Creative finance, life insurance

4 Replies

I am seeking different ways than typical to raise capitol. I am considering attaining a permanent or whole life insurance policy to borrow against it for the lower than average interest rates and lackadaisical repayment required. Has anyone here on BP had success in this area of financing? Also, is it possible to borrow against it immediately after purchase of the policy, or is there  required wait period before being able to borrow against it? 
 Those who have experience in this area, what would be any unexpected downfalls of this method that a new investor would not typically be prepared to confront?

@Account Closed

Just be aware that it is the cash value of the policy that you are borrowing against. This is a way to invest and put your money to work in two places at one time. Your cash value earns interest/dividends at the same time that you are building wealth by leveraging the cash value. The combined growth allows for this approach to make up for the fees inherent in a life insurance policy.

This topic has been thoroughly discussed in many threads here on BP. Here's one of the oldest and most active: 

https://www.biggerpockets.com/...

Let me know if you have any questions.

@Account Closed - yes, you have the jist of it. Whole life allows you to strategically accumulate your own capital so you don't have to raise as much.

Timing for when you borrow depends on the carrier, but in general, you can borrow immediately.

Downsides are less than 100% of what you've paid in premium is available as cash value in the first few to several years of the policy, depending on your policy design, age, and health. First year liquidity is typically 50%-90% for a policy designed for early cash value, depending on previously mentioned factors.

This "downside" in the early years reverses and becomes an "upside" in later years. Every premium payment creates cash value higher than 100% of the premium.

Also, to best optimize and lower the fee of your permanent life insurance you want to have five to seven years of equal premium payments into the policy. If you put a lump sum only in year one, you either loose many of the tax advantages of the life insurance, or your money will be "parked" in a temporary account to be transferred into the life insurance over a period of five to seven years, or the death benefit payed for will be way to high and your cash value will be extremely reduced.

I agree with all that has been said. Cash Value Whole life is a very effective way to experience tax-free growth and there by increasing your available Capital. When you use it that way, the same dollar can work for you in multiple different ways. In addition, if you have a dormant qualified account such as an IRA or 401k there is a way where you can create a structure that will allow you to legally use your qualified funds to pay your premiums on the Insurance contract without causing a taxable event and thus increasing your access to additional capital that you wouldn't otherwise have access to. When that happens, your cash become liquid, you have no limiting transactions (you can invest in whatever you want unlike a 401k where you have to stay arms length away) and you are not limited by how much you can contribute (such as only $19,500 per year with a 401k). Only limitation is the amount of insurance you can qualify for. Think of it as a Solo K with better access and tax free growth. The best part is with all the structures are in place you are able to put the profits from the investment back in system 100% tax free and still maintain the non MEC status of the insurance policy.