Equity Harvesting: Get THE Definitive Guide
How much could Mr. Smith borrow tax free from his life insurance policy starting at age 66?
$23,000 each year for 25 years for a total amount of $575,000.
While $23,000 is a lot of money tax free in retirement for a couple who's annual taxable income is $78,000 a year; the question becomes: what would Mr. Smith have done if he did not implement an Equity Harvesting plan?
Mr. Smith probably would have done nothing. Therefore, $23,000 a year is a significant improvement to Mr. Smith's retirement income.
The next question is: what is the cost to Mr. Smith for having an interest-only loan on $76,500 of new debt? If the home equity line of credit is at 7.5%, the costs to Mr. Smith would be $478 a month or $5,736 a year.
Therefore, when trying to compare using Equity Harvesting to doing nothing (which in this example means funding a post-tax brokerage account with the money that would have been allocated to the interest expense), Mr. Smith needs to invest $5,737 every year into the stock market and let it grow. When Mr. Smith reaches age 66, he needs to compare how much money he could remove from that account for 25 years to how much could be removed from this cash value life insurance policy.
When investing money in the stock market there are annual expenses. I will assume a conservative 20% blended tax rate (capital gains/dividend tax which is very conservative) on the growth (the industry standard is 30%) and only a .6% annual mutual fund expense (the average is over 1.2%).
For this example, it is assumed that the money will grow in a brokerage account at a gross rate of 7.5% annually (the same rate as the funds will grow in the life policy).
If Mr. Smith invested $5,737 ever year in the stock market, he could remove $19,038 a year every year after tax from ages 66-90.
Remember how much Mr. Smith could remove from his cash value life insurance after tax? $23,000 every year for from ages 66-90.
How much better did Mr. Smith do by using Equity Harvesting to build wealth vs. doing nothing and simply investing money after-tax in the stock market?
$3,962 a year or $99,050 over the entire withdrawal period.
Therefore, Equity Harvesting would be a viable financial tool to help Mr. Smith build wealth for retirement.
However, the above numbers do not create a fair example as the client who does nothing has no loan to pay off whereas the client who uses Equity Harvesting has a $76,500 loan still to pay off. In our example, Mr. Smith will have a $114,399 death benefit from the Equity Harvesting life insurance policy that will pay income-tax free if he were to die at age 90. That will more than pay off the $76,500 debt on the home.