A Business Owner's Loop: Premium Out of the Business, a Loan Back Into It

A business owner asked how to get more out of the cash that moves through his company, and whether he needed a mortgage to get a home equity line of credit. A home equity line of credit, or HELOC, is borrowed against a home. Without one, you can still open a personal line of credit or a business line of credit. My reply to him is in a video on how a business owner can maximize cash flow with infinite banking.

Say $30,000 a month flows through a business. It pays employees, and some is set aside for quarterly taxes. For most owners that cash does one job: it meets those expenses and nothing else.

The loop gives it a second job. The owner moves money out of the business and into the policy as premium. Some of my clients put in hundreds of thousands of dollars a year this way. Then the owner borrows from the policy and lends that money back to the business, which uses it for the expenses it was going to pay anyway. How the money gets from the business to you in the first place is a question for your accountant, because the answer changes the tax result.

The second step needs paperwork. Write a real loan contract between you and the business, with your accountant at the table, so it stands up if you're ever audited. The business pays you interest at a rate your accountant and the IRS would call reasonable. In my example the policy charged 6%, so the business paid about 6%. The business may be able to deduct that interest, which lowers its taxes. Whether it can depends on your facts, so don't assume it.

Meanwhile the policy keeps growing. In my example the carrier credited about 6% on the money I borrowed while charging about 6% on the loan, and the cash value kept growing tax deferred. That's one design. Some policies credit less on borrowed money, so ask your carrier how yours treats a loan. A policy loan also reduces the cash value and death benefit while it's outstanding.

The tax and legal side belongs with your accountant and a business attorney, since I'm a licensed insurance broker and not a CPA or an attorney. Write the loan contract before the first dollar moves.