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
@Steve Babiak I am not sure how you are seeing this as some sort of a staged video. It is simply showing a 10 year period. The MAIN thing in all of this, however you invest, is to use "Indexed" vehicles to protect you from losses. That is the ONLY way your account "averages" and percentages will be effective. The point of the video is to show that if an account looses, say 50%, you then have to GAIN 100% just to get back to ZERO!. Many people look at the average percentages over 10-20-25 years or however long. What is usually overlooked is losses create a new "starting point" so to speak. If I loose 50% of $100k, now I have $50k. Then, if the stocks go up 50%, I only gain 50% of that $50k, not the original $100k. So now I would only be at $75k even though the market essentially went down 50% and back up 50%. I am not claiming IUL is a miracle cure for money...if it was everyone would drop every other investment and we would not be here having this conversation. We have a 15.4% cap, with a guaranteed floor of 0.25%. This video was to simply show you an example of the last 10 years (sometimes called the lost decade due to continual losses in the markets) and how being indexed, and not loosing when the stock drop, over time, will work out WAY better in the end. They point this out in the video, so I am sorry if it comes across as some sort of smoke and mirrors. I devote my career to helping and educating people, not scamming them and ripping them off. I know those agents are out there doing that, but I am not one of them...by a LONG shot. haha
My appologies @Steve Babiak I got ahead of myself and missed the most simple answer to your question. Your question, as to why they chose this period of time...if you notice the posting date of the video (2011), is that it was the most recent point of time. Once again, no scam or smoke and mirrors. They actually took the most recent decade (at that time) to show an example of how indexing works.
@Ratho R. - But if you change that time window, to be not a decade but a more recent year or two ...
Oh I see what you mean. @Steve Babiak that may look nice on a short few years yes. What if I were to show you the returns from 2004-2007? Then you would be fired up and ready to invest...only to loose some 30%+ that next year! What we are looking at is a long term investment and retirement strategy that allows you to use it to invest in Real Estate as well. It is difficult to use a short term investing mind set when looking at a long term investment vehicle. If I were to tell you that for a few amazing years, let's say 5 of these 10, that you would gain more than the cap we are talking about, say 25% for even numbers, that would sound pretty great. However, that does not give you the "big picture" as the other 5 years of losses would drastically alter those gains. As a licensed agent in my state, I am legally obligated (as well as personal morals) to show my clients the best options for their situations. This can only be done, when my clients are looking for their long term (15-20 years or so) by showing them as much of a long term past that we have seen. Thus we use 25 year average to get a more realistic average.
Perhaps I am misreading your statement, but it looks like we are talking about a long term investment vehicle (Indexed strategies) and wanting to only look at a few recent good years. That would be impossible to give my clients an accurate picture of what they can expect for ROI. The company I work with shows a 25 year average and at this point we are showing an 8.98% average. We also calculate for all costs, management, fees, and whatever else people accuse agents of "hiding" as well as years of gains that we may cap out at, but also years where other investments are loosing, we simply lock in our floor of 0.25% and ride it out. As this video shows, the second the market starts to gain, our accounts start out at the floor and go up. NEVER loosing anything (Indexing) is the only way to get a true average over a long period of time. Yes we get capped out at 15.4%. However, I would rather get that when the market moves some 20-30%, in trade for knowing that any time the market starts to go down, that I will not loose anything I just gained. That is way more stable and much less stressful.
Basically, we just need to keep in mind that using longer term strategies for investing still needs to be structured with the bigger and longer term picture in mind. What we set up for people is a retirement plan, that by itself will secure their retirement ages, while being able to have access to these funds for REI. Thus you can make money from your money and cycle it back into your policy and keep growing both your retirement plan as well as your RE portfolio.
Cash value accumulation of whole life insurance is a great way to fund real estate.
But you must buy from a mutual life insurance company. That means the company is owned by policyowners and all profits go to policyowners. Non-mutual whole life policies make no sense. Why should profits from the premiums go to anyone except policy owners? I think a lot of the bad rap comes from these bad policies where premium profits do not go to policy owners.
My mutual life insurance company pays dividend of 6-7%. That is after "mortality costs" though, which means after you fund the risk. You can borrow using the cash value as collateral at 5%. So can essentially purchase the whole life policy on interest while you use the money for investments that gain you a lot more and you get free money with the insurance policy and you get not only protection against premature death, but you get disability protection.
If people are happy with stock market returns and risk, then whole life paying less percentage doesn't excite them. But this is a real estate forum, not a stock market forum.
I know someone in their 40's with early onset Parkinsons. I know at lady in her 30's who got osteo-arthritis, I know a person in their late 40's who had a stroke. These people are uninsurable. If they had a whole life policy and became disabled the company will pay their whole life premiums. That is not full disability insurance, but would still be very helpful.
I also know a retiring real estate investor. He has about 2.5 million in real estate properties which he is trying to divest. He bought a long term care / whole life policy for 1 million and pays $3k-$4k a month. He is very happy with that. If anything happens where he needs long term care he will be taken care of.
Whole life with long term care insurance riders are a great way to protect your other assets. You pay from your death benefit in case of disability and then the company contributes an amount equal to your death benefit. So $100k of cash can purchase a $150k death benefit with another $150k of company contributed long term care pool.
Cash value accumulation of whole life insurance is a great way to fund real estate.
But you must buy from a mutual life insurance company. That means the company is owned by policyowners and all profits go to policyowners. Non-mutual whole life policies make no sense. Why should profits from the premiums go to anyone except policy owners? I think a lot of the bad rap comes from these bad policies where premium profits do not go to policy owners.
My mutual life insurance company pays dividend of 6-7%. That is after "mortality costs" though, which means after you fund the risk. You can borrow using the cash value as collateral at 5%. So can essentially purchase the whole life policy on interest while you use the money for investments that gain you a lot more and you get free money with the insurance policy and you get not only protection against premature death, but you get disability protection.
If people are happy with stock market returns and risk, then whole life paying less percentage doesn't excite them. But this is a real estate forum, not a stock market forum.
I know someone in their 40's with early onset Parkinsons. I know at lady in her 30's who got osteo-arthritis, I know a person in their late 40's who had a stroke. These people are uninsurable. If they had a whole life policy and became disabled the company will pay their whole life premiums. That is not full disability insurance, but would still be very helpful.
I also know a retiring real estate investor. He has about 2.5 million in real estate properties which he is trying to divest. He bought a long term care / whole life policy for 1 million and pays $3k-$4k a month. He is very happy with that. If anything happens where he needs long term care he will be taken care of.
Whole life with long term care insurance riders are a great way to protect your other assets. You pay from your death benefit in case of disability and then the company contributes an amount equal to your death benefit. So $100k of cash can purchase a $150k death benefit with another $150k of company contributed long term care pool.
I agree that leveraging the cash value of permanent life insurance policies is a great way to invest in real estate. The investor can literally put their money to work in two places at one time. However, I take issue with the statement that the policy needs to be from a Mutual company.
The only thing that is necessary for this investing strategy is to have a "permanent" life insurance policy: Whole Life or Universal. Whether the company is mutual or not has no bearing whatsoever on the ability to leverage the cash value.
https://www.biggerpockets.com/blogs/7595/49878-are...
@Thomas Rutkowski We spoke probably a year ago when I was looking for options for my friend and his medical malpractice settlement. Don't know if you remember.
Thanks for the information. I don't know much about indexed universal life. When I purchased a whole life policy I wanted something separate from the stock market but I do know many who advocate for indexed universal life. It is not something I researched.
My point about mutual companies is that policy holders should participate fully in profits so their cash value and death benefits increase. I think a lot of the bad reputation of whole life policies comes from bad policies from non-mutual companies.
For indexed universal it is different as they are not participating policies and you are right it wouldn't necessarily matter on the company structure since the performance is not tied to the company as much, but rather to the index (and management of the index derivatives).
I do remember. Thanks for the reminder. At the end of the day, I like Mass Mutual, because they do have one of the highest dividends in the industry, but there are plenty of non-mutual companies that pay better than mutual companies. You're reciting the marketing pitch of the mutual company agents. I haven't seen any stats that actually prove its true.
Negatives of IULs...
Accounts can go negative regardless of what the agent tells you. The index may provide protection from negative returns in the index you choose, but IULs, as with all ULs, are essentially based on 1 year term policies so the costs go up every year. If you hit the floor, even a .25% floor, and your internal expenses are higher than the small guarantee, you will see a loss in your cash values. The company also sets the floors, the caps and participation rates in the index's you choose so they contractually can change this as you go. They also have the contractual ability to increase the internal costs of the policy which can cause all sorts of issues down the road. If you don't over fund these policies, there is a good chance in later years for an unintentional lapse. When working with an agent, have them run conservative return assumptions too. Don't let them show you the cap return year after year. Also, have them run with the assumption you take a distribution for said investment.
Also, as others have posted, try not to use an existing policy if it's purpose was for your family. If this is the case, I'd purchase a separate policy to dedicate to either your family or for the cash value growth for your future real estate investment.