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.
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.
If you can find a lender willing to do that, that would be the optimal situation. I'm not a lender, but I suspect that the lender ponying up the 80% would like to know that you have some skin in the game. That's why they want to see that the funds used for the down payment are seasoned... to make sure you didn't borrow it from a relative.
This is the rare situation where an actual policy loan is the better way.
For functions of purchasing residential or commercial properties, would not it be much better to just get a bank who would use your money worth as security for your needed deposit? (I.E. 20%) Then you would pay no interest on the quantity vowed and after that have the ability to have the project launched after the residential or commercial property worth grew 20%? You would then continue to make your tax totally free returns in the policy, however have the advantage of likewise making returns on that cash in realty at the very same time.
@Jerry W. Hi Jerry, would you mind explaining further? I’m considering buying an IUL, the advantages do seem to be pretty good. But I’m trying to educate myself more.
@Karina Ruiz, I have not dealt with this in years. Many years ago I tried to get a guy to post in the thread the exact numbers for a named insurance company that I could call and verify the numbers with. He kept offering to do it offline, but never online, so I called him out on it. As I understand it the benefit is based mostly on the fact that the over funded life insurance policy will earn you like 7% interest and the life insurance company or a bank will loan you money at 2 or 3% interest to invest that money. Why would a life insurance company pay you 7% interest on 85% of your fund and then loan the money back to you at 3%. I just don't see them doing it. Why would they pay you 4% more in interest on your money while they loan it back at a lower rate? It does not seem logical. I have not done any research in the last few years to test out their claims. If it seems too good to be true it usually is.
@Josh Calcanis
The infinite banking strategy uses an overfunded whole life policy specifically designed with something called paid up additions.
I would say this strategy makes sense for maybe 1 in 5 serious investors. It’s more of a long term wealth building strategy than it is an accelerator for investing in something like real estate.
Many will focus on the CONS of a whole life policy not knowing there is a big difference between the “retail” whole life policies sold to the majority of the population versus the investment grade versions which are designed with a lower death benefit in order to allow for much higher overfunding contributions on an annual basis than a typical whole life policy. The break even point on a well designed policy with reduced fees is about 3 - 4 years. After that time period, the long term wealth building payoffs of owning the policy begin.
Some of the PROS of these specifically designed policies are:
1.) they grow tax free at a guaranteed 4% interest rate plus typically another 1% - 2% annual dividend, also tax free growth. If you think about it, 5% - 6% tax free growth may be equivalent to an 8% - 10% gross return in the stock market...but then you have expense ratios, advisory fees and capital gains taxes taken off the top bringing your net returns much lower.
2.) The interest and dividend growth in these life policies are not correlated with the stock market or real estate market. These policies only increase on an annual basis. No downside. They cannot lose money unless you take out a policy loan, lose that money and never pay back the policy loan.
3.) The policy loans do not have a payback period. You get to set the terms on the payback. You can actually let the death benefit payoff the policy loan if you choose.
4.) These policies (and cash value inside them) are protected from creditors.
5.) The policies are private contracts, so the policy loans (typically used to invest in higher yielding assets) do not show up on your credit report.
6.) The life insurance companies to setup these policies with are the ones with the highest AM Best and BBB ratings. These highly rated companies have been around for 100+ years and some have been around since the Civil War days. The most impressive part is that these life insurance companies have paid annual dividends consistently since inception, through the Great Depression, World Wars, 1970’s stagflation, Great Recession, and now the pandemic. These life companies have much greater financial strength and history than the big banks. There were no bail outs requested by the life companies in the 2008-2010 period...
I could go on further, but I’ll stop there. And no, I am not a life insurance salesman. I just happen to be educated on the topic.
Finally to your last question, I have not heard of any big banks allow you to use your whole life cash value as collateral for a loan, but there are some credit unions and community banks that do. Check around locally if you have interest going down this path.
@Jerry W.
See my post above.
I think you were misled on some of those numbers.
@Karina Ruiz, I have not dealt with this in years. Many years ago I tried to get a guy to post in the thread the exact numbers for a named insurance company that I could call and verify the numbers with. He kept offering to do it offline, but never online, so I called him out on it. As I understand it the benefit is based mostly on the fact that the over funded life insurance policy will earn you like 7% interest and the life insurance company or a bank will loan you money at 2 or 3% interest to invest that money. Why would a life insurance company pay you 7% interest on 85% of your fund and then loan the money back to you at 3%. I just don't see them doing it. Why would they pay you 4% more in interest on your money while they loan it back at a lower rate? It does not seem logical. I have not done any research in the last few years to test out their claims. If it seems too good to be true it usually is.
Whole Life will get you a return in the range of 4% to 6%. Index Universal Life will get an average return of 5% to 8% but with more volatility (some years will be 0%, while some other may be up to the cap that is around 9% depending on the insurance company and the indexing method chosen).
When you get a loan out of the policy, the whole amount in your policy continues to grow as you never withdraw money from it, but instead used it as a collateral for a loan from a bank or the life insurance company. Usually a bank loan will be cheaper, but you will have to repay it. A policy loan rate may be higher but you don't have to repay it back nor pay the interest if you don't want to, as it will be payed back from the death benefit when you eventually pass away. With an IUL, some years you will have positive arbitrage with your loan, some year it will be negative depending on your indexing return. You can also get a fixed rate loan that will be at the same rate than your crediting rate, basically making it a zero fee loan, but you are also missing on potential growth.
@Karina Ruiz, I have not dealt with this in years. Many years ago I tried to get a guy to post in the thread the exact numbers for a named insurance company that I could call and verify the numbers with. He kept offering to do it offline, but never online, so I called him out on it. As I understand it the benefit is based mostly on the fact that the over funded life insurance policy will earn you like 7% interest and the life insurance company or a bank will loan you money at 2 or 3% interest to invest that money. Why would a life insurance company pay you 7% interest on 85% of your fund and then loan the money back to you at 3%. I just don't see them doing it. Why would they pay you 4% more in interest on your money while they loan it back at a lower rate? It does not seem logical. I have not done any research in the last few years to test out their claims. If it seems too good to be true it usually is.
Whole Life will get you a return in the range of 4% to 6%. Index Universal Life will get an average return of 5% to 8% but with more volatility (some years will be 0%, while some other may be up to the cap that is around 9% depending on the insurance company and the indexing method chosen).
When you get a loan out of the policy, the whole amount in your policy continues to grow as you never withdraw money from it, but instead used it as a collateral for a loan from a bank or the life insurance company. Usually a bank loan will be cheaper, but you will have to repay it. A policy loan rate may be higher but you don't have to repay it back nor pay the interest if you don't want to, as it will be payed back from the death benefit when you eventually pass away. With an IUL, some years you will have positive arbitrage with your loan, some year it will be negative depending on your indexing return. You can also get a fixed rate loan that will be at the same rate than your crediting rate, basically making it a zero fee loan, but you are also missing on potential growth.
Just to be clear, policy loans are not interest-free. If you choose not to repay a policy loan, the insurance company is loaning you the money to pay the interest and then tacking it on to your loan balance. The insurance company is willing to do this because they know that the collateral securing the loan (the cash value) is also growing at the same time. The main thing to be aware of when you choose not to repay a policy loan is that the loan balance is growing at a compounding rate... but its always offset by the cash value collateral that is also growing at a compounding rate. As long as the rates are at least equal, this can go on forever. The loan will eventually be satisfied from the death benefit proceeds.