Excess cash is a great problem to have, however, earning a competitive return on that cash requires a significant investment in time and energy. Many corporate finance departments spend countless hours making and tracking investments that keep their extra cash working until the company needs it. Others either don’t have the time and resources necessary to dedicate to investing or they fear risk in the markets, leaving the cash idle on their balance sheet. Regardless of the reason, putting your money to work for you can be made simpler with these two strategies:

Non-Qualified Investment Portfolio: Utilizing your excess cash to invest in a diversified and low-cost, yet highly tax efficient, non-qualified investment portfolio is an excellent way to have your cash work in your favor. As an example, over the last 5 years (ending 2/28/2022) a non-qualified, balanced (60% stocks, 40% bonds) investment portfolio would have earned an average 7.9% rate of return with a standard deviation* of 8.5%. Investing $100,000 5 years ago, would yield just over $146,250 today. If this was a tax efficient portfolio, it’s possible that there would have been little, if any, income tax realized on the portfolio as it grew. If sold, the Federal long-term capital gains tax on the growth would have been 15-20% of the $46,000 gain, plus potential 3.8% Affordable Care Act tax, plus potential additional state tax. Despite the potential tax, the investment would still net a $30,000 to $35,000 gain over 5 years. In comparison, you would only realize a $3000 to $5000 total gain (or 3-5% total return) on a cash/interest bearing investment with a gross return of 1%. While past performance is no guarantee of future performance, many analysts today estimate a more conservative 4-6% annualized return over the next decade, still higher than a cash/interest-bearing investment. Working with an investment advisor, you can select the portfolio and corresponding time horizon that is an appropriate for your business, ensuring the cash is available for withdrawal when the time is right for you.

Permanent Life Insurance Policy: heavily-funded and optimized permanent life insurance policy is a safer alternative, providing a much lower risk and more tax efficient option than some of the more traditional, fixed income investment opportunities. A life insurance policy can be designed in such a way to maximize the living benefits of the policy’s accumulated value, which is the cash at work in a policy that can be borrowed against, surrendered, or pledged as collateral with favorable lending rates. The objective is to put the most premium into the smallest amount of a life insurance policy required, creating significant cash value early in the policy. In some cases, as much as 80 or 90% cash value in the first year. Highly rated life insurance companies pay a guaranteed rate of interest and, in many cases, non guaranteed dividends, which can produce a growth pattern at rates that may be 3%, 4%, or even 5% tax deferred over the long term. While there are costs associated with a life insurance policy, the immediate benefits are the inherent death benefit and the power of tax deferral on the growth of the accumulated value. If the policy is held in force until death, the death benefit is income tax free and in most cases the value of the death benefit far exceeds the total of the premiums paid. Many people have a need for life insurance within the context of their business such as key person life insurance, business succession, or buy/sell agreement insurance funding strategies. These inherent needs make the utilization of over-funded life insurance policies an even more attractive asset for getting the most out of excess cash. In both non-qualified investment portfolios and over-funded life insurance policies, lenders are often willing to leverage these vehicles as collateral, keeping your money invested and offering favorable arbitrage for higher earning and lower borrowing rates, avoiding portfolio liquidation and potentially recognizing capital gain income taxes.

In both non-qualified investment portfolios and over-funded life insurance policies, lenders are often willing to leverage these vehicles as collateral, keeping your money invested and offering favorable arbitrage for higher earning and lower borrowing rates, avoiding portfolio liquidation and potentially recognizing capital gain income taxes.

We are happy to brainstorm these opportunities and give an objective, fiduciary-based recommendation through either a tactical or fee-based financial planning process. Contact a member of our team today!

*The standard deviation means that in general you would expect the portfolio returns to be + or – 8.5% from the average. In more extreme volatility situations, the standard deviation may be up to 2 or 3 times the norm.

**The indices used in the 60-40 non-qualified index from Morningstar include: 5% Bloomberg Commodity TR USD, 38% Bloomberg Municipal TR USD, 4% DJ US Select REIT TR USD, 2% FTSE Treasure Bill 3 Mon USD, 13% MSCI EAFE GR USD, 6% MSCI EM GR USD, 23% S&P 500 TR USD, 6% S&P Midcap 400 TR, 3% S&P Smallcap 600 TR USD.

This publication is not intended as legal or tax advice. Financial representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.

The data is for illustration purposes only and is not intended to imply or assure the performance of any investment. Past performance is no guarantee of future results.

The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance accumulated value to supplement retirement income will reduce the death benefit and may affect other aspects of the policy.