Unlocking Your Assets with SBLOCs and IBLOCs: A Quick, Flexible, and Tax-Friendly Solution

by | Jan 3, 2024 | Insights

Planning for the unexpected is an important part of your financial plan. When choosing wealth building strategies, we often hear “what if I need to access these funds?”. You may expect to hold an investment for 10 years, but unforeseen expenses or unique opportunities could arise anytime, requiring short-term access to long-term funds.

But what if the timing isn’t right? You might face a large tax bill if you sell your stocks or maybe the market is down. This is where Securities-Based Lines of Credit (SBLOC) and Insurance-Backed Lines of Credit (IBLOC) come into play. Like equity in your home, you can borrow against an investment portfolio or cash value life insurance policy. In this article, we will break down what SBLOCs and IBLOCs are and explore the financial situations in which they can be incredibly useful.

What Are SBLOCs and IBLOCs?

You might be familiar with a Home-Equity Line of Credit (HELOC) that allows you to borrow against the equity in your home. SBLOCs and IBLOCs take the same concept and replace the asset you’re borrowing against.

A Securities-Based Line of Credit (SBLOC) allows you to borrow against the value of your non-retirement investment portfolio, which can include stocks, bonds, ETFs, and mutual funds. SBLOCs generally include the ability to borrow up to 50-70% of your investment value without incurring taxable gains, which can be beneficial if you need to access funds without selling your investments.

An Insurance-Backed Line of Credit (IBLOC), sometimes called a Cash Value Line of Credit (CVLOC) differs from an SBLOC in that it is backed by the cash value inside certain types of permanent life insurance policies. You generally can borrow up to 70-95% of the cash value in these policies, which is often more secure than market-based investments.

Each is tied to a benchmark interest rate, which fluctuates over time.

The Benefits of SBLOCs and IBLOCs

SBLOCs and IBLOCs give you access to assets without creating a tax bill. Though you’ll pay interest on the loan balance, these rates are often much lower than the tax bill you’d pay for selling.

SBLOCs don’t require you to sell any investments, so if you need access to the value of your portfolio during a market downturn, you can borrow against the account without selling stocks at a loss, giving them time to recover.

IMPORTANT NOTE: If the market drops while you have an SBLOC loan, you could be forced to sell stock at the worst time to reduce the loan. Make sure to discuss this carefully with your advising team.

SBLOCs and IBLOCs typically do not require a hard credit pull, which means that applying for them won’t impact your credit score. The qualification process for these loans is also usually much quicker than traditional bank loans because the collateral for SBLOCs and IBLOCs is a liquid asset, so banks are more concerned about the asset itself rather than your credit score.

What kind of impact can this have in real dollars?

Let’s say you have $5 million in MSFT that you bought for $1 million. You want to invest $1 million in a real estate project. If you’re in the top tax bracket, you’re looking at $800,000 in gain and over $190,000 in capital gain tax. If you live in Washington State, you could also lose another 7% to the WA State capital gain tax.

If you borrow $1 million against these funds instead, you’ll pay the interest cost, but save the entire tax bill. This can allow you to spread out the gains over a series of years or avoid the tax bill altogether, depending on what fits your situation.

When to consider using SBLOCs or IBLOCs

Here are some scenarios in which SBLOCs and IBLOCs can be invaluable financial tools:

  1. Emergency Reserve: If you need a secondary emergency fund to cover unexpected expenses or bills, both SBLOCs and IBLOCs can provide quick access to cash.
  2. Investment Opportunities: When you spot promising investment opportunities, such as real estate or business ventures, but don’t want to liquidate your investments, SBLOCs and IBLOCs can help you seize the moment.
  3. Tax Planning: To delay the realization of capital gains and reduce tax liabilities, SBLOCs can be used as an alternative to selling securities. Another way to be a tax-smart investor.
  4. Business Investment: Whether you’re expanding your business or investing in a startup, SBLOCs and IBLOCs can provide access to the capital you need.
  5. Unforeseen Expenses: In case of unexpected financial needs, having a line of credit available through SBLOC or IBLOC can be a financial safety net.

Ultimately, SBLOCs and IBLOCs can allow you to leverage your investments or the cash value of certain life insurance policies to meet a wide range of financial needs. With the added benefit of a quick qualification process and no impact on your credit score, these lines of credit can provide a swift and accessible solution for your financial needs.

Zach Hamilton

Partner, Financial Advisor

About the Author

Zach graduated from Gonzaga University with degrees in Marketing and Finance. While growing up, Zach heard stories from his grandfather about his work as an insurance agent, and other stories from his dad who was an investment manager. They both spoke financial “languages” but had completely different dialects. Recognizing the breadth of the financial vocabulary ultimately led to Zach’s passion for financial planning. He credits his family for this enthusiasm. Zach sees his time with clients as an opportunity to translate all of the different – and often confusing – information they’ve heard and provide clear guidance for each unique situation.

Zach enjoys working with people – his clients – who also appreciate that their financial decisions have an impact not just on themselves, but also on their families, charities and their own life legacy. Many of Zach’s clients have a strong desire to “make a difference”, and they rely on his financial expertise to magnify their philanthropic goals.

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.

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