Andre L. Pennington, Wealth Attorney, Registered Financial Planner®, Inc. 5000 CEO, Pennington Law & Universal Wealth.
In a volatile, high-tax and credit-restricted economy, business owners are forced to rethink the way they store capital, access liquidity and build long-term wealth. Traditional tools—bank lines of credit, retained earnings, traditional investments and taxable distributions—do not always offer the efficiency or protection required to maintain control in unpredictable markets. Rates fluctuate, credit tightens, markets swing wildly, and governments increase taxes when they need revenue. Entrepreneurs need a structure that delivers stability, tax efficiency and instant liquidity without exposing their capital to market losses or the whims of lenders. This is where what I call the Capital Efficiency Strategy emerges as one of the most powerful frameworks for modern business owners.
The foundation of this strategy is a properly structured indexed universal life (IUL) policy governed under IRC §7702 and supported by the employer-owned life insurance rules of IRC §101(j). When engineered correctly, the policy becomes a tax-free liquidity engine, a protected growth vehicle and a balance-sheet enhancer all at once. It grows tax-deferred, provides tax-free access through loans under IRC §72 and pays out tax-free under §101(a) and §101(j) when the appropriate notice and consent rules are followed. Rather than functioning as traditional “insurance,” this design operates more like a private capital reserve for the business owner—one that banks themselves rely on as Tier 1 capital to demonstrate their strength and solvency.
The strength of the strategy begins with how the cash value grows. The policy is never directly invested in the market; instead, interest is credited based on the performance of an index such as the S&P 500. In the structure I recommend, the policy can credit 110% of the index’s annual gains while guaranteeing a floor of zero, meaning down years never reduce the cash value. When the market rises, the policy captures amplified growth; when the market falls, the policy remains stable. That combination of upside participation and complete downside protection produces a far smoother and more efficient compounding curve than any traditional investment account—and it does so without exposing the business owner to market risk.
The liquidity profile is equally remarkable. Despite common misconceptions, these policies do not lock up capital. When properly structured, they can provide access to approximately 85% of the cash value within 48 hours, without bank underwriting, credit checks, collateralization requirements or repayment mandates. Because distributions are taken as policy loans rather than withdrawals, they are not taxable events. For business owners navigating fluctuating cash cycles, shifting demand or sudden opportunities, this creates a form of instant, private liquidity that may be more reliable than a bank line of credit—particularly in an environment where banks can freeze or reduce credit limits with no warning.
Participating loans amplify this advantage. With loan rates hovering around 5% and the full cash value continuing to earn index credits—even on the portion borrowed—the business owner can simultaneously grow wealth inside the policy and put money to work externally. This creates a powerful double-duty effect: The same dollars can expand a business, acquire real estate, cover expenses, pay down high-interest debt or pursue investment opportunities while still compounding inside the policy. For entrepreneurs who understand leverage, this transforms the policy into a private banking system that continually strengthens the owner’s long-term financial position.
One of the most advanced components of the Capital Efficiency Strategy is the tax-timing arbitrage it creates. When structured within the right entity and funded with proper timing, business owners can direct dollars into the policy before they are exposed to taxation. Those dollars are then leveraged into a tax-free growth vehicle that often outperforms what the owner would have kept after paying taxes. Instead of sending a dollar to the IRS and reinvesting the leftovers, the owner captures that dollar on the front end, allows it to grow protected and tax-advantaged inside the policy and later accesses it tax-free through policy loans. When executed correctly, the tax-free compounding that occurs inside the policy exceeds the marginal tax that would have been owed had the owner taken the income taxable.
Over time, this creates a permanent spread—an arbitrage—where the strategy effectively turns routine expenses, business reinvestments and operating cash flow into wealth-generating activity. The business owner is no longer simply paying expenses; they are running those expenses through a structure that quietly grows wealth in the background. Living benefits add another layer of real-world protection. Because the policy includes benefits for chronic, critical and terminal illness, the owner can accelerate a portion of the death benefit tax-free during life if health circumstances change. This creates a built-in emergency reserve and business continuity plan that protects both the family and the enterprise.
Perhaps the most overlooked advantage, however, is the impact on the business’s financial profile. A properly structured IUL becomes a liquid, appreciating asset that lenders respect. Banks rely on permanent life insurance as Tier 1 capital—the highest-quality capital on their balance sheets because it is stable, contractually guaranteed and not subject to market volatility. When a business owner adopts this structure, lenders view the increased liquidity, reduced risk profile and internal access to capital as strong indicators of financial health. This can improve lending ratios, underwriting outcomes and the business’s ability to access credit.
Altogether, the Capital Efficiency Strategy can provide business owners with a unified financial architecture that has the potential to protect capital from market losses, offer tax-advantaged growth, provide tax-free liquidity, strengthen the balance sheet and create a tax-free legacy. In an economy where uncertainty is the norm, control—not speculation—is the ultimate advantage. This strategy can help give business owners control over when they access capital, how their capital grows, how they are taxed and how their wealth is passed to the next generation.
That said, while IULs offer market-linked growth with downside protection, they are complex contracts that require ongoing management, disciplined funding and a clear understanding of how caps, spreads and insurance charges affect long-term performance. Costs inside the policy can increase with age, underfunding can cause the policy to underperform or lapse, and illustrated returns are not guaranteed. It’s important to work with a professional who understands how to properly structure an IUL for this strategy.
Done right, few tools are as powerful, efficient or legally supported. It is a deliberate financial design—one that quietly allows business owners to build wealth by redirecting dollars they are already spending, capturing tax advantages they are currently losing and using those same dollars to strengthen their long-term financial future.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
Read the full article here