Life Insurance as Financing?
Rental Property Investor · Orlando, FL · Member since 2015 · 131 posts · 62 votes
BP,
I was speaking with a friend of mine who recently began working for a financial group. She mentioned that she had a few clients that had use their overfunded life insurance policy as financing for a deal. Basically, it's a conventional loan with a lender, but they use the policy as collateral.
She wasn't too familiar with the matter and was going to try to dig up some answers. To be fair, she just started and wants me to begin working through her (purchase life insurance).
I wanted to see if anyone on here is familiar with a strategy like this. What are the pros and cons to something like this? Is this even possible?
There is a dividend rate. You have selected to have the dividends be used to purchase paid up additions. That is the best way to do it. Can you send me the name of the carrier by msg?
You are right on track with your thinking. If you do what you state, then you will achieve an infinite ROI because there will not be any of your own money in that deal. You'll have done it with 100% OPM. Remember - Your cash value is still in the life insurance policy earning dividends. You made the down payment with the insurance company's money.
Even better is the fact that the policy loan is non-amortizing. All you should do is pay the 5% interest each year. You can keep your loan principal working without putting additional equity into it via amortization.
Probably a whole life policy. Stay away from them, they are horrible investments. Term life is much cheaper and you can get better returns on the difference in price on whole vs. term in the stock market or real estate.
@Josh Calcanis I have had a few of these pitched to me, basically you borrow against money you put into it. The only people I have ever heard say good things about these are the folks who sell them. I have challenged several to go over figures with me on the forums but none have ever done it.
@Brian Mathews Thanks! Really haven't explored it as an investment option.
@Jerry W. it was the first time I've heard of it and obviously there is a reason. Thanks for the input.
BP,
I was speaking with a friend of mine who recently began working for a financial group. She mentioned that she had a few clients that had use their overfunded life insurance policy as financing for a deal. Basically, it's a conventional loan with a lender, but they use the policy as collateral.
She wasn't too familiar with the matter and was going to try to dig up some answers. To be fair, she just started and wants me to begin working through her (purchase life insurance).
I wanted to see if anyone on here is familiar with a strategy like this. What are the pros and cons to something like this? Is this even possible?
Josh - I would be happy to explain how this works to you. Usually when life insurance pops up in these forums, the life insurance trolls come out of the woodwork, as the previous posts suggest. They scream "buy term and invest the difference!" and then disappear back into their holes until the next time it pops up.
The concept is very simple and it works. If you can put your money into an account that earns 7% (give or take), and you can borrow against it, as if you had a credit line, then anything you do with the loan proceeds in excess of your loan cost will be gravy. You are quite literally putting your money to work in two places at one time. Its a no-brainer.
The biggest problem is that most people dont fully understand how permanent life insurance works. 1. They think you borrow "from" the cash value. If that was the case, they would be right. This wouldn't make sense. But its not the case. Policy loans are loans against the cash value. That is a HUGE difference that is lost on many people.
2. They think it takes forever to build cash value. In a normal life insurance policy, yes, cash value accumulates slowly and steadily. But in an over-funded life insurance policy, I can get as much as 85% of the premium going straight to the cash value. You might see that as a loss, but you would be looking at it all wrong. Since that balance is now your "credit line", you have the ability to get a loan from the insurance company (not your own money). That gives you $1.70 of working assets for every $1.00 of premium you put into the policy.
Here's a recent blog post I wrote on this subject.
https://www.biggerpockets.com/blogs/7595/47651-are...
This absolutely works and there are plenty of people here on BiggerPockets using this strategy. Where else can you get this kind of leverage, asset protection?
Good luck!
@Josh Calcanis I have had a few of these pitched to me, basically you borrow against money you put into it. The only people I have ever heard say good things about these are the folks who sell them. I have challenged several to go over figures with me on the forums but none have ever done it.
I'd be happy to go over the numbers with you. You can start with the numbers I used in my blog post.
https://www.biggerpockets.com/blogs/7595/47651-are...
I've got dozens of clients using this strategy for their real estate investing that would dispute your comment that the people selling them are the only people saying good things about it.
If you can put your money into an account that earns 6-8% interest and you can borrow against it to make other investments, what else do you need to know? That one sentence says it all: You can put your money to work in two places at one time.
Plus the loan interest reduces your taxable income while the cash value grows tax-free! Its more powerful than a self-directed IRA.
I've always been against insurance that you dont "need" but I am a little curious about this. Can you give a ballpark of what kind of premium you would have to pay and for how long before you could borrow $100,000. What's the interest rate you borrow at.
My other thought against this is that you can do the same thing with retirement accounts. Not borrow from them but against them.
@Josh Calcanis When structured correctly this can be a great tool. Please read this complete post as I will eventually answer your inquiry on how to use cash value life insurance to invest in real estate. First, it is important to know many life insurance agents do not know how to properly build a cash value life insurance policy or do know but build the policies to pay them rather than you. Therefore Life Insurance gets a bad name in the marketplace. Lie Insurance is not meant to be a replacement for the stock market and the ROR should not be comparedf. @Brian Mathews That said, this is the first place people compare when they say it is a bad investment.... Yep, life insurance is horrible.. my Whole Life insurance's IRR is 6.15%, but hey the market has returned closer to 9%.. obviously it is a poor choice to buy in Life Insurance. Let's take a look at the data. I encourage everyone to research some thing called the DALBAR. Basically, it measures investors returns when accounting for investor behavior over 10, 15, 20 year periods. The data shows that investors in equities have a ROI of 3.17% during the period of 1990-2010. Inflation over that same period of time was 2.8%. I will let you do the math on the true ROI. In the meantime, many whole life contracts had/have 4% guarantee. Whats-more is that in the good & great years in the market during that 1990-2010 an investor in a non tax qualified account was probably paying taxes on phantom returns from their mutual funds, etc... Hmmm let's add in the additional opportunity cost of the taxes paid out of pocket and subtract that out of the 3.17% return as well. Point made....
Now on to your question. @Thomas Rutkowski was correct on many of the items he wote about, except I believe that he may be using a slightly different type cash value life insurance policy called Indexed Universal Life (IUL). IUL can be used, but I would prefer to use Whole Life Insurance from the likes of one of the big mutual life companies. I would NOT take a loan from the life insurance against the policy, but I would take what is called a (collateralized or secured) cash value line of credit at approx 3.75-4.25% from the bank with the cash values of the life insurance policy as collateral. Again, if my guarantee is 4% on the values in the life policy and when dividends are added I likely get more than 4%. Then, and ask your tax advisor about this one, when structured like this one potentially can deduct the interest when the money is used for your real estate business. @Josh Calcanis I would enjoy speaking with your friend as I do this for my clients when appropriate here in Seattle too.
@Mike Landry a properly structured policy should be blended to maximize cash growth and keep insurance expense to a minimum.
@Jerry W I would be happy to show you how this works mathematically via web-meeting.
(Disclosure: NONE of the above should be considered, legal, tax or investment advice please seek out the counsel of a qualified professional for guidance)
Now on to your question. @Thomas Rutkowski was correct on many of the items he wote about, except I believe that he may be using a slightly different type cash value life insurance policy called Indexed Universal Life (IUL). IUL can be used, but I would prefer to use Whole Life Insurance from the likes of one of the big mutual life companies. I would NOT take a loan from the life insurance against the policy, but I would take what is called a (collateralized or secured) cash value line of credit at approx 3.75-4.25% from the bank with the cash values of the life insurance policy as collateral. Again, if my guarantee is 4% on the values in the life policy and when dividends are added I likely get more than 4%. Then, and ask your tax advisor about this one, when structured like this one potentially can deduct the interest when the money is used for your real estate business. @Josh Calcanis I would enjoy speaking with your friend as I do this for my clients when appropriate here in Seattle too.
Thanks @Justin Holley and @Thomas
Great information.
So what you're borrowing against is what you've paid into the policy NOT the value correct?
I've always been against insurance that you dont "need" but I am a little curious about this. Can you give a ballpark of what kind of premium you would have to pay and for how long before you could borrow $100,000. What's the interest rate you borrow at.
My other thought against this is that you can do the same thing with retirement accounts. Not borrow from them but against them.
All of my policies are designed for maximum cash value and minimum death benefit. If a client has money, say $250,000, they are using for their real estate business, then I would design a policy around 5 annual premiums of $50,000. Roughly 85% of the premium goes straight to Cash value.
So, to answer your question, you would have to make a premium payment of about $120,000 in order to have about $100,000 of cash value on day 1. And you would need to continue funding the policy at that level for 4 more years.
Or, if all you have is $100,000, you could begin to cycle it into premium over 5 years. The challenge is in maintaining liquidity to make your premium payments of $20,000 each year. Does this make sense? In year 1 you would make a $20K premium and invest the combination of cash value and your remaining $80,000. In year 2 you would invest your cash value plus the remaining $60K. and so on. This is complicated, but it is the way that most of my clients build their policies. Everyone keeps their money working and this is my single biggest challenge in promoting this strategy to real estate investors.
You cannot borrow against retirement plans. If you know of a lender that will do this, I'd love to know who it is and how they protect their investment. An IRA can borrow money to leverage a purchase within the IRA, but its not quite as effective because of the low LTV on these loans.
Thanks @Justin Holley and @Thomas
Great information.
So what you're borrowing against is what you've paid into the policy NOT the value correct?
You are borrowing against the cash value, which will be something less than the premium you paid into the policy... depending on how well the policy was designed.
@Thomas Rutkowski So you say if you funded $120K you'd have $100K available to you and some level of life insurance I'll assume. You're losing $20k of your money immediately. And I'm not trying to be a smart ***, I'm curious. Why would you do that? At my current rate of term level insurance of $500K I'd have 23 years of premiums with that $20K difference and not have my money. Why not just take the $120K and invest it? Rather than lose $20K right off the bat? As many suggest on there. You could buy 5 properties valued at $100K with a $20K down payment. Or invest it in the stock market. If you achieved a modest and very achievable 5%, your money would grow to around $200K.
@Thomas Rutkowski So you say if you funded $120K you'd have $100K available to you and some level of life insurance I'll assume. You're losing $20k of your money immediately. And I'm not trying to be a smart ***, I'm curious. Why would you do that? At my current rate of term level insurance of $500K I'd have 23 years of premiums with that $20K difference and not have my money. Why not just take the $120K and invest it? Rather than lose $20K right off the bat? As many suggest on there. You could buy 5 properties valued at $100K with a $20K down payment. Or invest it in the stock market. If you achieved a modest and very achievable 5%, your money would grow to around $200K.
1. Keep in mind that you access the cash value by borrowing against the cash value. So you actually have $200K growing and earning interest. You will make more with that reduced cash value than you would if you invested the full amount. Get out a calculator and run the numbers.
2. Just from a pure retirement income perspective, that 85% reduced "investment" will still generate 2-3 times the income of 100% going into a traditional account. Ever heard of the 4% rule? Google it. Because your cash value is still growing even while you're taking income, dollar for dollar, cash value will generate 2-3 times the income. Tax free. Which is more: 8% of 85 or 4% of 100?
@Thomas Rutkowski So you say if you funded $120K you'd have $100K available to you and some level of life insurance I'll assume. You're losing $20k of your money immediately. And I'm not trying to be a smart ***, I'm curious. Why would you do that? At my current rate of term level insurance of $500K I'd have 23 years of premiums with that $20K difference and not have my money. Why not just take the $120K and invest it? Rather than lose $20K right off the bat? As many suggest on there. You could buy 5 properties valued at $100K with a $20K down payment. Or invest it in the stock market. If you achieved a modest and very achievable 5%, your money would grow to around $200K.
1. Keep in mind that you access the cash value by borrowing against the cash value. So you actually have $200K growing and earning interest. You will make more with that reduced cash value than you would if you invested the full amount. Get out a calculator and run the numbers.
2. Just from a pure retirement income perspective, that 85% reduced "investment" will still generate 2-3 times the income of 100% going into a traditional account. Ever heard of the 4% rule? Google it. Because your cash value is still growing even while you're taking income, dollar for dollar, cash value will generate 2-3 times the income. Tax free. Which is more: 8% of 85 or 4% of 100?
So if I put in $100K, I have $200K growing and earning interest? Somehow I think you missed what I said. If I were to invest $120K I would get a very achievable return of $80000 in 10 years at 5% in the stock market totalling $200K. You spoke of if investing the full $120 you only get $100K of cash value. (85%) I could take the remaining $20K and buy 23 years of term life insurance with $500K of coverage. I spend roughly $60. a month on term life. What are the returns in 10 years through whole life?
@Brian Mathews If you have about 20mins for a quick web-conference in the coming days or week I am happy to show you the math, with no strings attached what so ever. I believe once you see the numbers calculated live, especially taking into account the time value of money, you will understand more clearly. What's great is this technique is simply one of the many tools to potentially have in your REI tool box.
@Brian Mathews If you have about 20mins for a quick web-conference in the coming days or week I am happy to show you the math, with no strings attached what so ever. I believe once you see the numbers calculated live, especially taking into account the time value of money, you will understand more clearly. What's great is this technique is simply one of the many tools to potentially have in your REI tool box.
I must politely decline. My mother who is a retired insurance agent, the guy she worked with for 20 years and the insurance agent in my networking group all have said to never buy whole life as it is a bad product. I obviously know these people very well and trust them implicitly.
So if I put in $100K, I have $200K growing and earning interest? Somehow I think you missed what I said. If I were to invest $120K I would get a very achievable return of $80000 in 10 years at 5% in the stock market totalling $200K. You spoke of if investing the full $120 you only get $100K of cash value. (85%) I could take the remaining $20K and buy 23 years of term life insurance with $500K of coverage. I spend roughly $60. a month on term life. What are the returns in 10 years through whole life?
This makes absolute sense even without a death benefit. I'm not sure what part of this you are not "getting". Leverage allows you to earn a higher rate of return. Yes, your original principal is reduced to 85%, but it is now growing at about a full one-third faster than the original 100%.
Again, break out your own calculator and do the math. Do you understand the Rule of 72? If you divide your earning rate into 72, its the amount of time it takes to double your money. If I have $100 earning 7.2%, it will take 10 years to double to $200. In 30 years, the $100 will double 3 times. $100 => $200, $200 => $400, and $400 to $800.
The cash value leverage will allow me to make about 1/3 higher returns -- because my money is working in two places at one time. There is a tax advantage and an interest rate arbitrage advantage. But just to keep the math simple, lets assume I'm earning 9.5% investing in the same things you do, only I'm doing it with policy loans. My $85 will double every 7.5 years, or 4 times over 30 years: $85 => $170, $170 => $340, $340 => $680, and $680 => $1360.
In my world, I like $1,360 better than $800. A lot better, actually.
Would you rather have a Tesla or a Ferrari? Depends on whether you're going 100 yards or a 1/4 mile.
Hello everyone,
I am a licensed life insurance producer in Oregon and in my opinion, everyone should have an Indexed Universal Life (IUL) policy on themselves. And that holds doubly true for every RE investor. An IUL allows you to earn more money with your money while providing a death benefit!
The pros to this product are huge but just to name a few:
1. You won't lose on your cash value (fund is indexed from around .75% min to around 13% max and follows the major market indexes such as the S&P 500)
2. So long as your cash value and/or monthly payments cover the costs of the insurance and the account expenses (yes there are a few expenses, nothing is free) you are insured for life.
3. The gains in the account grow tax free! The life insurance wrapper allows tax free growth.
4. Distributions that you take from the account are taken TAX FREE. The distributions are LOANS against your cash value. Similar to other products discussed above, since the loans are against your cash value and not actual withdrawals, your policy value continues to earn interest while the Ins Co charges you a small interest rate to loan you money which they use your cash value as collateral. Should you not pay back the loan or die, they will simply take what you owe out of your death benefit when it is paid to your estate or beneficiary.
There are obviously many other rules, restrictions, pros and even a con or two (but I can't think of many) but the pros far outweigh the cons.
I suggest everyone look up and listen to the Joe Fairless Podcast episode: JF322: How to Use Your Life Insurance Policy to Fund Your Deals.
In this episode his guest describes exactly the benefit that we are discussing here. Essentially, if you structure the plan properly and have a substantial amount (or even a smaller amount over time is great and is what I am doing to get started) to contribute to plan, so long as you're insurable, you can open a policy, fund it heavily (but within tax guidelines to ensure tax-free growth and withdrawals), and then LOAN yourself the money to invest into your deals.
Done correctly, you do in fact put your money to work in 2 places at once!
If you're interested in learning more please PM me and I can even run some illustrations for you so that we can see what your investments may be capable of.
One final thing that I have to mention is if this is a route you're considering, you HAVE to keep the policy in force for your entire life because if you don't or if you do cash out the policy, then you WILL receive the tax bill. And that's one tax bill that you never want to see..... This is not a huge deal because as others have mentioned, often just the growth on your investment is more than enough to cover the cost of the policy.
Have a great rest of the weekend!
Bob
I was "invited" by BP to contribute to this thread so, here goes. I have a whole life policy that I took out in 2007. This is from a well established insurance company that you would instantly recognize the name. Since my spouse and I have a high W2 incomes, we are prevented from contributing to a Roth IRA. The policy was sold to me as a work around to this problem. I pay into it for ~25 years, and I can withdraw 40,000 nominal dollars per year for 20 years after i stop contributing. Due to my "advanced" age at the time, the premiums are rather high. To date, I have paid nearly $107,000. When I checked a month ago, I was told the cash value was $93,000. The minimum guarenteed return is 3%. I have no reason to believe it has returned anything better. If I borrow against the cash value, the cost is 5%.
I would love to put that 93k to work in real estate investing so I get the most from this onerous monthly premium. My wife also has the same policy taken out at the same time, and presumably the same cash value available. I have read the posts above several times. I guess the point I get hung up on, is that if I am charged 5% interest to borrow, and I can't deduct this interest like I can on the mortgage interest from my own residence, then the leverage seems less obvious to me. It would just seem it would be detracting from the cash flow of the potential rental property. And if don't pay it back, then it detracts from my potential future retirement. Thanks for any insight.
I was "invited" by BP to contribute to this thread so, here goes. I have a whole life policy that I took out in 2007. This is from a well established insurance company that you would instantly recognize the name. Since my spouse and I have a high W2 incomes, we are prevented from contributing to a Roth IRA. The policy was sold to me as a work around to this problem. I pay into it for ~25 years, and I can withdraw 40,000 nominal dollars per year for 20 years after i stop contributing. Due to my "advanced" age at the time, the premiums are rather high. To date, I have paid nearly $107,000. When I checked a month ago, I was told the cash value was $93,000. The minimum guarenteed return is 3%. I have no reason to believe it has returned anything better. If I borrow against the cash value, the cost is 5%.
I would love to put that 93k to work in real estate investing so I get the most from this onerous monthly premium. My wife also has the same policy taken out at the same time, and presumably the same cash value available. I have read the posts above several times. I guess the point I get hung up on, is that if I am charged 5% interest to borrow, and I can't deduct this interest like I can on the mortgage interest from my own residence, then the leverage seems less obvious to me. It would just seem it would be detracting from the cash flow of the potential rental property. And if don't pay it back, then it detracts from my potential future retirement. Thanks for any insight.
Hi Brian - I've contributed numerous articles and responses to this topic here on BP. I think you are looking at your premium the wrong way. You mention that you cannot contribute to a Roth IRA because of your income. This policy was designed as a retirement plan. Your premiums are buying as much cash value and as little "insurance" as possible. You are essentially complaining about saving a lot of money.
You should really try and find out what your dividend rate is. I think you'd be surprised. Most companies pay much more than the minimum guaranteed rate. Whole life companies are paying 4.5% to 6.7%. An Indexed UL may have been flat for a few years due to the indices it is tracking.
The big difference between your retirement plan and someone with an IRA, is that you can leverage that cash value every day between now and the day you retire. You can put your money to work in two places at one time. Someone who has a self-directed IRA can invest in RE with it, but their money is working in only one place at one time. They can't touch it until they retire.
If you put that money to work between now and the day you retire, and pay off the loans, you will not only have your cash value to support your retirement, but you will also have the additional side-fund that you created with the leveraged cash value.
You cannot deduct the interest on the policy loan. But you can get a commercial loan with a personal guarantee that is secured by an assignment of collateral against the policy. That interest would be deductible.
@Josh Calcanis I have had a few of these pitched to me, basically you borrow against money you put into it. The only people I have ever heard say good things about these are the folks who sell them. I have challenged several to go over figures with me on the forums but none have ever done it.
I've shown the numbers in numerous posts and article here on BP. I'll go over it with you anytime.
Mr Rutkowski: I called the company and was told I don't have a dividend rate- the proceeds instead are used to buy paid up life insurance. The value was initially $500,000 but now the death benefit is $527,000.
Would you mind giving some consideration to the following hypothetical situation? You find a single family property that's listed for $100,000. You believe you can rent it for $1000/month. You have a permanent life insurance policy that has $50,000 cash value accumulated. Would you get a regular mortgage for 80% and then use the life insurance cash value to secure the other 20%? Thanks.
There is a dividend rate. You have selected to have the dividends be used to purchase paid up additions. That is the best way to do it. Can you send me the name of the carrier by msg?
You are right on track with your thinking. If you do what you state, then you will achieve an infinite ROI because there will not be any of your own money in that deal. You'll have done it with 100% OPM. Remember - Your cash value is still in the life insurance policy earning dividends. You made the down payment with the insurance company's money.
Even better is the fact that the policy loan is non-amortizing. All you should do is pay the 5% interest each year. You can keep your loan principal working without putting additional equity into it via amortization.
For purposes of investing in properties, wouldn't it be better to simply get a bank who would utilize your cash value as collateral for your necessary down payment? (I.E. 20%) Then you would pay no interest on the amount pledged and then be able to have the assignment released after the property value grew 20%? You would then continue to earn your tax free returns in the policy, but have the benefit of also earning returns on that money in real estate at the same time.