Becoming Your Own Bank?

Question

Hey Investors,

If there was an opportunity to invest your money in let's say the S&P500, be able to take a loan from your own money while having that money you just took a loan from continue to grow with the S&P500, pay <5% interest on that loan and pay that loan back on your own terms, would that be a solid loan to invest into real estate?

Thomas Rutkowski · Answer

That is not how life insurance works. The difference between the death benefit and the cash value is called the Net Amount at Risk. Its exactly like it sounds. Google that term and you might get a more specific and correct answer.

I'm done here. You obviously have an axe to grind with life insurance. I have hundreds of clients utilizing their policies for real estate investing and they are absolutely building more wealth doing it.

Fortunately, the people following these posts "Get it" because my phone blows up after every exchange like this.

Thomas Rutkowski · Answer

Both statements are false.

The cost of insurance DOES increase each year. But the SAME percentage of the cash value is being spent on it in order to maintain the minimum possible death benefit. In a properly-designed, maximum over-funded policy i.e. the kind you would use for this application, the cost of insurance is less than 0.25% of the cash value. That is hardly going to endanger the policy.

Even in a traditionally-designed policy, the rising cost of insurance is factored into the policy pricing to make sure policies are adequately funded. This is not an IUL issue. Both Whole life and IUL face the exact same costs. They rely on the same mortality tables. They function the same under the hood.

Of course the cash value doesn't get passed on to the beneficiary! Do you even understand how insurance works? The cash value is quite literally the policy owner saving up the death benefit over the life of the insured. It is part of the death benefit. So if the DB is $1,000,000 and the cash value is $100,000, the insurance company is coming up with an additional $900,000 from their risk pools. THAT is where the "cost of insurance" goes: into the risk pools to pay claims. The risk to the insurance company goes down every year (and COI!) as the cash value increases.

Every dime you pay in, and all the growth, can be leveraged by the policy owner or will pass to the beneficiary when the insured dies. Hardly a rip-off.

Thomas Rutkowski · Answer

It doesn't matter if it is an increasing death benefit or level death benefit. The net amount at risk is the difference between the death benefit and the cash value. This is true with either scenario.

More importantly, however, when we are talking about this type of application we are always talking about a maximum over-funded life insurance policy. That should always be an increasing death benefit.

Christopher Penaflor · Answer

It depends if you choose a level or increasing death benefit. With an increasing death benefit, the client's beneficiaries receive the insurance + the cash value. Here is a policy I designed for one of my clients with a $500k death benefit. As you can see, the net death benefit increases as the cash value grows.

Jeffrey Dixon · Answer

You cannot make a loan to yourself from your own IRA.

Chris Seveney · Answer

This is done every day. Of course you need to have a significant amount of capital in order to do this. If you have less than $1M liquid its not worth it based on private banks requirements. Anything less than $1M and what you take out will not really get you very far, and you are just hedging/leveraging your assets which also adds a huge risk to your portfolio.

Thomas Rutkowski · Answer

Policy loan interest rates are MUCH more affordable than any other rates right now (4.5%). You need to remember that the reason your cash value still earns dividends when you take a loan is that it is serving as the collateral for the loan you are taking against the policy.

Interest is the cost of doing business whether the loan is from the insurance company or from a bank. The advantage of The Double Play is that your money is working in 2 places at once.

Thomas Rutkowski · Answer

The fees in an IUL are no different from a whole life. If I ran apples to apples illustrations and laid them side-by-side, there would only be very slight, company-specific differences.

The fact that you can put your money to work in 2 places at once more than makes up for the the fees of a maximum over-funded policy. The policy owner will build more wealth over time than if they use their own money directly. This will likely outperform an LOC against a stock portfolio because of the higher LTV on the policy loan as well.

Dominick Johnson · Answer

Seriously guy? Even a 2 second google search can prove that’s a lie! So your response is to keep lying? Wow

Lane Kawaoka · Answer

I think you are talking about the Security Backed Line of Credit (SBLOC), think of it like a HELOC or real estate mortgage but for your traditional investments. You can own Stocks with a top-tier brokerage, maybe JP Morgan or Vanguard, or even a newer player like M1 Finance. With an SBLOC, you can borrow against a portion of your stock value.

The amount you can borrow depends on how volatile your stocks are. Got Tesla stock? Super volatile, so maybe you'll get a loan for half its value at 2-4% + SOFI interest. But stable stocks like AT&T might give you 60-80% LTV? You'll get a much better loan-to-value ratio.

Your borrowing rates? They're tied to how strong your banking relationship is. The higher your net worth, the better the deals you get. That's why this strategy really shines at the 'Penthouse' level which I talk about in my new book. It's a double or even triple win: you earn from your stocks, and you can reinvest the loan in more stocks, real estate, whatever.

Becoming Your Own Bank?

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