They say it takes money to make money — and that's a lesson I learned the hard way when I started a new business. Even the most basic business is going to have some startup costs, and mine was no different. I needed several thousand dollars to get things off the ground. And after considering my options, I decided the best way to fund my business launch was by using the cash value from my life insurance policy.
I'm launching an import business using some of my contacts in China. While the overhead is fairly low, I needed to set up a corporation, pay for travel to and from China, cover shipping costs and rent a warehouse for storage. Altogether, my startup expenses will be about $10,000 before I start earning anything.
Choosing Cash Value
I bought a whole life insurance policy because I wanted to help protect my family financially in case something ever happened to me. I also liked that this type of policy built cash value, which is money I can take out and spend while I'm still alive. Whenever I pay a premium, some of the payment goes into my cash-value balance. The insurance company invests my money to help it grow over time.
At this point, I have roughly $12,000 in cash value, which is enough to cover all my startup expenses. There's no fee to access the cash, and I can take it out whenever I want. I'll contact my insurance company, and they'll transfer the money to my bank account within several days. It's important to note that loans and withdrawals against the cash value will reduce the death benefit and may cause the policy to lapse.
Weighing My Options
I considered a few other options for my business launch. First, I thought about putting everything on my credit cards. While this would have been easy, it would also have been a lot more expensive. I expect it's going to take about a year to pay everything back. The annual percentage rate (APR) on my credit card is 16.99 percent, which means I'd owe an extra $1,699 in interest for paying through my credit card. Not a great strategy in my opinion.
If I took out a bank loan, the interest rate would be lower than my credit card but would still be hundreds of dollars (plus any fees charged to set up the loan). I'd also have to apply for a loan, which takes time — and there's no guarantee I'd qualify.
I could have taken some money out of my Roth individual retirement account (IRA). I could take out my contributions without owing taxes or a penalty. So, it's not a bad source of money for me. The problem is that it could be complicated to pay the money back. You can't take out loans from an IRA, and I can only add $5,500 per year into my account.
It would take two years to repay the $10,000 into my IRA and, in the meantime, the investments I do have in the plan would grow more slowly. That means this approach would've ultimately set back my retirement plan. And if I were to withdraw too much and start taking out investment earnings, I might end up owing income tax plus a 10 percent penalty, according to the Internal Revenue Service (IRS). For me, it wouldn't be a great solution for more expensive goals.
After considering all my options, I decided my life insurance's cash value was by far the best choice for me.
As soon as I make enough from my business, I plan to pay back my cash value loan. While I could make a withdrawal and never pay the money back, it will be much better to pay it off in the long run. That way, I'll have even more cash value ready for other goals, such as buying a house, maintaining coverage for emergency expenses and retirement. Also, paying back the loan helps me maintain the size of my death benefit for my loved ones.
The cash value has been a nice additional feature on top of my permanent life insurance coverage. I already appreciated that my death benefit will never expire — and I know that $500,000 death benefit will be a huge help for my family when I eventually pass away. But with the cash value, my life insurance is also helping me while I'm still alive.
While you might not have a plan for that money, it may come in handy one day. It sure did for me and my business launch.