Using Life Insurance and SDIRA for Real Estate Investing

Liberty Hill, TX · Member since 2016 · 85 posts · 96 votes

Hello BP community,

I am exploring all of my options for investment capital and before I consider banks, private and hard money lenders, I wanted to get some ideas or suggestions from other investors who have either used the cash value of their life insurance policy or a SDIRA to grow your portfolio. I currently have a $500k term policy that can be converted into Universal Whole Life and also significant assets in a ROTH, Rollover IRA and 401k from my last job.

Also, does anybody know the guidelines for a non-recourse loan from the SDIRA?

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Allen Tyndall

Wilmington, NC · Member since 2017 · 14 posts · 19 votes

Ramon, the last reply here is a little off. Here's my take: Yes a self directed IRA is a great bet if you have a substantial amount of capital there. I almost exclusively work with real estate folks with strategic financial planning and most people use either cash, IRA. or cash value from an insurance policy. When structured properly (overfunding), a non-variable universal life or permanent life insurance policy can be your best friend. For one, billionaires buy life insurance, so the notion that you won't need it one day is simply not true. Anyone with a basic understanding of the tax code and probate would understand that. Second, for real estate investors, especially those who flip, need constant capital. There's risk with lots of cash. It's not creditor protected, there's no yield, and you likely will carry more than the FDIC caps at banks. This is not a good strategy if the advisor does not structure the policy to build a lot of cash from day 1. Walk away if you don't see that. I'm happy to provide examples of what I mean. Life insurance will provide the following: 1) permanent death benefit 2) protection from creditors 3) non-taxable yield of 5%+ (with the right company), which is the equivalent of 7.5-8% taxable. 4)leverage capability (arbitrage). If you're earning 5% on your cash value, get a collateral assignment to a bank and secure your cash value to a credit line. If you have 250k of cash, they'll extend you a credit line instantly. Likely, it will be at 3% or so, which means you use their money at 3% while your policy earns 5% and you'll go make 25% with the borrowed money on a flip. 5) guarantees to never lose money (there's reserve requirements to back your accumulated money) Happy to explain this more privately... there's lots of details there. It's just math and logic. I can show you how they work together. -Allen

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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
@Ramon Cuevas
If you have loved ones depending on you financially you should keep term life insurance until you build enough assets and your need for life insurance is eliminated. Just make sure that it is level term, meaning that you have guaranteed premium (no increase) for guaranteed coverage for 15, 20, or 30 years, or however long you need it. Converting your term policy to some type of cash value would be poor financial choice, your premiums could easily increase 10-fold for the same coverage.
You can use your Roth and Traditional IRA (and 401k) to setup and moved funds into self-directed IRA, which would give you the freedom to invest into any investment opportunity.
You can use leverage to buy investment real estate in your IRA, but must use non-recourse financing. You typically will need 30-50% down payment and about 10% reserves. As long as the property meets lender's guideline it is relatively easy to get one of those loans. Here is a list of lender that I've put together over the years, you can contact them directly to learn about the requirements each of them has:
https://www.biggerpockets.com/blogs/2810/50272-lis...
Hope this is helpful. The subject of SD IRA is a frequent topic here on the forum, you should search for previous posts and can learn a lot for other discussions.
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Allen Tyndall
Wilmington, NC · Member since 2017 · 14 posts · 19 votes
9y
Ramon, the last reply here is a little off. Here's my take: Yes a self directed IRA is a great bet if you have a substantial amount of capital there. I almost exclusively work with real estate folks with strategic financial planning and most people use either cash, IRA. or cash value from an insurance policy. When structured properly (overfunding), a non-variable universal life or permanent life insurance policy can be your best friend. For one, billionaires buy life insurance, so the notion that you won't need it one day is simply not true. Anyone with a basic understanding of the tax code and probate would understand that. Second, for real estate investors, especially those who flip, need constant capital. There's risk with lots of cash. It's not creditor protected, there's no yield, and you likely will carry more than the FDIC caps at banks. This is not a good strategy if the advisor does not structure the policy to build a lot of cash from day 1. Walk away if you don't see that. I'm happy to provide examples of what I mean. Life insurance will provide the following: 1) permanent death benefit 2) protection from creditors 3) non-taxable yield of 5%+ (with the right company), which is the equivalent of 7.5-8% taxable. 4)leverage capability (arbitrage). If you're earning 5% on your cash value, get a collateral assignment to a bank and secure your cash value to a credit line. If you have 250k of cash, they'll extend you a credit line instantly. Likely, it will be at 3% or so, which means you use their money at 3% while your policy earns 5% and you'll go make 25% with the borrowed money on a flip. 5) guarantees to never lose money (there's reserve requirements to back your accumulated money) Happy to explain this more privately... there's lots of details there. It's just math and logic. I can show you how they work together. -Allen
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Thomas RutkowskiPro Member
Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
9y
Great advice from @Allen Tyndall. I've written a lot on bigger pockets about the subject of leveraging cash value life insurance for real estate investing. Its a very powerful strategy and you will build more wealth using that strategy long term than investing through a SD-IRA.
Unless you don't think you can qualify for life insurance, you should really start fresh with a properly designed and funded policy. Unless you really lucked out, the chances are that they policy you have right now would not be the best choice for policy optimized for leverage. The "convertibility" only locks in your insurability. Its still just like starting over with a new policy.
But since most of your wealth is in, or can be in an SD-IRA, that is likely your best bet for moving forward. Use the life insurance solution for cash savings outside of qualified accounts.
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