Wealth Management Group Newsletter – Winter 2019
Stephen Van Oss

Cash is King

According to the Wall Street Journal, cash was the best performing asset class in 2018. However, many investors shy away from cash investments, such as Treasury bills, money market funds and savings accounts. Given their modest returns in recent years, that is not surprising. But, cash does play an integral role in a well-diversified portfolio, particularly as interest rates increase.

Relative stability

For starters, the low volatility and liquidity of cash investments provides stability in the event of a significant or prolonged market downturn. This is especially important if the length of time before you need to utilize your portfolio is relatively short. Needs and life goals can dictate such timing. Driving factors such as nearing retirement, college tuition for a child and a new car are just a few examples. Each individual circumstance is unique and it is important to create an approach that works for you.

Some investors view cash as a drag on their portfolio’s overall returns, but the opposite can also be true. When you have a cash cushion, you can allocate other funds to riskier investments that possibly offer significant growth potential over the long term. With sufficient cash on hand, you will not need to use long-term investments for short-term cash needs, and sufficient cash makes it easier to stay the course rather than sell these assets in a panic during turbulent times. Keep in mind that asset sales have tax implications. Unintended consequences can result if there is a failure to plan.

Additional benefits

Cash offers other advantages, including:

  • Lower Downside Risk
    Because cash investments have little downside risk, they help to mitigate a portfolio’s overall volatility. In the event of a market downturn, a portfolio with significant cash investments generally declines less than one without such investments.
  • Diversification
    Cash offers diversity, which can be critical to a healthy investment portfolio. Different asset classes (for example, stocks, bonds and real estate) tend not to move in tandem with each other. Cash investments are good diversifiers because they typically have relatively low correlations with other types of assets.
  • Inflation Protection
    Keeping cash under your mattress is usually a bad idea because its value erodes over time as inflation drains its purchasing power. Cash investments; however, earn interest and their interest rates tend to change quickly as market rates and inflation shift. Short-term money markets are currently yielding around 2%.
  • Insurance
    Certain cash investments, such as deposit accounts and CDs, enjoy the added protection of FDIC insurance on balances up to $250,000.
  • Opportunity Cost
    Holding cash gives you the opportunity to purchase assets at attractive prices without having to sell to raise cash during times of distress.

Magic number

How much of your portfolio should be invested in cash? There is no one correct answer to this question because an appropriate cash position is dictated by such factors as your financial situation, time horizon and risk tolerance. Our subsidiary, ORBA Wealth Advisors, is a great resource to help you evaluate cash needs in your portfolio. Be sure to inquire during the next conversation with your trusted ORBA advisor on how this new service could benefit you.

For more information, contact Adam Guldan at 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services

Benefits of Borrowing Against a Life Insurance Policy


If you are low on cash and need funds to pay for college tuition, unexpected medical bills, mortgage payments or other expenses, one option is to borrow against the cash value of a permanent life insurance policy. Policy loans typically offer significant advantages over credit cards and personal bank loans, including lower interest rates, flexible repayment terms and a speedy approval process. However, these loans are not risk-free. Consider both the potential advantages and disadvantages before you take out a policy loan.

Tapping cash value

Most insurance companies allow you to borrow amounts as high as 90% to 95% of a whole or universal life policy’s cash value. These loans offer several advantages over traditional loans, including:

  • Lower Costs
    Interest rates are usually lower than those available from banks and credit card companies and there are little or no fees or closing costs. In addition, although you are not paying the interest to yourself, your interest payments may benefit you indirectly if your insurer distributes a portion of its profits to policyholders as dividends.
  • Simplicity and Speed
    So long as your insurer offers loans, there is no approval process, lengthy application, credit check or income verification. Generally, you can obtain the funds within five to ten business days or less.
  • Flexibility
    Most insurers do not impose restrictions on how you use the funds. You also have the flexibility to design your own repayment schedule. You can even choose not to repay the loan. However, that can have negative consequences.
  • Credit Scores Unaffected
    Policy loans will not appear on your credit report.
  • Generally No Tax Impact
    Except as discussed below, policy loans are tax-free. They are not considered income, nor are they reported to the IRS in most cases. This is a big advantage over surrendering a policy in exchange for its cash value. Surrendering can trigger taxable gains to the extent the cash value exceeds your investment in the policy (generally, premiums paid less any dividends or withdrawals). Note that interest paid on the loan typically is not deductible.

Recognizing potential pitfalls

Before you borrow against a life insurance policy, be sure to consider the disadvantages, including:

  • Reduced Benefits for Heirs
    If you die before repaying the loan or choose not to repay it, the loan balance plus any accrued interest will reduce the benefits payable to your heirs. This can be a hardship for family members if they are counting on the insurance proceeds to replace your income or to pay estate taxes or other expenses.
  • Possible Financial and Tax Consequences
    Depending on your repayment schedule, there is a risk that the loan balance plus accrued interest will grow beyond your policy’s cash value. This may cause your policy to lapse, which can trigger unfavorable tax consequences and deprive your family of the policy’s death benefit.
  • Eligibility
    You can borrow against a life insurance policy only if you have built up sufficient cash value. This can take many years, so do not count on a relatively new policy as a funding source.

Dispelling a myth

There is a common misconception that you are “borrowing from yourself” when you borrow against a life insurance policy. In other words, when you pay interest on the loan, you are essentially paying yourself.

This may be true when you borrow money from a retirement plan, but it is not accurate when it comes to life insurance policy loans. In fact, you are borrowing from your insurer, pledging the cash value of your policy as collateral and paying interest to the company. Policy loans may be cheaper than traditional loans, but they are not free.

Reviewing your options

A life insurance policy loan can be an attractive, cost-effective source of funds to meet current expenses. Before you borrow against a policy, be sure you understand the risks and evaluate the relative pros and cons of traditional loans. Make sure you really need to borrow and consider whether you have alternatives, such as selling an asset or reducing expenses.

Sidebar: Retirement plan loans have hidden costs

One alternative to life insurance policy loans is to borrow from a 401(k) or other retirement plan. If your plan permits loans, you can borrow up to $50,000 or 50% of your vested account balance, whichever is less, at interest rates lower than those of comparable bank loans. You may view such loans as “free” because you are borrowing from yourself and paying interest to yourself.

In reality, borrowing from a retirement plan comes with hidden costs:

  1. You lose the tax-advantaged growth that you would have enjoyed on the funds you borrow—exchanging potential growth for a fixed interest rate. You also lose the benefits of additional contributions to the plan during the loan’s term. The plan suspends contributions until the loan is repaid or because you cannot afford to make contributions and loan payments at the same time.
  2. The loan may be accelerated if you quit or lose your job. If you cannot repay the outstanding balance promptly, the transaction will be treated as a distribution subject to taxes and penalties.

For more information, contact Stephen Van Oss at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services

Forward Thinking