When it comes to contributing to life insurance policies, you may have heard terms like “old money” and “new money” thrown around—but what do they actually mean, and which strategy is right for you? Today, we’re breaking it down to make sure you have all the information you need to make smart financial decisions.
Why Should You Care About Life Insurance Contributions?
First things first: insurance isn’t a need—it’s a want. It’s about what you want to do with your money, not what you have to do. Your contribution strategy impacts how much money you can grow, how much you’ll owe in taxes, and ultimately, how much freedom you have when it’s time to use that money.
If you’re looking to grow your wealth strategically and minimize taxes, you need to understand how your contributions work—and whether the old money or new money strategy fits your goals.
The Basics: What Are “Old Money” and “New Money”?
When we talk about contributions to a life insurance policy, we often refer to “old money” and “new money”:
- Old Money: This is the money you’ve already accumulated. Think of assets you have in savings accounts, investments, or retirement accounts like IRAs or 401(k)s.
- New Money: This refers to the income or contributions you plan to make moving forward. It’s the money you’re earning now and deciding how to allocate for future growth.
How Do These Strategies Work?
Imagine your financial plan as a group of buckets—each bucket represents a different type of tax treatment: ordinary income, capital gains, tax-free, or tax-exempt. Where you place your money makes a huge difference in how much you get to keep.
Old Money vs. New Money Contributions:
- Old Money can be repositioned to reduce future tax burdens. You might want to shift assets from taxable accounts to life insurance policies to decrease taxes down the line.
- New Money contributions focus on where you put your current income. Putting that income into a tax-exempt account like a whole life insurance policy could help balance your future tax exposure.
Want to understand if repositioning old assets could reduce your tax burden? Visit https://financialcaffeine.com for in-depth videos and resources.
Creating a Balanced Tax Strategy
Think of your finances like a teeter-totter: One side represents taxable accounts (like 401(k)s), and the other side represents tax-exempt assets (like life insurance). The goal is to balance both sides to create more flexibility when it’s time to access your funds. By reallocating old and new money, you create a plan that allows you to take control of your future distributions.
Two Funding Strategies for Life Insurance Contributions
There are typically two primary approaches when it comes to funding life insurance policies:
- Full Funding: Consistently contributing a substantial amount to build up cash value quickly. This strategy is ideal if you want to see rapid growth and access to capital sooner.
- Short Funding: Contributing strategically in a way that allows space for future assets—great if you anticipate an influx of money down the road, whether from a real estate sale, a business venture, or inheritance.
How Do You Decide the Right Approach for You?
To decide whether the old money or new money strategy makes more sense, you have to look at your current financial landscape and future goals. If you have old assets that aren’t optimized for tax efficiency, consider moving them to a better position through insurance. If you’re earning new income, think about how best to allocate it to achieve a lower tax burden in the future.
Want to Dive Deeper?
If this has you thinking about how to best contribute to your life insurance policy, you’re not alone. Getting this right can help you grow your wealth, minimize taxes, and gain financial freedom.
- Interested in learning more about contribution strategies? Visit financialcaffeine.com for videos and resources.
- Ready to take the next step and explore your unique strategy? Book a one-on-one consultation at financialcaffeine.com/survey to get started.
Remember, your financial journey is yours alone. There’s no “right” answer for everyone—it’s about finding the right balance that works for you and ensures a secure, prosperous future for you and your loved ones.