, as this is a long-term strategy that when set up earlier has the potential to provide a larger benefit at the age of retirement, for example. So while it is important to be diversified in our investments, it is also important if not more so, to be diversified from a tax standpoint.
How does it work? This solution involves using an indexed universal life insurance policy that has a zero floor in negative markets but credits the policy each year based in-part on market performance in years of positive performance2. A bank loan is also taken out in conjunction with this life policy in order to get more cash into the policy beyond what the individual contributes. This loan rate seeks to be competitive to current rates due to the pooling of multiple policy owners inside a tranche. The loan is then in place for 15 years, with the assumption that the policy will have performed sufficiently for the cash value to be used to pay off the loan. This is not guaranteed3. The policy could be utilized after 15 years, but the longer you wait to use it, the larger the potential benefit.
Who should plan for it? The ideal candidate would be one that has at least 15-20 years to let this strategy unfold, has a protection goal both while living and if the unexpected happens, has a need for potential tax-free income, and has a retirement goal. This solution requires one to have a combined household income of 100k, be between the ages of 18 and 65, be in average or good health, and contribute at least 22k each year for a period of 5 years. If interested, I am able to run illustrations to show the power of this tax-free strategy that may produce the income that you may not have realized was possible. Hopefully you have enjoyed this series and as always reach out, we're here to help.
Written by: Matthew McCormick
Matthew McCormick is a Registered Representative and Investment Adviser Representative of/ and offers securities and investment advisory services solely through Equity Services, Inc., Member FINRA/SIPC, 1 N. Franklin Street, Suite 3450, Chicago, IL 60606. (312) 236-2500. Weyers McKeever Financial Partners and all other entities are independent of Equity Services, Inc. In CO, MO, NH and WI, Equity Services, Inc. operates as Vermont Equity Services, Inc. Representatives of Equity Services, Inc. do not offer tax or legal advice. For advice concerning your own situation, please consult with your appropriate professional advisor.
TC142579(0624)1
1 The use of cash value life insurance to provide a tax-free resource for retirement assumes that there is first a need for the death benefit protection. The ability of a life insurance contract to accumulate sufficient cash value to help meet accumulation goals will be dependent upon the amount of extra premium paid into the policy, and the performance of the policy, and is not guaranteed. Policy loans and withdrawals reduce the policy’s cash value and death benefit and may result in a taxable event. Withdrawals up to the basis paid into the contract and loans thereafter will not create an immediate taxable event, but substantial tax ramifications could result upon contract lapse or surrender. Surrender charges may reduce the policy's cash value in early years.
2 The 0% “floor” provided by an indexed universal life insurance policy ensures that during crediting periods where the index is negative, that no less than 0% interest is credited to the index strategy. However, monthly deductions continue to be taken from the cash value, including a monthly policy fee, monthly expense charge, cost of insurance charge, and applicable rider charges, regardless of interest crediting. Indexed universal life insurance policies do not directly participate in any stock or equity investments.
3 Premium financing relies on internal policy funding to pay back the loan. This is not guaranteed and results may be more or less favorable than illustrated. The ability to internally fund a life insurance contract will be dependent upon the performance of the contract and is not guaranteed. If remaining policy values and scheduled premiums are insufficient, additional out-of-pocket payments may be needed to keep the policy in force or to repay the loan. Kai-zen is responsible for the premium financing arrangement. The life insurance companies with which we work are bound only by the terms of the life insurance policies that they issue.