Most cannabis entrepreneurs overlooking this place to park cash

Image of a generic insurance policy

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Cannabis businesses are eligible for property and casualty (P&C) insurance in most states.

But the majority of hometown insurance agents aren’t familiar with the details of business coverage – much less business insurance policies for the cannabis industry.

Jasnik Parmar is an insurance expert. But don’t call him about covering your greenhouse, dispensary or lab. He’s got bigger ideas.

The Ann Arbor, Michigan-based insurance specialist is looking to move into the cannabis space. He said he has already raised a significant amount of the capital he needs to launch his enterprise and is awaiting approval from state regulators.

Cash losing value

Every cannabis executive knows that marijuana companies have cash-management issues.

Cannabis industry participants with cash in hand can either use it to finance expansion or sit on it. The cash can’t go in (most) financial institutions, and it can’t go into brokerage accounts because of federal regulations.

That situation drives Parmar bonkers.

Unused cash is not merely dead money, he points out, it’s actually earning a negative rate of return because of record inflation. The precarious situation is going to erode hundreds of millions of dollars in precious cannabis earnings this year – and every year – until the Federal Reserve can rein in inflation.

Parmar would rather see that cash parked inside a life insurance policy or annuity.

Reviewing options

Life insurance policies are fairly sophisticated financial instruments: They can do a lot more than simply cover assets.

A life insurance policy is a bet with the insurance company that you are going to continue to live. You can buy term coverage, which pays out for a period of time, or whole-life coverage, which is what it sounds like: It covers you as long as you’re alive and the premiums are paid.

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Where do all those premium payments go?

Some go to the insurance company. Some go to the sales commission. The rest goes into a series of buckets that can include an account that builds cash value (or an account that holds securities such as stocks and mutual fund shares).

Parmar gives the example of the prototypical 40-something business owner who smokes. That policyholder parks $1 million in cash – Parmar is all too happy to send an armored car to collect it – and gets a policy worth, say, $2.7 million. (Keep in mind this is hypothetical. Rates vary greatly based on who’s insured and the condition of the insured’s health, so they might be better or worse.)

Newcomers to the life insurance world might think the policy covers the insured only in the event of death and that the cash is locked up until then.

Not so.

The cash (or the securities purchased by the policy from the cash in one of its buckets) gives the policy value: It is a tangible asset that banks can legally lend on.

That’s because, Parmar said, these dollars are not the proceeds of a cannabis business. They are the proceeds of an insurance policy, which is a binding legal contract.

Unlike cannabis cash, this asset can be borrowed against, either from a bank that uses the policy as collateral or, in some cases, via a direct loan from the policyholder to the policyholder.

Once the cash comes from an insurance policy and not from a cannabis business, it can be deposited anywhere – including a bank or brokerage account – and used for any purpose.

If you have any questions for Parmar, drop me a note and I will forward your info to him.

Andy Obermueller can be reached at editorial@mjbizdaily.com.