Many organizations are required to keep a meaningful amount of cash on their books, while some simply choose to do so. This has become problematic for some investors, as yields on conventional cash and cash equivalent assets remain at or close to zero. What can an organization do to improve its return on these assets?
Look beyond the savings account.
For organizations with a sizeable cash balance held in savings accounts, CD’s, Treasury Bills and the like, the current yield environment provides little-to-no return on an annual basis. We find that many organizations have a discrepancy between the timing of their need for cash and how that cash is invested. While cash may be needed on a day’s notice, it is often not necessary to have available for months. By combining short- term, low-cost, high-quality fixed income funds to match the time frames of when this cash is needed, an organization may be able to generate yields that are greater than that of other instruments, while attempting to maintain minimal principal risk. Daily liquidity remains, and net returns may be higher than they were previously over annual periods.
Opportunity also exists in the life insurance market.
Business-owned life insurance can be designed to maximize the accumulation of cash and may be able to provide returns that exceed other options. For example, one option provides little return if the policy were cashed in during year one; however, a 4 percent net return year-over-year can exist thereafter. With another option, it’s possible to obtain a range of returns from 1.5 percent to up to 10 percent per year in the first year or two, even if it’s cashed in. The returns noted may be obtained net of all costs.
But isn’t life insurance an illiquid vehicle?
Typically, yes. Significant penalties are normally assessed when withdrawing cash from a life insurance policy. However, a small number of products assess minimal surrender fees at withdrawal/surrender. In those instances, a business or individual can surrender a policy and may be able to walk away with principal and earnings that exceed those which may be obtained in savings accounts.
What’s the “catch" with these options?
While there are differences in these approaches, and investors must understand them before they invest, these options may improve your earnings without a significant amount of additional risk. If your organization consistently maintains cash of $1 million or more, or you personally maintain a cash balance of at least $250,000, you may want to consider exploring this opportunity with specialists knowledgeable in this area. They can assess your situation and determine if it’s an appropriate option.