Life Insurance used as a bank account
Real Estate Investor · Midlothian, TX · Member since 2010 · 18 posts · 3 votes
I was listening to some old podcasts from "The Real Estate Guys" today. They had a special guest speaking about using life insurance as a better bank account for REI's.
Has anyone used Whole Life Insurance as a bank account? What has your experience been? Any lessons learned?
He probably sold life insurance....
Advantages...can't be attached by creditors, exempt from bankruptcy, proceeds tax free if properly drawn, loans from cash value at low rates but reduce death benfits, can be pledged and assigned .
Cons, dificult to add additional amounts to account, premiums required to keep current, low very low ROI, but OK if you need life insurance too, might be hard to get to cash quickly, fees for transactions may apply.
Off the top....don't think it's a good idea just for a bank account....IMO.
He probably sold life insurance....
Advantages...can't be attached by creditors, exempt from bankruptcy, proceeds tax free if properly drawn, loans from cash value at low rates but reduce death benfits, can be pledged and assigned .
Cons, dificult to add additional amounts to account, premiums required to keep current, low very low ROI, but OK if you need life insurance too, might be hard to get to cash quickly, fees for transactions may apply.
Off the top....don't think it's a good idea just for a bank account....IMO.
For most people buying term and investing the difference between term and whole life is the best strategy. This is a good question for your non-commission financial advisor.
There are some elaborate "bank" insurance strategies out there sold by hungry RIAs....smoke and mirrors mostly!
AO Williams started the BTID and Primerica has followed suit primarily to sell mutual funds. I hope the consensus here about mutual funds is the same as mine. I bet if you took "the difference" of what you would have paid to permanent insurance, bought cases of beer, drank the beer, flew to Connecticut and got .05 cents a can you would have more money than you would in the mutual funds
Patrick, couldn't agree more. Mutual funds may not be the last place I would put money, but not far from it.
I would not suggest using a life insurance policy as a bank account.
I was an insurance broker and worked with Metropolitan and Prudential when A L Williams came on the scene with this. My feather in my cap from those days, was using a a paid up at 65 whole life plan that had stronger additioanl paid up inusrance and cash value and then borrow from the cash values to pay the premiums after, generally seven years, depending on age and ratings. Farmers loved it, because the premiums were tax deductable and at that time the interest expense as well, did alot of estate planning as well, so the real cost of coverage was less than the term the company sold. I devised this as a new agent/broker, invited to Houston and presented the program I was selling, they dubbed it the VOP, variable outlay program.
Contrary to popular belief, there is a place for permenate insurance, especially in by sell agreements and corporate financing and estate planning, if you know what the heck you're doing!.
I generally advised term for most people who actiually need life insurance. Most people buy way too much because they 'love their family" and do not advocate buying a mutual fund with the difference between term and whole life as it is a silly numbers game to promote other products pushed by ins companies! Who says you have to invest more with that agent just because whole life costs more????? Dah!
Remeber you have the right to acquire additional during any policy period up to the amount you carry at the premium in effect at that time at your age, you can always get more even if you become uninsurable, there is a value to that. Higher future premiums are paid with future dollars, not for the ten years prior when you were paying for more than you really needed....but the commission check to the agen t is more...LOL! Good luck!
Who said anything about investing the money in mutual funds? The investors on this site can surely find deals with at least a 10% return on equity and higher leveraged returns. The "invested difference" should be in whatever is the best for your portfolio at the time.
I am a believer in having a balanced portfolio and investing some money in Fama/French three-factor-based portfolios that invest in Dimensional Funds. Having all of your assets in real estate or any other asset class is sub-optimal from a risk/return perspective.
I also agree with Bill that whole life policies make sense in SOME instances, but that term is better for most.
Thanks for the information! I still have some more learning to do to completely understand this concept, but now I have a good direction to head in.
Here is a video I did this morning to make my point. I hope it makes sense to all of you. I am also including the link to the Real Estate Guys Radio show for your reference that perhaps gives a better foundation to what I am trying to get accross.
Video Link [http://www.youtube.com/watch?v=ut23OR5fVVc]
Podcast Link: [http://traffic.libsyn.com/clean/realestateguysradio/What_is_Your_Risk_Paradigm_-_A_Life_or_Debt_Decision.mp3]
Patric, I tried to search the site you provided without success, sorry.
Can you make your point here or provide the site so that I can "click" to get there....
If you advocate using a life insurance product, of any kind, to advance any real estate investing goal within the scope generally found on this site, please give us your idea.
The Brackets kind of messed up the links, here they are again...
http://traffic.libsyn.com/clean/realestateguysradio/What_is_Your_Risk_Paradigm_-_A_Life_or_Debt_Decision.mp3
http://www.youtube.com/watch?v=ut23OR5fVVc
Thanks goodness there is no prohibition against purchasing BOTH a Term insurance policy and a permanent insurance policy ... sometime in the same policy.
I find that most people have a real need (understood or not) for BOTH TERM and permanent insurance. The bulk of their insurance needs can be filled with term insurance as most of the need (while raising children) will disappear once the kids have left college. It is rare for a family to pay off the mortgage due to trade ups). Additionally, those with pensions may do better to have some permanent insurance on the pensioner as opposed to taking the reduced pension payout on two lives.
Parents with dependent children also have a permanent need for life insurance.
There are other reasons to consider permanent life insurance too.
Best bet, talk to an independent advisor ... even if you have to pay a fee and NOT rely on a website's message board.
Absolutely Kevin, a modified or blended policy can be useful. You mentioned kids leaving home. This is one ploy used by many agents/companies to over insure the insured, IMO. You really need to weigh the financial loss of income arising from the passing of the insured and make the decission as to whether or not the same or higher standard of livving should be financed. While that can sound cold, it's a consideration since many remarry, some types of businesses will remain in producing about the same income. Alot of assumptions are made with a great deal of salesmanship that should be examined related to kids, one that comes to mind is paying the college tuition! That's why many say they are worth more dead than alive.
When I was in that business, I did not use the canned spiels promoted by the company (and there were times of conflict, but as they say, production covers a multitude of sins and since I was a high producer, I was given free reighn) but higher limits, when appropriate should be done with a team, your attorney, your accountant and your agent. I would also advocate getting bids.
Kevins suggestion of seeking independent advice is a good one, even for lower amounts as premiums can be paid for a long time.
I'll still can't get to that site, so if anyone wants to put up the basis of the program as to how or why a policy could or should be used to promote RE would be a good thing...(maybe it's my computer...LOL) thansks
Financeexaminer,
Email me at [REMOVED] and I will email the links to you...I don't think it is your computer, it's the board..
I've met a number of people who had loved ones for whom "their wills matured. One woman, a nurse, was widowed by her husband. She had 2 kids to raise and since her hubby had a $1 million life insurance, she could afford not working and spending the time raising her kids. When I met her, her two kids were in HS and she was almost through all of the $1 million. She was taking courses to update her now *dated* nursing skills to rejoin the work force.
Amount and type of insurance are never easy answers.
Too many people use a temporary solution (term) for permanent problems.
I agree that people should seek a financial adviser to discuss how to take care of their temporary and/or permanent insurance needs. Often though the worst adviser to talk to is an insurance agent.
IMO many people get sold a permanent life solution that goes along ways toward helping an agent, but does poorly for protecting an estate or protecting a families long term financial needs.
The investment return inside a whole life policy is extremely poor IMHO. For those that can't manage to save this can be an option forcing them to save something.
There are other issues to consider and choosing a financial adviser that is well versed on a wide range of investment vehicles is important. The adviser also needs to understand the individual or family's specific needs, financial position, risk tolerance, goals, etc.
@Kevin:
Can you please elaborate on your point regarding MOST people benefiting from having both term and whole life? The "understood or not" part is where you lost me.
I take it you are not a fan of people buying term and investing the difference. Is this correct?
First, I'll limit my discussion on this topic. This thread nor this website are not the best forums for involved discussions of insurance topics.
@Bryan
I'm not a fan of people using term insurance, a product with a limited life by design to solve a permanent problem. It would be like taking a trip from New York to Los Angeles in a car that would take one only to Kansas City.
The real question is what life insurance needs ... what would happen - financially - to a family if one member dies at each stage of life? IMHO it is rare for a person's needs to completely disappear at any point in his/her life. Many things can happen after the kids are grown and the house is paid off. Often these days, the kids return to the nest, the parents decide on a different home or -- a biggie -- medical expenses during the senior years especially nonmedical care at home or in a nursing home (@ $5,000 to $10,000 per month).
Even without the above expenses, what about pension plans or social security? Most pension plans offer the pensioner one amount per month for the rest of his/her life but a lesser amount per month if the pensioner chooses the joint lives of himself/herself and spouse. SS survivor benefits are also lower.
My "understood or not" comment refers to the many people who refuse to realize the risks later in life with a "that is not going to happen to me" attitude.
Talk to the spouse or other close family member of someone who has spent a year in a nursing home.
@Charles
Historically the return inside a Whole Life policy is extremely poor. These days with near zero interest rate on bank savings, some of the older policies (Whole life or universal life) offered guaranteed minimums of 2% or 3%.
But you are very correct that taking a long-term view of one's financial life with due consideration to the risks - even risks we cannot foresee is the best way to plan ahead. Talking to a qualified, unbiased third party is a good step and worth the money.
This thread has become very interesting however the same recurring theme is appearing. Somehow the consensus that insurance, especially permanent insurance, and the subsequent agents that sell it are ripping off buyers and that it is not a viable vehicle. I actually agree with that point for most agents but there have been some incredible changes to insurance, specifically riders that make it a much more stable, less expensive and beneficial financial vehicle that i think every real estate investor should have. There are a small group of agents out there that are selling life insurance for maximum cash value accumulation which significantly reduces their commission and has immediate cash value Here are a few other reasons: If you look at the balance sheet of every major bank in our country they have up to 30% of their liquid capital in cash value of life insurance they own on their employees. Wal-Mart owns almost 1 million policies on its employees both those that worked there as well as those that have left. Disney does this, Dow chemical does this as well as GE and many other major corporation Here is an article about BOLI and COLI (Bank owned and corporate owned life insurance) Banks and corportions and not buying for protection, they are buying for cash value. This shows that cash value is one of the best if not THE best place to hold liquid capital [/http://moneycentral.msn.com/content/insurance/p64954.asp]
The internal rate of return in perm insurance using Paid Up Addition Riders is higher than anything else I have seen with comprable stability. (There is a video link in a post above that shows that that the IRR of insurance is over 5% not 2-3%)
How does this apply to real estate??
My last point is that the insurance company will lend you money against your cash value without any qualification or specific repayment period. The entire time your cash value grows. I am a real estate investor and I do this. Here is a website that has an article about how to use Life Insurance with Real Estate [LINK REMOVED]
Just some thoughts...hope this helps
Thanks Patrick,
If you borrow the money against your cash value, are you charges an interest rate? If so, what is a typical rate?
Yes,
The insurance company does charge you interest. It depends on the company but right now one of the policies I have is charging 4.76. They are typically about 1-1.5% below the dividend rates. The theory is that if they are lending their pool of money to you they cannot invest it. However, if it is a mutual company like New York Life or Mass Mutual etc the % they charge on policy loans is part of their overall profit and at the end of the year profits are re-distributed to policy owners as a dividend. Companies like Prudential, Metlife, Lincoln, John Hancock are stock companies so profits and dividends go to share holders...If you are going to use Insurance the companies I recommend are AUL, MTL, Guardian, New York Life. They all have the specific riders that allow for maximum cash value growth...Not all insurance companies have these riders
Yes, there are single pay polices or single premiums that are paid. I give them a lump sum, 50K and my cash value is a shade under initially, but if I di the next day, my deat benefits as with any policy include the cash value, you don't get the CV and the DB.
They are still a poor investment vehicle unless you are using the insurance portion as a buy sell agreement or, in the large corporate stors, as a key man policy with additional goldn parachutes or using it for a very short term. Frankly, in corporate cash management accounts, life insurance is not used as T-Bills and Govt. Bonds represent a better safekeeping platform. To say an insurance company is safe today we only need to look at AIG. Prudential for example, in my opinion is solid as a rock, but in todays environment, that rock can crack, poor investments and any large loss of insured lives in a short period will effect reserves. Look at State Farm and the Katrina claims history, they simply refused to pay at first, many have not gotten a dime as of today, so the unforseen or low p[robability occurence does effect how claims of any type of policy can or will be paid.
I have not visited any of the sites provided and Patric, sorry, but I don't go to any business type of email account, not saying you would, but I get about 200 RE spams as it is, lol,.
Bryan, term is generally used to insure the risk over a shorter period, while risks are greater. The permenate insurance you take to your grave, and if you hear the insurance tell it, it will cost you 50K to be burried....one GI benefit that must be worth 50K, everything is already paid for in my case, the works. There should be something there to settle the estate. But, as to my first comment to the cons, that's enought to bank somewhere,
One more thing speaking of banks, say you find a bigger deal than you can swing out of that "program" will the insurance company loan you more since you have a "relationship" with them? No! Will the bank if you do business with them? Yes, quicker than any Ins, Company, don't forget the value of having a banking relationship if you need it. When you get to be as big as Wal Mart, I'd suggest T-Bills/Bonds. At one time I was in charge of float of over a hundred million, it sure wasn't put in any insurnace policy....
@Bryan
Find someone in his/her late 70s or 80s who started a family in his/her early 20s. He/she might have purchased a house and bought $50,000 worth of life insurance coverage because of the mortgage debt.
Today, year 2010 after 10 years of subpar stock market performance (if he/she even has any stocks - financial textbooks say to lighten up on stocks in the older years) and current interest rates at 1-2% yielding not enough to live on without touching principle. Now one spouse gets sick and needs some care not covered by Medicare (there are LARGE loopholes), The couple MUST tap more retirement savings and/or house equity. Then the ill spouse dies leaving a lot of bills for the survivor to handle while dealing with grief (loss of a lifetime companion).
Permanent Life Insurance would have been a big help.
Even when the above situation does not happen, it is rare for people to have enough money especially if they were a worker instead of a business owner.
My $0.02
@financeexaminer. Although I agree with some of your points I think your conclusions are based on limited information, let me see if I can clarify a bit on some of your points. AIG and Prudential are stock companies and make unneccesary risks to attract/retain shareholders. These companies got in trouble because they were insuring mortgage back securities (Credit default swaps, derivatives), their ALMOST demise was NOT because of their life insurance or annuity holdings and the holdings subsequent investment strategy.The companies I have referred to throughout this thread are mutual companies. State Farm faltered because of a disaster relating to Property and casualty Insurance not Life Insurance or annuity infrastructure. 2 points to wrap this up:
1) There has never once in the history of the US and Canada been a life insurance policy or annuity that has failed (unless of course the policy owner fails to pay premiums). This cannot be said about any other financial service or product. There have been numerous insurance companies that have gone out of business but because of the financial methodology of insurance and annuities the contracts were purchased by other insurance companies. Also there are state guaranty funds that protect life insurance and annuities, most states it is double what FDIC protects in banks.
2) Life Insurance companies hire the most intelligent mathmeticians in the world to properly predict needed ROR, mortality rates etc. therefore the empirical basis for insurance and annuities is the most sound out there. remember with Mutual companies they are designed to make you the owner of the policy and the insurance company, profitable.
It sounds like you are really busy and do not like spam emails but I think a video might be helpful in one of my previous posts where the IRR is over 5.3% which is tax free. The insurance company will allow you to borrow the entire value of your cash value for whatever you want, including real estate. We all know the power of leverage and how using OPM can increase the overall ROR. Now consider having cash value that is guaranteed, earning tax free dividends, is protected from creditors, is in a mathematically designed product that has never failed (Whole Life Insurance) Plus it has a death benefit which is hands down the best transfer method of an estate..
My whole point is to use life insurance as part of a real estate strategy. You can earn dividends, have optimal protection, increase the estate of your family plus borrow from the insurance company collateralized by the cash value to buy your real estate.
John Mccain took a loan from Fidelity to run for president in 2006. His death benefit on his life insurance policy was the collateral...another very interesting strategy that I don't have time to get into today...
also, if you put $50k in a single premoium policy which you mentioned in your post and died the next day of course you would not get the cash value plus the death benefit but you would get a 250k-300k death benefit...that is a 500% ROR. is that bad?
Hope this helps your conclusions a bit
I can see that comments are only from Patric, maybe I shouldn't have mentioned that I was a TOP PRODUCER IN THE SOUTHEAST OF THE COUNTRY in my third year in the business!....this is very elementary, stock and mutual companies.....guarnateed returns.....assignments of policies......and yes, they have the best actuarials, that's pretty much why they make more than you do off your money! The comment of losses was aimed at catastophic losses, we haven't had any since 9/11, check out how quickly lfe companies paid on the act of war clause!
Obvioulsy, this insurance angle is a marketing matter, especially right of the gate posting here, good luck with it.
Kevin, I agree with much of what you said, except that there are uses for term. Not all risks need to be transferred over a lifetime, but only during a set number of years.
Instead of being worried about life insurance, you better consider disability insurance. As Kevin pointed out above, the worse thing is not being able to work, being in a nursing home and losing everything you have.....you're only one car accident away or one fall off that roof and you're done!
Insurance policy.....all said and done, it's a poor substitute for a bank....if you have enough cash to put into a policy to finance your deals, you're a poor money manager, IMO. I can stay in a liquid position and easily get 15 to 20% with a little effort, so why fool with all this?
There is an old saying in the insurance business, figures lie and liars figure. Later...good luck!