Cryptocurrency and Insurance: The Dream

What if an insurance company who was looking to expand their market share started offering a cryptocurrency investment option inside their permanent insurance? What kind of opportunity would there be if consumers could have their insurance premiums invested in cryptocurrency instead of current more conservative investment options? 

First, we must understand how an insurance product may be structured, to understand why this could be game-changing. I will explain this in very high-level terms to get the point across. Permanent insurance policies have two major components, death benefit and cash value. For each premium you pay, some portion goes towards the cost of insurance and another portion goes to the “equity” or cash value of the policy. 

This cash value or “equity” is invested into some type of investment vehicle. In a whole life insurance policy, the equity inside your policy grows as the insurance companies’ portfolio grows. With a universal life policy, you have the option to pick between 10-20 investments that the insurance company has approved. As those investments go up, your equity rises. Now, this is where it gets fun to think about the impact of crypto on your insurance policy. 

If an insurance company gave you the option to place your funds inside a cryptocurrency investment it would have the ability to grow rapidly. As you have already heard the many stories of investments in crypto going through the roof, your rocket ship of an investment could now enjoy the major benefits associated with insurance products.  

There are unique features that are attributed to the equity inside your insurance policy. The investment portion of an insurance policy gets to play by a different set of rules than traditional investments. These rules try to separate what is an insurance vehicle and an investment vehicle. Knowing the rules and where you can benefit has significant upside.  Some of the advantages are as follows: 

1. Tax shelter – Just like a TFSA, insurance proceeds grow with tax free compounding. Any gains made on a crypto investment would not be taxed upon realizing the gain.  

2. Vesting – This is an insurance term for whole life insurance that means once you have received a dividend from the company, it is impossible to lose that money. It is like saying you can never have a negative return on your investment. Once you make money, you can’t lose that money. Vesting is not available when it comes to Universal Life policies. 

3. Switching investments – Unlike a normal investment where you would have to sell your investment to then buy another investment (triggering tax); investments inside your insurance policy can be changed without realizing any capital gains.  

The wheels starting to spin yet on how these features would benefit your crypto investment? It could be a very powerful tool for creating wealth.  

There is also the fact that insurance is a very effective tool for transferring assets to your estate. Some of the intriguing features of permanent life insurance are the following: 

• Creation of CDA – The capital dividend account is an accounting term that tracks the amount of capital dividends that can be paid out of a corporation tax free. There are only two ways of creating capital dividends.  

1. The non-taxable portion of capital gains. 

2. Life insurance 

The important part is that life insurance CDA is created by the total of the insurance portion and the “equity” portion. The actual calculation for CDA in life insurance is the death benefit minus the adjusted cost basis of the policy. And as we remember, what if that equity portion was invested into something as explosive as a successful crypto fund. All the gains could be passed through the CDA to a family member tax-free.  

You are probably thinking now that this type of thing would be way too good to be true. As I mentioned earlier, there are rules that have been put in place because this type of combination would be used as an investment tool. Once such rule to limit this being used as an investment vehicle is the 250% rule. The 250% rule says that the value of the investment inside an insurance policy cannot be 250% greater than the investment was 3 years prior.  The 250% rule also includes both the gain on the investment as well as the deposits made into the equity portion of the policy. 

Special tricks can be used to maximize the amount of money you can dump in. Here are a few of the tricks an insurance specialist could do. 

• Reduced Paid Up insurance option — This means that you can take the “equity” from your policy and pay off the remaining insurance premiums. This causes the equity in your policy to decrease by the amount it takes to pay off the remaining premiums but then no more payments are required thus, the insurance is “paid up”. So, what if your crypto investment took off to record highs? Well, you could have the option to pay off your insurance and never have to put another dollar into your insurance policy again. Remember what I said about vesting? You can’t lose the money in a whole life policy. Once the policy is paid off, the remaining equity can continue to grow going forward.  

• Paid Up Additions – in whole life insurance policies, policy owners receive a dividend from the insurance company. This dividend can be paid to you in cash, or you can elect for the dividend to buy more insurance. The insurance that is purchased doesn’t affect your premium but rather adds additional coverage on top of what you currently had that is paid up from the dividends from your policy.  Well, what if your crypto investment went sky high and now your dividend is monstrous? That dividend is going to be large, and you can purchase additional insurance which can then be passed tax free to the estate. 

The world is infatuated with the returns that people are getting in cryptocurrency. Why wouldn’t you be excited! Being strapped to a rocket ship gives you every reason to be excited and worried about your money all at the same time. However, with that being said, the world’s appetite for cryptocurrency is changing. Many of the top institutions in the world are now incorporating these investments into their portfolios.   

In the future, we will see crypto more mainstream in everything that we do. Currently, there are already insurance companies invested in crypto and I am sure more will come. Is it a big hoax that will one day hit zero? I am not here to give advice but rather open your eyes to the possibility of finding creative ways to maximize your wealth, help you save tax now, save tax later, and pass that wealth to future generations.