Cash Value Life Insurance VS Self Directed IRA
Rental Property Investor · Saint Petersburg, FL · Member since 2020 · 29 posts · 18 votes
Cash Value Life Insurance VS Self Directed IRA
Most Popular Reply
I’ll jump back in here and digress for a bit and make a few comments that I’ve seen here and in other more recent posts.
As I previously noted, based on the fact pattern described whole life really is not appropriate or a good option; however, in the right situation and for the right person permanent life insurance (aka cash value), which might consist of whole life, IUL, VUL, etc, can be very useful. I am a CPA and CFP (financial/investor advisor, whatever label) and my family uses a combination of both term and whole life as part of our financial plan. We believe it it very valuable for protection, legacy planning, education planning, long-term care perhaps, and as a supplement to our investment portfolio. It is multi-faceted and might be called upon for any number of these purposes (the cash value can be reused). We don’t put all of disposable income into it as it represents one piece of the ongoing puzzle. From an advisory standpoint, it can be used in some less conventional situations such as for executive compensation and buy-sell agreements for example.
I know there are plenty of insurance agents that want you to allocate a considerable amount to insurance regardless, as they are not fiduciaries and that’s how they make a living. They sell product only in many cases, and if you are working with someone you must apply some critical thinking and skepticism to their advice and see if it is in your best interests.
I frankly get annoyed when I see and hear comments about high compensation of insurance agents as an argument against using it, as that is really not relevant if the ultimate solution is good and valuable. For life insurance agents they get paid by directly by the insurance companies they represent. Real estate agents and loan officers can be highly compensated just the same (they have strong lobbies) and their industries set it up so they are paid commissions (which I don’t think is a dirty word), but the difference is that the public just views those products or services more as an inevitable necessity compared to insurance. Not choosing to do something because you don’t want someone to be paid makes no sense (cutting off ones’s nose to spite one’s face). If you are about to sell a house and see that the realtor commissions are 6% on the CD are you going to call it off? That’s the conventional standard that has been set, but I’m just putting that out there as an example. Same thing can be said for a loan officer, title insurance, attorneys, etc. I still view their services as valuable and necessary and their compensation by itself is not a deterrent or distraction. I know too that with all these professions (realtors, LOs, insurance agents) that considerable time is also spent with prospects or clients where they do not get paid at all. That is hard to gauge but it certainly is true.
I saw the mention of Dave Ramsey who is not a financial advisor (or fiduciary), but rather a financial entertainer. In most cases he tells you the obvious (stay out of bad high interest credit card debt) and he appeals to the masses in which permanent life insurance may not be a good solution (ie so term would be better for protection only). He has a number of conflicts of interest and is not required to disclose them. I could take it in another direction if you wanted to pan annuities and say Ken Fisher (who actually is a financial advisor and fiduciary) is right as they have “nose bleed fees”. For his firm, he has chosen to be compensated by managing traditional investment portfolios, so anyone using annuities would take away from his potential AUM so he tries to attract and convert them. He probably does not like real estate or alts either for the same reason, but annuities are just easier to jab at and are more liquid. Annuities are a form of insurance (opposite of life) and get similar negative attention and criticism, and my take is they can serve a purpose for the right person in the right situation. Allen Iverson or Bobby Bonilla should be thankful for their advisors (look it up)!
Anyway, I just felt like elaborating and to emphasize that you have to evaluate someone’s situation thoroughly, and of the financial products and services available I would not label anything in particular outright bad, it just may not be appropriate or as useful depending on the context of the situation.
26 Replies
IMO the benefits of cash value life insurance have been massively oversold. See if you can find some people who use those plans and get their thoughts, rather than folks who sell the plans. SDIRAs have pros and cons, the biggest con probably being UBIT (in the context of apartment investing).
Neither of these on their own is going to get anyone to the point where they're retired and living on cash flow.
I'd say focus on doing your deals and raising your income while not raising your living expenses, then the rest will follow.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
@Greta Andrews
SDIRA over a insurance policy for investing purposes
If you are an agent could you do an s Corp then pay yourself like $20k then you could do a solo 401k, put the $20k (max allowed if not contributing with current employer) then the company profits can contribute like 25% so another $5k and easily put $25k a year which it’s is only around 6k or whatever the new limit
7e investments53 Reviews - 3yDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
Many of our investors use Self-Directed IRA funds. Stock Brokerage firms don't want you to know that you can invest in things other than stock-related investments, but a true SDIRA can really take your real estate investing to new heights. Your SDIRA can even take out a mortgage! There are a lot of rules to be aware of, but I'm a big Self-Directed IRA fan.
- 3yThomas RutkowskiPro MemberFinancial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
Life Insurance over a SD-IRA. You miss out on all the tax advantages of real estate doing your investing in an IRA.
Leveraging the cash value of a maximum over-funded policy allows you to put your money to work in two places at one time. And because the interest on the loan against the cash value is a business expense, it lowers your taxes. You will accumulate more over time.
IRA contributions are limited. Life insurance premiums are not, though you do have to justify the amount of the death benefit.
Check out the many posts here to find the people actually using this approach. I doubt you will find any that disagree. The only naysayers are those who aren't doing it themselves.
- Investor · Baltimore, MD · Member since 2023 · 38 posts · 10 votes3y
I'd say a self-directed IRA might be better for you. A Cash Value Life Insurance plan can be good for tax savings and protecting your loved ones, but I'm not sure it would help you achieve your real estate goals. With a self-directed IRA, you can invest in real estate and other alternative assets, all while enjoying tax-deferred or tax-free growth. Plus, with your W-2 job and real estate agent income, you should be able to contribute to a self-directed IRA without any issues. Just make sure you follow the rules and regulations carefully to avoid any penalties or fees. I hope that helps!
- Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes3y
They both won't be able to serve the same purpose, let's compare the two.
Save money: 100% of your contributions to an IRA are available for you invest from the day one. Big chunk of your life insurance premium goes to pay insurance salesman commissions so you have negative return from day one.
Pay less taxes: contributions to an IRA are tax-deductible so it will help you pay less in taxes. Life insurance premiums are made with post-tax dollars, resulting in zero tax savings.
Invest: you can have a self-directed IRA (or better yet a truly self-directed Solo 401k plan) and invest your retirement dollars into virtually anything you wish, tax deferred. With cash value life insurance whatever is left after paying salesperson's commissions is earning a nominal return, you don't have the ability to invest these funds (unless you take a loan from the policy, think of this, you have to borrow your own money and pay interest to the insurance company on the loan! such as rip off!).
You should reconsider using the financial advisor who make this offer to you, he is looking after his own pocket by suggesting cash value policy to you. Get a fee only advisor, or educate yourself and get rid of a financial advisor altogether.
Since you are a real estate agent you are considered to be "self-employed", which means you qualify for Solo 401k plan. If you make $40K in net SE income you will be able to contribute over $30K of that into self-directed Solo 401k plan. 100% of these funds are available to you to invest the minute you make the contribution. And assuming you are in 30% tax bracket you will be saving $10K in taxes by contributing $30K (contributions are tax deductible).
I assume you are eligible for it and I would go with the solo 401k as @Dmitriy Fomichenko stated. Much better for tax, investing, and liquidity purposes (can borrow).
Cash value life insurance can serve a purpose but it is not an apples to apples comparison and if you are going to have to make a choice based on your fact pattern you would go with the retirement plan. There is a good chance the financial advisor you are using would not be able to benefit if you opted for the solo K or SDIRA if you invest in alts or real estate.
- Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes3y
@Greta Andrews Dave Ramsey a nationally respected financial expert , best selling author, and financial advisor calls whole life( cash value) insurance a con job orchestrated on novice investors by “ enthusiastic ignoramuses” masquerading as financial advisors.
Borrowing money from yourself and paying interest on your own money is a non common sense approach to investing.
- Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes3y
The only people that will recommend the insurance route is people who sell insurance.
Just because a "financial advisor" recommended it doesn't mean anything. Anyone can use the term financial advisor to describe themselves and many of these advisors are not fiduciaries and instead of recommending products that are in your best interest, they recommend products that give them a large commission.
The salesman makes it sound so tempting, you get some added life insurance while also earning passive guaranteed tax free income! The problem of course is that they always fail to mention the fee structure that is hidden on page 157 of the 200 page insurance policy handbook that they give you that describes how the policy operates.
Lets be realistic, the insurance company is making money or else they wouldn't be in business. The salesman is obviously making money or he wouldn't sell insurance as a job. And then they tell you that YOU are also making money, but also getting additional stuff on top of that with your life insurance policy. Obviously not everyone can simultaneously be profiting, that's just not how the real world operates. Don't fall for their scams, read the fine print and learn about the fee structure. I’ll jump back in here and digress for a bit and make a few comments that I’ve seen here and in other more recent posts.
As I previously noted, based on the fact pattern described whole life really is not appropriate or a good option; however, in the right situation and for the right person permanent life insurance (aka cash value), which might consist of whole life, IUL, VUL, etc, can be very useful. I am a CPA and CFP (financial/investor advisor, whatever label) and my family uses a combination of both term and whole life as part of our financial plan. We believe it it very valuable for protection, legacy planning, education planning, long-term care perhaps, and as a supplement to our investment portfolio. It is multi-faceted and might be called upon for any number of these purposes (the cash value can be reused). We don’t put all of disposable income into it as it represents one piece of the ongoing puzzle. From an advisory standpoint, it can be used in some less conventional situations such as for executive compensation and buy-sell agreements for example.
I know there are plenty of insurance agents that want you to allocate a considerable amount to insurance regardless, as they are not fiduciaries and that’s how they make a living. They sell product only in many cases, and if you are working with someone you must apply some critical thinking and skepticism to their advice and see if it is in your best interests.
I frankly get annoyed when I see and hear comments about high compensation of insurance agents as an argument against using it, as that is really not relevant if the ultimate solution is good and valuable. For life insurance agents they get paid by directly by the insurance companies they represent. Real estate agents and loan officers can be highly compensated just the same (they have strong lobbies) and their industries set it up so they are paid commissions (which I don’t think is a dirty word), but the difference is that the public just views those products or services more as an inevitable necessity compared to insurance. Not choosing to do something because you don’t want someone to be paid makes no sense (cutting off ones’s nose to spite one’s face). If you are about to sell a house and see that the realtor commissions are 6% on the CD are you going to call it off? That’s the conventional standard that has been set, but I’m just putting that out there as an example. Same thing can be said for a loan officer, title insurance, attorneys, etc. I still view their services as valuable and necessary and their compensation by itself is not a deterrent or distraction. I know too that with all these professions (realtors, LOs, insurance agents) that considerable time is also spent with prospects or clients where they do not get paid at all. That is hard to gauge but it certainly is true.I saw the mention of Dave Ramsey who is not a financial advisor (or fiduciary), but rather a financial entertainer. In most cases he tells you the obvious (stay out of bad high interest credit card debt) and he appeals to the masses in which permanent life insurance may not be a good solution (ie so term would be better for protection only). He has a number of conflicts of interest and is not required to disclose them. I could take it in another direction if you wanted to pan annuities and say Ken Fisher (who actually is a financial advisor and fiduciary) is right as they have “nose bleed fees”. For his firm, he has chosen to be compensated by managing traditional investment portfolios, so anyone using annuities would take away from his potential AUM so he tries to attract and convert them. He probably does not like real estate or alts either for the same reason, but annuities are just easier to jab at and are more liquid. Annuities are a form of insurance (opposite of life) and get similar negative attention and criticism, and my take is they can serve a purpose for the right person in the right situation. Allen Iverson or Bobby Bonilla should be thankful for their advisors (look it up)!
Anyway, I just felt like elaborating and to emphasize that you have to evaluate someone’s situation thoroughly, and of the financial products and services available I would not label anything in particular outright bad, it just may not be appropriate or as useful depending on the context of the situation.
@Jeff Nash
I fully agree with you.
Permanent Life Insurance is a complex product that has many advantages. When used properly it could be very valuable. However when their use is not properly executed you lose most of its benefit as the front loaded costs were charged no matter what.
Some people don’t have the proper mindset to stay on course for many years and should stay away from them as it takes almost a decade of careful execution to start benefiting from their powerful benefits.
I hate people in these forum dealing in absolute. You should put all your money in IRA! Or in 401k! Or you should never use a retirement account! You should not buy stocks. It's not black and white. All of those, including permanent life insurances have their place in a personal portfolio but some people believe that because one specific product does not make sense in their personal situation that it should never be used by others.
I am using credit card debt for some of my investments. If you listen to some credit card should never be used… I disagree there are some situations when it could be use. But you have to be careful as they could be dangerous for your financial health if not used properly. I am using margin on my brokerage account. Some people will tell you never to use margin. I am using permanent Life insurance too and use it as collateral for investing. Again some people will tell you that is stupid.
Then by some ‘expert’ I’m a triple moron. So be it. These same experts will be coming to me asking to finance their next real estate project….
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
Quote from @Greta Andrews:
Cash Value Life Insurance VS Self Directed IRA
I know the two aren't usually talked about in the same breathe. Each would be compared to other products in the same wheelhouse. And they would be introduced by very different professionals. However, with my limited knowledge they seem like they could serve a similar purpose for me. Save money, pay less taxes, spend it on real estate and the stock market. I have wanted a self-directed IRA since I first learned of them about a year ago. The idea of Cash Value Life insurance is brand new to me, and was introduced by a financial advisor, but looks promising.
Some background on me:
I have a W-2 job and make about $80,000/year.
I'm a real estate agent, and hope to make about $40,000 as an agent this year and intend to continue until I outgrow my W-2 job.
I will soon start renting out a triplex after April 1st.
My goal is to buy more small multifamily until my net worth is high enough to invest in someone else and sit back and collect the check Ie. apartment syndication.
Thought and comments are appreciated.
Apples and Oranges. People try to compare them and in an insurance forum people will favor insurance and real estate they favor SDIRA. The reality is both play a key role in your asset management plan. I have both - why? Because I make really good money and if I dropped dead tomorrow I have life insurance as well as a SDIRA.If I do not, then I can use it also to invest. Could I have a term policy - yep - but I wanted the flexibility and cash value.
Both have their pros and cons.
7e investments53 Reviews - Member since 2021 · 2 posts · 2 votes3y
Hey Greta! I do not suggest life insurance for the purpose of using cash value in real estate. It is true that certain policies will accumulate significant cash value, but you either have to put in several thousands for a certain amount of years and let it season for a bit (Life Insurance Retirement Plan) or you pay your monthly/annual premium for quite a while and wait until you're in your 60's or 70's+ to have access to a good amount of cash value (Variable Universal Life). I think life insurance is something that everyone should have, but I would not use it for the sole purpose of accumulating cash value for real estate. I'd look into an IRA.
- Specialist · Grand Rapids, MI · Member since 2020 · 116 posts · 80 votes3y
Quote from @Chris Seveney:
@Greta Andrews
SDIRA over a insurance policy for investing purposes
If you are an agent could you do an s Corp then pay yourself like $20k then you could do a solo 401k, put the $20k (max allowed if not contributing with current employer) then the company profits can contribute like 25% so another $5k and easily put $25k a year which it’s is only around 6k or whatever the new limit
Question for you regarding the S Corp. I'm a 401k administrator and yes, you can use an S Corp to fund a Solo 401k (can use Schedule C, w-2, K-1 as a partnership, or 1099 income towards a 401k...). My question is what do you mean by saying "if you're an agent"? I've seen folks create their own management company to convert the Schedule E income to Schedule C (or w-2 if it's an S-Corp), but how does being an agent help with that? Always looking for strategies to help clients!
- 3yJim PfeiferBusiness MemberInvestor · Dublin, OH · Member since 2014 · 241 posts · 495 votes
There are a lot of good answers here! I won't re-hash all of it, but I will say I have both high cash value life insurance polices and a self-directed 401k. I use both for investing and find myself looking for ways to put more money into the life insurance while looking for ways to get money out of my self-directed account. Why? Because I want to get as much of my capital into a tax free earnings bucket as I can and for me, that's real estate. I can buy real estate syndications and never pay taxes on the gains (Lazy 1031). With my self-directed account, I am partnering with the government because they will decide how much tax I pay and when I can take it out.
The question was - which should someone put money into - this is an unanswerable question because each person's situation is so different and these two products are, as others have said, comparing apples and oranges. They are both fruits, but very different.
High cash value life insurance is not an investment, but when used properly it can turbo charge your investments. The key is to have it set up correctly and for your specific situation. I used to sell these policies and the first policies I sold were to my wife and myself. I was trained to sell a specific type of insurance in a specific way - targeting high paid professionals who would use it for retirement. This is completely appropriate - except that wasn't how I was going to use it. I sold myself the wrong type of policy because I was inexperienced and I was following my training. I don't sell insurance anymore, but I still buy new policies and I have them structured by an agent I know, like and trust and someone who understands how to structure if for me to maximize cash so I can use it to turbo charge my investments. As an example, I use my cash value to buy ATM's. I take a loan against the cash value at 5.5% and put it into ATM machines which pay around 25% cash on cash. For round numbers, I take out $100,000 and pay interest of $5500 per year and earn $25,000 per year. After 4+ years, my loan and the principal is paid back and I collect ATM distributions for another 3+ years. At the end of seven years, the interest and principal is paid back and I have effectively manufactured $60,000+ in cash. For those four years that I had the insurance loan - the cash value was collateral, so the actual cash value in the policy continued to grow. I earned two returns with the same dollar and created cash out of nothing. I can't do that with a self-directed IRA.
The reason I still use the self-directed account is that I had some old 401ks that I rolled over - I use that money to invest in debt because if I invest in real estate through that account, I lose a lot of the tax advantages.
Again, it's different for each person - neither of these are bad products, they just have to be used correctly. Yes - Suzie Orman and Dave Ramsey say whole life insurance is a scam - but as was said above, they are financial entertainers. They have great advice for people deep into debt - they give terrible advice for people who are striving for financial freedom through investing. Both of them own whole life insurance - they just don't think their audiences are smart enough to own it correctly.
The key to investing is to have great partners - so if you decide to go with the self-directed IRA, whole life insurance or both - make sure that you have a partner who you know, like and trust that can give you expert advice. If you get your insurance agent from the yellow pages, be prepared to feel like whole life insurance is a scam. If you get your insurance agent from a trusted person who already uses that agent successfully, then be prepared to have a properly structured policy that can turbo charge your investments. I would say the same for any financial product.
- Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes3y
@Jeff Nash there is no need to express your bias against well respected and nationally known Dave Ramsey. He has become a celebrity because his financial advice is very popular as are his books he has authored.
If you are going to belittle Mr Ramsey perhaps you should include your personal biography including how many people you have helped. And yes Mr Ramsey owns millions in RE.
What you call yourself has little relevance to whether you call yourself a fiduciary or financial advisor. What a person calls oneself does not directly reflect on their level of expertise or how great their advice is.
No one is begrudging life insurance salesmen for wanting to make a living. But high upfront commissions in relation to insurance payments is not helping the insured.
@Todd Goedeke Dave Ramsey’s name was mentioned and I didn’t need to say anything, but I wanted to. In my opinion (which I am entitled to express and understand there will be differences among us), he does not offer anything other than rudimentary commentary. I am pretty sure my viewpoint is shared by just as many as those that are ardent supporters of Dave Ramsey like yourself apparently. I believe Dave Ramsey is a very talented spokesperson and influencer and it’s undeniable that there are a lot of people that will proclaim that he has helped, which is great. I just personally don’t like his style and think he is more of a promoter than anything else, which can be said for many people we hear and see regularly. He is not a licensed financial professional, which is convenient because he does not have to adhere to strict regulatory standards such as disclosing conflicts of interest and how he gets compensated as noted.
As I said before I do not disagree with advice like paying down “bad” debt; however, he seems to not like debt in and of itself which in my opinion runs counter to what many on BP and other forums would view as a useful and often necessary tool and method for accumulating wealth in real estate. So in my opinion, that might not be the best advice; it depends on the context and someone’s situation as I frequently will state on nearly all of my posts. Dave Ramsey might feel the way he does about debt because he got burned and declared bankruptcy (a publicized fact), and you are influenced by your past and learn from it and others might benefit from sharing.
My biography is what is it and is fully disclosed on several public websites by 3rd party regulators (TSBPA, FINRA, NFA, TDI, etc) and reiterated on several of my own. I’ve been doing what I’ve been doing in public accounting and financial services in combination to various degrees for over 23 years and helped many people, not millions mind you. There are no public testimonials because I have limitations and restrictions on that sort of thing. If you actually have to work one on one with people and dig deep into their situations, touching millions is not feasible nor is it some personal goal of mine. I would not be any good at grabbing a mic and gabbing for hours each day.
Anyway, I did not mention or call you out personally on my original post here for a reason, and now I’m done and no additional response is warranted or will be made on my part (mic dropped).
- A high upfront commission by a real estate agent is not helping the house seller or buyer.
Quote from @Todd Goedeke:
No one is begrudging life insurance salesmen for wanting to make a living. But high upfront commissions in relation to insurance payments is not helping the insured.
A high upfront commission by mortgage broker is not helping the mortagee.
A high upfront commission by the car dealer is not helping the car buyer.
Each product has different remuneration model. Some financial advisers are taking a commission on asset under management every year. Wall street is taking a commission on every transaction. Some mutual fund are taking a commission upfront. Edge fund are taking even more outrageous fee each year. It does not mean it is bad. I don't mind paying fee, if I am getting a better return after fee.
If you look at the sum of all the fee of a life insurance and divide them by the total length of the life insurance, you will see that the average yearly fee is lower than most of mutual fund.
And I agree with @Jeff Nash that Dave Ramsey is of great help for people who don't know how to manage their money and are getting in debt. But his advice are useless for people building wealth as leverage is a very useful tool. And the majority of people on BiggerPockets are absolutely not following what he preaches. - 3yThomas RutkowskiPro MemberFinancial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
Quote from @Autumn Williams:
Hey Greta! I do not suggest life insurance for the purpose of using cash value in real estate. It is true that certain policies will accumulate significant cash value, but you either have to put in several thousands for a certain amount of years and let it season for a bit (Life Insurance Retirement Plan) or you pay your monthly/annual premium for quite a while and wait until you're in your 60's or 70's+ to have access to a good amount of cash value (Variable Universal Life). I think life insurance is something that everyone should have, but I would not use it for the sole purpose of accumulating cash value for real estate. I'd look into an IRA.
This is not true of properly-designed, maximum over-funded life insurance policies. You are probably thinking of a typical whole life where the goal is to get as much death benefit as possible for the money. While the cash value of those policies CAN be leveraged, real estate investors use policies that are optimized with maximum cash value and minimal death benefit and fees.
1. They can be leveraged immediately upon issue. There is no waiting for years. Unless you are funding your policy with $200 per month. It would take awhile to build up a usable amount in that case. That's not the insurance policy, that's the funding.
2. No "Seasoning". Again, you can leverage the policy immediately upon issue. Since policy loans are loans against the cash value, the cash value is unaffected by any loans against it. It still earns dividends.
- 3yJesus FloresPro MemberRental Property Investor · San Diego, CA · Member since 2019 · 19 posts · 14 votes
@Dmitriy Fomichenko Great articles! Thanks for sharing the links.
- Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes3y
@Matt Ruttenberg an agent can be self employed. A self employed person can start a Solo401k and roll over existing IRAs and old 401ks into the new Solo 401k. An advantage of a Solo 401k vs an IRA is no tax related to UBTI.
- Specialist · Grand Rapids, MI · Member since 2020 · 116 posts · 80 votes3y
@Todd Goedeke
Ok I see which direction you’re going there… thanks for the explanation!
- Real Estate Agent · Kailua-Kona, HI · Member since 2022 · 61 posts · 15 votes2yThis!!!! It’s always based on someone’s financial situation and goals! Mahalo for sharing!
Quote from @Jim Pfeifer:
There are a lot of good answers here! I won't re-hash all of it, but I will say I have both high cash value life insurance polices and a self-directed 401k. I use both for investing and find myself looking for ways to put more money into the life insurance while looking for ways to get money out of my self-directed account. Why? Because I want to get as much of my capital into a tax free earnings bucket as I can and for me, that's real estate. I can buy real estate syndications and never pay taxes on the gains (Lazy 1031). With my self-directed account, I am partnering with the government because they will decide how much tax I pay and when I can take it out.
The question was - which should someone put money into - this is an unanswerable question because each person's situation is so different and these two products are, as others have said, comparing apples and oranges. They are both fruits, but very different.
High cash value life insurance is not an investment, but when used properly it can turbo charge your investments. The key is to have it set up correctly and for your specific situation. I used to sell these policies and the first policies I sold were to my wife and myself. I was trained to sell a specific type of insurance in a specific way - targeting high paid professionals who would use it for retirement. This is completely appropriate - except that wasn't how I was going to use it. I sold myself the wrong type of policy because I was inexperienced and I was following my training. I don't sell insurance anymore, but I still buy new policies and I have them structured by an agent I know, like and trust and someone who understands how to structure if for me to maximize cash so I can use it to turbo charge my investments. As an example, I use my cash value to buy ATM's. I take a loan against the cash value at 5.5% and put it into ATM machines which pay around 25% cash on cash. For round numbers, I take out $100,000 and pay interest of $5500 per year and earn $25,000 per year. After 4+ years, my loan and the principal is paid back and I collect ATM distributions for another 3+ years. At the end of seven years, the interest and principal is paid back and I have effectively manufactured $60,000+ in cash. For those four years that I had the insurance loan - the cash value was collateral, so the actual cash value in the policy continued to grow. I earned two returns with the same dollar and created cash out of nothing. I can't do that with a self-directed IRA.
The reason I still use the self-directed account is that I had some old 401ks that I rolled over - I use that money to invest in debt because if I invest in real estate through that account, I lose a lot of the tax advantages.
Again, it's different for each person - neither of these are bad products, they just have to be used correctly. Yes - Suzie Orman and Dave Ramsey say whole life insurance is a scam - but as was said above, they are financial entertainers. They have great advice for people deep into debt - they give terrible advice for people who are striving for financial freedom through investing. Both of them own whole life insurance - they just don't think their audiences are smart enough to own it correctly.
The key to investing is to have great partners - so if you decide to go with the self-directed IRA, whole life insurance or both - make sure that you have a partner who you know, like and trust that can give you expert advice. If you get your insurance agent from the yellow pages, be prepared to feel like whole life insurance is a scam. If you get your insurance agent from a trusted person who already uses that agent successfully, then be prepared to have a properly structured policy that can turbo charge your investments. I would say the same for any financial product.
- Rental Property Investor · Saint Petersburg, FL · Member since 2020 · 29 posts · 18 votes2y
Quote from @Chris Seveney:
@Greta Andrews
SDIRA over a insurance policy for investing purposes
If you are an agent could you do an s Corp then pay yourself like $20k then you could do a solo 401k, put the $20k (max allowed if not contributing with current employer) then the company profits can contribute like 25% so another $5k and easily put $25k a year which it’s is only around 6k or whatever the new limit
This sounds like a great idea.
- Investor · Houston, TX · Member since 2019 · 95 posts · 29 votes6mo
Greta — honest answer: they do different things. An SDIRA or Solo 401(k) gives you the tax deduction now and lets you invest in real estate inside the account. Great for reducing your tax bill today. Cash value life insurance doesn't give you a deduction, but it grows tax-free, you borrow against it tax-free, and your family gets paid when you die — also tax-free. The real question is what problem you're solving first. If you need to lower your 120K tax bill now, retirement accounts win. If you want a place to park capital that you can access anytime without penalties or taxes, and you want protection built in, that's where properly structured whole life fits. Most people don't need to choose one or the other. They need both at the right time.
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