Do many seasoned investors recommend to tap into your life insurance cash value as a loan to your self to fund a real estate investment? this that a good strategy for someone that has limited liquid cash in the bank account?
What are the pros/cons of this strategy?
Thanks,
Rob
Im not an expert at all but I know as a buy and hold investor the best way to get threw the hard time is to have large cash reserves. I think many people would say that it would have helped them if they would have had more cash on hand. I agree that whole life policies are not the best investment but its a great place for me to build up a large cash reserve that I can access when I need it. Now I understand that its not the best investment but I look at it as a safety net in case I die or the market crashes. I plan to use that cash as a personal loan to purchase properties once I have two years worth of expenses set aside. Im not arguing which is right or wrong just giving my personal opinion
I actually cashed mine right out. I am not a fan of whole or universal life policies anyway so I cashed it out and closed it up. I waz getting just under 5% return ing that vehicle. I put that money into a rehab and hold property. I was able to then pull that money back out when I refinanced with a commercial mortgage. The equity in the property is more than I withdrew from closing my policy and I got the money back out to put towards other projects. If however you have a serious health condition where it is hard to get a term policy I would then recommend to hold on to the whole life policy. All depends on your goals.
In my opinion, NO.
The purpose of the insurance policy is a safety net and protection for those who are beneficiaries.
If the need for money is this great, the investment consideration is far too risky and you are gambling with your future and the future of the benefaciaries. Please consider the original purpose of the insurance and those who it affects.
In my opinion, this is not a wise consideration for any person - seasoned investor or not.
Rob,
The posters here are making some good points to consider, both Pro and Con.
I am currently considering doing just what you are asking about. Our situations might be quite different though.
Mine is this:
So, to me, it is a no brainer. If say you only had 20K cash value and a 2K a year premium on the LI policy it would be a whole different story. If CAN be a great way to go, but a LOT of 'what ifs' to consider. Good Luck,
Dan Dietz
Sorry to show up late on this. I was not around when this was posted.
"Hello @Rob Shah my professional advice on investing would be to secure your money in an Indexed retirement account. The important part is the INDEXED.
This solves many problems with the current options for investing. (ONLY structured by a licensed professional)
1) Only participate in stock market gains, and not in the losses. (Our 25 year average is 8.98% right now)
2) Access to your money for any reason (Investing in deals for this situation)
*Note: Structured properly, you actually still earn interest on money you take out to use on your deals. (About 3-5%) * Loans are at 5% charge, from the 25 yr average of 8.98% leaves you GAINING 3.98% on the money you "loaned" out to do your deal. After you get your profits back, pay back into your account and grow it with the profit (keep some back for yourself too.) Structured properly by a professional, and the loan comes out and has to time line to be paid back. WAY better than hard money or any other loan out there.
3) While investing, you are also building a secure, tax free retirement plan for later on. Thus, your REI strategy is free to be more of a hobby rather than trying to secure enough rentals to live on in your golden years.
There are many more ways to use an Indexed retirement plan for investing, but these are a few highlights to show you that there are SAFE options out there.
IRA and 401k, etc, are all exposed to market volatility/losses, and have penalties if you do not take the money out at a certain age or the correct way.
As a licensed retirement specialist, I strongly recommend investors put their money where it is contractually guaranteed to NEVER loose. I have devoted my time, efforts, and career to providing this exact thing to individuals, groups, businesses, but specifically for Real Estate investors. We investors work really hard for our money, why would we want to put it somewhere that it would spend it's entire time fighting to dig back out of the next market crash?"
cash value life insurance policy is NOT a good option for most people. Why did you get the life insurance in the first place? Probably to protect (financially) your wife and children should you die prematurely. Next question is: how long do you need life insurance for? While you have people depending on you financially. So this need is temporary. Therefore you will be much better off by buying the cheapest term life insurance policy and investing the difference in income producing assets such as real estate that has tendency of going up in value over time. By doing so you will save a lot of $$ on junk fees and commissions to the life insurance guy who sold you cash value life insurance policy.
Now, if you have no discipline of saving and investing, and the only way you can do it through cash value life insurance policy where you have 'forced" savings component, then this type of policy might be OK for you (but then you would not be hear on the forum talking about investing).
So do you research, don't just blindly believe what insurance salesman tells you, you will find that most consumer advocates will agree that term policy will be the best way to protect your family financially.
Let me also add, there might be some other estate planning benefits of the cash value policy, that this would apply once you have a net worth of $3MM or more. Be wise with your money and don't waste it.
Hope this helps.
let me disagree with you about using Index Universal Life to invest for retirement. While your number look good on paper, what are the hidden costs and fees of those types of policies?
I just don't like the idea of giving control of my retirement dollars that I work very hard for to institutions to manage. No one will care more about my retirement than me. That is why I use self-directed retirement account where I am the only one who controls my investments. While I have small portion of my portfolio in the traditional stock market for better diversification, investing through IUL is bad idea.
I know that you have been trained differently and will disagree with my opinion, but over the last 14 years of financial planning and investment experience, I learned a few things. And I am doing the same thing that I recommend to my clients.
Take your money out of that ridiculous cash value Whole life policy, it's overpriced, high fees and not much in returns after expenses. Get a term life policy if you have a family and need to replace your income in case you were to pass, I mean that is what it's for. My wife is getting her's tonight, a 20 year term @ 500k for $20 a month. Whole life could never come that close. Use the excess money you save to save up for investing in real estate or retirement.
A whole life policy is an asset. You can borrow against any asset to invest in another asset. You just have to bear in mind that what you're doing is borrowing. Meaning - if you're going to pay that money back to your life policy, factor it into your calculations as a loan instead of cash. It might change your deal analysis.
One of the great values of real estate investment is that, for the vast majority of people on this forum, it is a "close-in" investment over which you can exercise a great deal of control. Even if I buy a rental in Kalamazoo, I can manage my property manager, be proactive about issues, and keep that property generating revenue with my own muscle.
To me, the value represented by whole and universal life insurance is less applicable to people who like close-in investments than it is to people who like to put money somewhere and let it work. For totally hands-off investors who have low risk tolerance, whole and universal life options are great.
But I look at my life in terms of what I'm going to build. At this point, building requires debt. I need to keep earning money to meet those obligations; if I die tomorrow there needs to be cash to meet my obligations and to send my kids to school; term life makes sense.
Beyond the present, I have a plan for retirement that involves building assets one by one, taking care of those assets, and generating income from them. (Asset value is, importantly, more responsive to inflation than cash value.) I believe that people who share that viewpoint or intent should think very carefully about how whole or universal life would fit into their portfolio.
I should probably mention, since I'm an insurance agent, that I looked at the commission these policies pay and the growth against historical inflation, and I couldn't bring myself to sell them...or even to maintain a life insurance license. So this is a personal, and not professional, point of view.
Just to throw one more little tidbit to what I wrote above........ If you have kids approaching college age PAY ATTENTION!
When applying for Financial Aid, Parental Assets are looked at and factored in, along with income, and quite heavily. Almost every asset you might have; stocks, bonds, property, business, etc... are counted EXCEPT FOR CASH VALUE OF LIFE INSURANCE, and Retirement Accounts in most cases.
When my oldest was about 16, my wife was Gifted a large lump by a relative that was still living but elderly, like in the 100K+ range. Nice to get, but VERY bad for Financial Aid, and my wife did not want to 'use it up' in case the relative might be in a situation to need some help in their remaining years.
When I studied up on the college FA, I came across the info on Cash Value LI, and am glad I did. We stuck the whole lump into my policy, got 800K in coverage, and AFTER all cost still got a 7% return (cds were 1.5 - 2% during this time).
IF I had not done that, it would have made a difference of AT LEAST 50K in Financial Aid for 2 kids over 4 years. So in reality, my returns were MUCH higher than just the stated rate.
Just an FYI of one of the side benefits to Cash Value Life Insurance.
Dan Dietz
Here is how ridiculous the claims of the life insurance agents who promote the cash value as an investment. It is not an asset but rather a liability! Here is an example.
I just had a friend approach me couple weeks ago asking to help his father. He had a cash value life insurance policy for the last 10 years, he paid almost $50K into it, and guess what his cash value is now. Just shy of $40K! What is the return on investment? You don't need to be a rocket scientist to figure this out! It's negative!!
He asked me to help him invest the money (he cashed in on the polity). I put him in touch with one of my contacts with whom I dealt with and invested personally, and he invested in a note secured by real estate, getting 10% annual interest. Getting $300+ every single month. How do you like this "financial makeover"??
Dmitriy,
I guess it all depends on the policy etc.... I put about 150K in, and AFTER providing about 800K in Insurance (paid internally from the returns) it has grown to about 195K. So not outstanding, but around 5.5%+ on average, AND I can borrow on if, it helps when qualifying for financial aid for college Saving of at least 50K, and if I drop dead today, my family will get 800K. And, this is a guaranteed rate also. Stocks MIGHT be able to do that, but statistics would say probably not.
I think the thing we all need to remember is that every situation is different, and every product is different.so we all need to look at it on an individual basis.
Dan Dietz
This solves many problems with the current options for investing. (ONLY structured by a licensed professional)
1) Only participate in stock market gains, and not in the losses. (Our 25 year average is 8.98% right now)
...
As a licensed retirement specialist, I strongly recommend investors put their money where it is contractually guaranteed to NEVER loose. I have devoted my time, efforts, and career to providing this exact thing to individuals, groups, businesses, but specifically for Real Estate investors. We investors work really hard for our money, why would we want to put it somewhere that it would spend it's entire time fighting to dig back out of the next market crash?"
From what I know an INDEX can go both up and DOWN. Ratho, from your earlier post apparently you believe otherwise. And then when you put the word "guaranteed" in there, when the future is unknown ...
Great question Steve. This is an amazing area that not too many investors know about. That is why I come here specifically to help out and answer these questions. The point of indexing is that you can invest, without having to be involved in the market. If you look at my bio, and follow my website link, you will see a short four minute video that will explain it more in depth.
The reason I can say guaranteed with such confidence, is that the company I deal with contractually guarantees that is the stock market goes down your account gets locked in and does not loose. That means you have it in legal writing that your account will never lose any money when the stock market goes down (in fact they guarantee 0.25% as a floor so you are still earning more than you could letting it sit in a savings account.) When the stock market goes up you start out at that point and go up with it. I know society yrains us that to gain anything you have to risk loss, but that is not true. By the company using an index strategy they are able to lock in gains on the market gains, and avoid losses when the stock market is down. They use a strategy of stock options. If you know anything about stock options, it gives them the option to buy or not buy that share. Thus they are able to gain with the gains , and avoid any losses. Any losses that may occur, are absorbed by the insurance company.
I also have to point out that to say "life insurance" is a very broad term. There are so many different versions and types that to simply say "life insurance is not a good investment", is too general of a statement.
It also depends on which insurance companies you deal with. I will admit that there are many agents out there just trying to make some money off of people and not selling them the right plans, or structuring their plans correctly for their clients. If you find an agent that you can trust, and is educated properly to structure your plan, then you will see sucess. That is why ideal specifically with IUL.
if Whole life is such a good investment then why are the fees 3% and worse. I can withdrawal my principle investments tax free if I wanted to touch my roths. Plus my annual fees on my Roth are .05% plus in u dthe past 5 years they have a ROI of 26%. Also with cash value what do you think they do with all of that money should you die. They keep it and your family only gets the face value of the policy. Whole life is a bad deal anyway you look at I.
@daniel dietz
You commented on how having a policy with whole life helps getting financial aid. How is that. I don't get the logic.
I know of a real estate investor in California that set up an investment program using the vehicle that @Ratho R. spoke about. He put in 250k a year into the plan for four years - totaling 1 million. He can access this million at any time as a tax free loan and use the funds to buy investments then repay the loan. All the while his cash (a million bucks) is growing tax free at a higher rate then his loan repayment rate is. I don't know the exact details, but I would imagine this could work for smaller amounts as well.
I think retirement plans can be one of many vehicles used in real estate. The main thing is to do something!
Life insurance assets are not counted as an asset when applying for financial aid so since its not counted it allows your total assets to seem lower and potentially could allow you to qualify for financial aid.
The advantages of EIUL or equity indexed universal life are that the components of 1) admin costs, 2) cost of actual life insurance, and the cash value are all segregated so you can see how they are growing and what you'll need to earn in order to pay for your cost of life & admin each year. As opposed with whole life these components are all coupled together and not "transparent," on your statements. The formula for your guaranteed cash values on whole vs EIUL are proprietary and dependent upon assumed variables.
Here are some great advantages from permanent life policy that is structured correctly:
- building cash value in the policy in the policy can grow from the floor of 0-1% up to 12% average based on S&P 500 or other index in the case of EIUL.
- can be a place to store liquid capital waiting for your next real estate deal
- interest cost when taking a policy loan accrues passively with payment terms at your discretion. This is similar to neg amortization side account within the policy against the cash value. There are no required payments and in the event of death the net cash value that goes to the beneficiary gets subtracted from the loan and the accrued interest balance.
- Death Benefit: policy in place provides an instant estate to heirs potentially income tax free as long as the policy is in force at the time of death
- a store of liquid funds via "cash value," which can be borrowed from with out bank guidelines for any reason within 3-5 business days up to 90-95% of the current cash value however Its probably not recommended to borrow up to that high because you'd probably want the returns on your cash value to be "enough," to cover atleast the admin and cost of life insurance aspects of the policy so that the policy is self sustaining and kept in force. Otherwise if you borrow too much or withdraw too much the earnings on the remaining cash value may not be enough to cover the "costs," which then causes the cash value to decrease because costs exceed earnings till the cash value is completely drained and the policy may lapse (cancel/expire). This expiration could cause all the outstanding loans within the policy to be taxable.
- asset protection from creditors in some states
- borrowing money from the policy does not show up on your credit report or affect your FICO's
- Privacy since the life policy does not show up tax returns and financial statements, unless if you claim it
- Provide liquidity outside of qualified plans like roth IRA, IRA, 401k, 403b, defined benefits etc which have high restrictions on access to the money, potential withdrawal fee's, federal and state income taxes, age requirements, req min distributions potenially, limited access to funds (lesser of 50% of 50k on 401k's), guidelines to adhere to, and more
I think qualified plans are a good part of the overall financial plan and can be used to great advantage for RE investing along with correctly structured life insurance to provide adequate liquidity since most real estate is not very liquid and credit is not always available to obtain the access to capital that you may need (tailored to RE investor audience) especially in an emergency when your credit tanks or borrowing guidelines are constantly changing.
Not all life policies are created equal and there are many different types of life policies from Variable universal life, whole, participating whole life, indexed universal life, straight 20 whole life, survivor joint life policies, term life policies, and more.
Marcus,
I am not sure if you have had college aged kids go through the FA process, but I will try to explain my thinking. Also, schools vary on how they do things, but for Federal and State Aid the formulas are pretty set.
This is going to long, but hopefully it might help a few folks out there.
I forget the exact formulas, but essentially when a student applies, both their own income and assets are counted (NEVER save in the students name above the exempted amounts) as well as their parents income and assets. The students are counted at a much higher rate than the parents. The parents rate, in my case, was about 6% of assets and 33% of income. From all this info a families EFC, Expected Family Contribution is calculated which is a 'guideline' as to what they 'should' be able to afford towards college expenses. The loans and grants they are eligible for are largely based of the EFC. For example if a school costs 40K, and the EFC is 15K, there is what is called 'unmet need' - the amount of college cost - EFC - 25K worth of loan or grants they are eligible for. Many grants are also based on the family's AGI off of there Federal Tax Return.
The gift my wife got was about 150K. Let's say we did NOT put this into an Insurance Contract and instead just a a 'stock market index ETF' or similar, and assume a 10% return. This means it might have earned 15K per year before taxes. This would change our EFC by about $7500 per year, going from about 5K to 12.5K. If in an Insurance Contract, it is NOT counted toward the EFC, the same way that Retirement Accounts are not counted. It also would also have raised our income enough that our kids would not have been eligible for the Pell Grant program - which they only qualified for about 1K in Pell Grants each, but it had HUGE affects otherwise too, which I'll get to in a minute.
So, what meant in terms of actual FA that my kids got is several fold; 1)With the lower EFC, they were able to get 'deferred Staford Loans' meaning no interest while in school saving about 2K each over 4 years 2) They were able to get a small amount of Pell Grant each year for 4K each over 4 years 3) Both of my kids schools also gave Scholarships somewhat base on the amount of 'unmet need' along with GPA. They averaged about 3K per year each on that. If we had had the higher 12.5K EFC they would not be eligible for that 4) At one kids school, since she was "Pell Eligible" (meaning just qualified, whether she used it or not) and in a certain major, along with our income being in the bottom quarter of students (<80K) she was eligible for School Grants of about 15K over the 4 years. If we had the higher EFC, she would have not been eligible.
So, that adds up to 51K in Financial Aid they would NOT have got with the higher EFC we would have had if we had not invested in the Life Insurance instead of keeping it in a taxable type of product.
Of course, everyone's situation is different. In my case, this is what happened. If someone had an income of say 300K and countable assets of 500K, a 150K gift would NOT make a difference as there EFC is so high they would likley be expected to pay for the entire cost of almost any school out there EITHER way.
Hope that helps.
Dan Dietz
So @Ratho R. , in the video link you provided, the time interval for the investment analysis was chosen to make this "indexed product" look better. Why not have the investment interval be exactly the year where the S&P skyrocketed? Oh, I know why - because the "cap" on that "index" doesn't allow for the account to gain as much as the S&P did, so it underperforms the S&P index it supposedly was intended to mimic.
Im not an expert at all but I know as a buy and hold investor the best way to get threw the hard time is to have large cash reserves. I think many people would say that it would have helped them if they would have had more cash on hand. I agree that whole life policies are not the best investment but its a great place for me to build up a large cash reserve that I can access when I need it. Now I understand that its not the best investment but I look at it as a safety net in case I die or the market crashes. I plan to use that cash as a personal loan to purchase properties once I have two years worth of expenses set aside. Im not arguing which is right or wrong just giving my personal opinion
I agree with @Darren Flater on his point. I have a friend that flipped homes and had some buy and holds before and during the real estate crash. It was the cash value in his life insurance policies that kept him afloat for the 2-3 years during the worst of it. It's not sexy, it's not huge returns, but it's a great way to get tax free money when you need it. Both sides of the fence are right in different ways - I just know what my friend went through and what other guys went through that were 100% in real estate. My friend that had the cash in the policy he could borrow against fared much better.