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.
I think all of these are great points. I am a life insurance broker and see it from two different stand points because I am also a investor. What I've found was it was great to have the traditional permant life insurance policy for cash first death benefit second. I advice alot of my clients to use a blend between term and traditional permant. Reason being is because you lock in your insurability in the event of a disability or life threatening event as well as the added benefit of having protection that you can never outlive.
Secondly it allows you to pass on a legacy of significance to your loved ones. Another great point is look up the percentage of term policies that payout. You will be dilute surprised at the numbers.
Furthermore, it does take time to build cash and if you structure the policy correctly you can put essentially as much as you want into a policy as long as it doesn't reach the MEC limit of the contract. I like mutual companies such as Northwersten Mutual, New York Life and Guardian because they're not companies trying to raise the bottom line for the stockholders. These are companies that are owned by the policy holders so therefore fees are very low compared to your stock owned companies.
Do take in mind that these policies are not for everyone. Their for individuals that have a open mind and ones that are not looking for a get rich quick scheem. Also this policy is not for an individual making below $100k/year and living above their means but trying to get rich over night. I perso ally use it as my bank and it works great for all that I do.
For further questions please feel free to contact me and not to sell you a policy but specifically for networking and knowledge purposes.
Yes, it's the old build your estate to pass on through life insurance theme.
Life insurance is to transfer the financial risks of premature death....period.
And, Prudential is a mutual company as well. Originally, Pru was a stock company in the 1800s providing basically small burial type policies and grew and converted to mutual policies before the depression. One of there selling points was making loans to the unemployed saving homes and families....la, de, da.
If you are insurable, have a significnt financial risk of premature death, debts, kids, obligations, get some life insurance, most people are in that boat...not just a risk now, but the likelyhood in the future as well. Get perminate coverage at a young age that you can add to later on to keep up with inflation. Insure the bulk of your risks with term at a cheaper rate. Take the money that would be eaten up with the difference in whole life coverage and invest it regularly. Throw it in your IRA, whatever. I taught life, health and accident as well as property and casualty lines at the university level in the finance department, so this is my last go'round on the topic, don't want to bore anyone.
Agent walks in the office and says he just wrote an application for 20 Million Dollars! The guy is the picture of health and 40 years old. Everyone gives pats on the back and they celebrate the getting the binding check on the deal. Week later, comes back denied! Why? Because the beneficiary does not have a an insurable interest in the insured for that kind of coverage! That means the beneficiary would get stinking rich from his death and they did not have the life style or the insurable risks to warrant $20M.
While insurance companies as a whole have no scruples, the underwriters do, for the benefit of the company, since one, the legal purpose of insurance is to convey a financial risk for the indemnification of a loss and secondly, that sure puts a target on that guy's back for someone to get rich out of a car accident! Now, if building wealth for your family were really a valid reason to buy insurance, you'd think the company would have placed that policy! But it's not, but it's a good way to sell as much as you can place.
I'm not anti-insurance, I'm pretty anti-insurance marketing, especially for the wrong reasons. But really, good luck to you Ins Guys, but I don't really think this is a good place to convince investors to do their banking in an insurance policy. Too many sharp people here.
Now, someone is going to say "Bill, I know you love your family and want to provide for them....don't you?"
And then I tell the guy at the kitchen table..."what the heck makes you think that? They can fend for themselves just like I did!"
Never nod your head "yes" in front of an insurance salesman! LOL!
I am so glad I found this post.
I have to admit I don't know much about life insurance policies until a few weeks ago. We had someone come in to our local REIA meeting and discuss using dividend paying whole life insurance as your own bank. I never heard of anything like this before but it seemed very interesting. I did some research and found that this is called the infinite banking method by Nelson Nash.
I see there are arguments both for and against this method and both sides seem to know much more about this topic than I do. I met with the life insurance salesperson last week and I applied for the policy, I didn't commit to anything yet, just applied. Maybe you can help me determine if this is the right course of action for me at this point in time, a 22yr old real estate investor. Wouldn't this be something better than say having a 401k or a roth IRA account. I haven't studied long term savings yet but to me this seemed like a good way to go...any thoughts or help would be apperciated
Lafi...please explain your thought process about why you think life insurance would be a better vehicle for your funds than a retirement account.
Well I like the fact that I can use the cash value tax deferred at any time and that the policy pays dividends as well as providing something for my family in case of my death. Paying $6k a year gets me a 1million dollar policy at my death...and once that is maxed out I can open up more policies over time...
Lafi understand that there are so many different variables to look at besides reaching 1 million dollars by death.
It's a great vehicle if you structure it properly.
The fact that you are thinking about life insurance at your age is great......but, there is another old saying (lots of them)....life insurance is sold, not bought. Sounds like you have been sold.
If you are in a position to place a 1M dollar policy, you can also afford to talk to your account (CPA) and attorney. IMO, those that are serious about extate planning should not be advised only by those who sell financial products. There are things said above that are actually mis-statements used to form conclusions, so many I have not addressed them all, but it's salesmanship. It's an art and many agents are taught various approaches, which is one of the big reasons I got out of the business....and I refused to use the company materials.
Estate planning should be accomplished in a team approach, you're in charge but one one hour meeting with your attorney, cpa and insurance agent (and better that your agent be a certified financial planner, not just someone who passed the insurance agent's license testing) and I guarantee that such a meeting will be more valuable than what you pay for the time. Meeting everyone at the same time keeps them all a little more honest, with more steak than sizzle, IMO. Having an accountant and attorney identify the financial needs and structure of your plan and the agent funding the actual need will save you time and money.
Keep in mind too, that taxes change. IMO, funding an insurance policy that relies on current tax advantages can be a mistake. I know, as interest on the loans from a policy use to be tax deductable, not any longer! While it may not sound like much, large policies that provided financing for premiums eventually effected the plan and reduced death benefits on an after tax basis. No tax code is written in stone......especially now with all that is going on.
Know too that dividends are an important part of insurance marketing and that many larger companies will pay out to ensure they establish and keep a good marketing angle, but there is no guarantee. Know too that while you may insure with Prudential, or any company, your policy may also be underwritten by other companies in a chain and the earnings may only be as strong as the weakest link. This portfolio management aspect is usually unknown at the agent level.
Understand that you will be borrowing the additional premium paid in a policy that provides the cash value and that the dividends paid will be less than most investment alternatitives when annualized over the long term.
So, I'd suggest that you do your due diligence. While most wives like the idea of a million bucks if you die, is making them an instant mil, really prudent? A very good family friend was in that boat and she, years ago, went through alot of it in a short time, lucky for her a good chunk was in trust. You should buy your insurance, not be sold. Good luck...
This is not a perfect analogy but it illustrates my point.
If you went to Home Depot or Lowes and described to a worker the problem that you had with one of your houses/apartments, and the worker then suggested that you needed this piece of equipment to install plus these wires, plus these tube plus this additional hardware and then this (drywall, panelling, or whatever) to cover it up and then these 87 tools to complete the job, would most people start to ask the clerk and others if there were a simpler way to solve the problem?
To me, when someone offers a Whole Life insurance policy as solution to banking needs, I start to ask the same question "Is there an easier way to overcome this same problem?"
For instance, buying a lesser amount of permanent insurance (Whole Life or Universal Life or Variable Universal Life or Private Placement UL) along with a substantial amount of term insurance.
$6,000 per year FOR LIFE is a long term commitment.
Will part of the life insurance need disappear as your wealth grows? Such as when you own your residence free and clear? when the kids leave the nest? When you own properties free and clear? If yes, then a 30 year term policy will fill that need very well.
I agree with Bill. Meeting with several professionals - a lawyer, an accountant and a financial planner (preferably one not selling product) will clarify the many, complex and interwoven issues involved with life long planning of financial issues. This whole thread has only skimmed the surface of these issues.
BEFORE meeting with these professionals, think about your long term GOALS for your life. Write them down and discuss them with the professionals and ask for guidance around the potholes and speed bumps on these roads.
Good Luck
Thank you for the responses. Yes I admit going into this I knew I was being pitched a product and that she is getting paid on whatever policy I purchase. The real interest I have in doing this is the concept of "Becoming your own Banker" which is what she was discussing. The death benefits came secondary. Like I said I don't know much about the different types of policies and which ones would be better for me...
I would like to meet with my attorney and accountant about this but I don't think they would know too much about this.
So from the perspective of becoming your own banker, and having access to your cash value is this still a viable option?
Kevin, you mentioned if there is an easier way to overcome the same problem? Can you help me understand why buying a lesser whole life and more term insurance is better? What other variables should I be looking at?
6k a year for life is a very long term commitment, but I also thought of the fact that I will have access to that cash value at any time kind of lessens the burden...
Here's a question...the next time I meet with the life insurance salesperson, what questions do you think I should be prepared with so I know that I am not being sold?
So from the perspective of becoming your own banker, and having access to your cash value is this still a viable option?
Kevin, you mentioned if there is an easier way to overcome the same problem? Can you help me understand why buying a lesser whole life and more term insurance is better? What other variables should I be looking at?
6k a year for life is a very long term commitment, but I also thought of the fact that I will have access to that cash value at any time kind of lessens the burden...
Here's a question...the next time I meet with the life insurance salesperson, what questions do you think I should be prepared with so I know that I am not being sold?
I will not address these questions for two reasons. First, I am neither an insurance agent nor a financial planner.
Second, and much more importantly I have no idea about your financial or family situation or your goals.
As I posted previously, think about your goals .. where you want to be financially, socially, professionally at each stage of your life. These professionals (lawyer, accountant, financial planner, insurance agent, investment advisor, etc) are the team of coaches that guide you along the path. Trust me, the path is very bumpy, has many curves and many sideroads that can get you lost quickly and permanently.
Once you have these goals clearly set in your mind, then you can meet with these coaches to help you.
By the way, if you don't trust the opinions that they give you or your question their competence, find another professional.
Lafi, you seem "sold" on the "access to cash values." Cash values in a permanent life policy are important but in the early years, these are very small and accessing these funds by withdrawal or loan will hinder the policies performance.
If I were a budding real estate investor who came across deals at unexpectant times I would ask this insurance agent "I may run across a perfect real estate (or business) deal that I want to make and I will need as much cash as possible and have that cash in my hands in 2 weeks or less. Let's say this happens in 15 years. What are my options for getting how much cash how soon from this life insurance?" After receiving the answer, then ask "What if this happens in 12 months?"
Also, it is very important to ask "what happens in the life insurance cash value drops to zero in 30 years (at age 55) or in 60 years (at age 85)?" Some life insurance policies could solve one problem but create another if the cash values are not monitored by both the agent and the client.
This is my last post in this thread.
Please seek guidance from competent professionals for these complex financial issues.
I agree with most of what's been said. A financial plan is not about a product but a strategy and plan. Insurance agents are typically taught to sell products in a slam bam thank you maam fashion. The Infinite Banking Concept is more of a plan which evolves over time and needs to adapt to your income, financing needs, other investements etc. @Kevin. Access to cash value can be within a day as most insurance companies will do a ACH transfer in a policy loan up to the entire amount of your cash value. Also, the policies associated with The Infinite Banking Concept are traditionally level premium whole life and so if funded properly will not zero out like a Universal Life Policy would becuase the cost of insurance is fixed not increasing. By funded properly I mean the use of a APUAR rider to the MEC limit every year for the first 5-7 years so that there is enough value in the cash value to sustain the required base premiums until age 65, 90 or 121 based on the level premium policy you choose..
@Financeexaminer I think you meant to say Prudential was a mutual company, demutualized and is now a publicly traded or stock company. Just wanted to make sure that clarification was there because they are definitely a stock company now. Here is their homepage that lists their stock price: http://www.investor.prudential.com/phoenix.zhtml?c=129695&p=irol-stockQuote
Prudential is a world wide insurance mess, yes, it is a stock company, it also has mutual policies under Prudential Mutual Wetern Life Insurance Company, in the US.
As to a question to ask, ask the agent if there is a guarantee on the time frame you can have a check in hand from the time your request, in writing, your cash from any policy.
If you're buying real estate with it, you could be out of contract by the time you get your check. Disbursements are generally covered by state law, anywhere from a few days to 90 days. I have never seen a drive up window at an insurance company to pick up certified funds. I would imagine getting 10K would be just a few days, but getting 100K? I use to do alot of withdrawls for policies and they took about two weeks to confirm....and that's within the company! You won't get a guarantee, only an assurance from the agent. This scheme might sell books or tapes/cds, but life insurance companies are not set up to be banks. Good luck
Thanks Bill I will be asking her this question,
Also, I don't think pulling out 100k would be a problem for me for at least a few years anyway. Then again even if it took two weeks am I right in saying that it's still quicker than going to any other lender for that amount? plus the interest saved?
I think the real question is whether or not it is easier to get the money out of the account you saved the money in instead. That is...unless you want to lock in a lower rate for whole life given your situation and age.
I do want to lock in a good rate. But I am also thinking how would the policy be affected when I pull money out? I think this model is about borrowing that money from your policy, and making payments back into it charging yourself the same interest any other lender would, and that way the money starts to multiply at a faster rate.
Can this be done with different savings vehicles like 401k or IRA?
It seems this same discussion is happening elsewhere on BP
:D
http://www.biggerpockets.com/forums/56/topics/57761-whole-life-insurance-real-estate
Yes...the discussion has happened like 3 or so times in the last month..weird!
Paying your policy back with interest is still paying with money you have earned. This is pulling money from one pocket into the other IMO.
Do you need life insurance at this point in your life? Who is relying on your income if you die? To me that is the real question and all answers are derived from that. If you don't need insurance then just save the money and "borrow" it from yourself!
To answer and clarify a few points, with most mutual insurance companies there are clauses in the contract that state that the insurance company has up to 6 months (sometimes longer) to comply with a loan request so the money may not be as liquid as one would think...I have seen loans for very large dollar amounts well over $100k processed in the same amount of time as a $10,000 policy loan but you don't have the absolute guarantee. Another misconception is the % on the loan from the insurance company is yours, that is false. That does NOT go to you, that is profit to the insurance company which (if its a mutual company) ultimately comes to you in the form of a dividend however NOT directly.
I don't like blanket statements!
I know the individual personally who sold a lot of whole life insurance to Robert Kiyosaki through Guardian
I know the individual personally who sold whole life and Universal Life to John Huntsman Sr who invented the majority of McDonalds packaging and is a multi billionaire because of it. His son is currently the ambassador to China
I know that Donald Trump has his whole life through Northwestern Mutual
However, all of these guys know how to use financial tools because they have a team and are educated. Tt as a part of their overall financial plan.
I think term is perfect for a lot of folks
I think whole is good as well
Universal Life can also be a good tool
Being self Insured might be a good route as well
When statements are made that this product is good and that product is bad it is short sided as I doubt anyone on this blog is God and knows everything about everything
The use of any financial product is contingent on the level of education of the user.
If I walked on to the golf course with all of Tiger Woods clubs and he only had a walmart putter and a 9 iron I know he would wreck me...
Amen Patrick !
I noticed there are a lot of blanket statements as well reading through all of these replies.
I have studied the infinite banking concept mostly through books and discussing back and forth with 2-4 different life agents, general agency's, and direct reps that I am friends with but it seems most agents do not know the product well enough to even explain an infinite banking policy's use efficiently. What are your thoughts on that?
I have studied the infinite banking concept mostly through books and discussing back and forth with 2-4 different life agents, general agency's, and direct reps that I am friends with but it seems most agents do not know the product well enough to even explain an infinite banking policy's use efficiently. What are your thoughts on tha
Did you dig up a really old post for this, these "programs" have had variations for 40+ years that I know of. A single pay premium and then borrow from the cash value and pay interest......you do realize that the amounts borrowed diminish the life coverage.
Regardless of what type of policy you might have, there is the real cost of covering the risk, that goes to the ins company, anything above and beyond begins to finance the game of the product and that too will have administrative expenses. The net may be available to you but you're paying it back even if the spin is paying yourself.
There are many good reasons to have life insurance, estate planning, funding buy-sell agreements, covering exposure in joint ventures/partnerships or assigning proceeds for collateral issues such as in an SBA loan.
At one time, interest paid on insurance loans was tax deductible and under those circumstances, front loaded policies provided pay up additions with cash value to net out loan costs and was a good source for tax deductible loans for short term business needs, like a farmer planting a crop and repay with rotating crops, but not now!
This scheme is not a good source of funding RE deals. It does sell insurance.
If you need insurance, get a small amount that survives your old age and fund the lion's share with term. Term is flexible by design and there are tricks to fill most any need at even lower costs, like don't use a mortgage term, use a uniform decreasing term policy which is much cheaper but that always covers the liability to insure. This means you're paying the lowest cost on insurance and admin costs.
Invest in other investments. Yes, drink the beer and sell the cans. A friend has been making a small killing in penny stock, go to crowdfunding, invest in local cell phone companies or loan money to a bakery for inventory, many car dealers will be happy to use your money. It may not be liquid but it can be as liquid as trying to get a check from your insurance agent and you'll be earning a lot less in insurance.
Buy term, if needed, invest the rest, bet I can make more with a hundred bucks than any insurance company would give me, any day of the week. :)
Term may be great for pure protection while you're building your assets, but like some of the prior replies it will vary with your life goals, plans, and preferences.
First of All if term was so great for "everyone," (blanket) you'll be hard pressed to renew that term policy past 65 when you'll probably need it most and then secondly as term gets past 40-50,50-60, and 60-65 its prohibitively expensive even on the just the pure insurance aspects of it.
Then 65 till death you'll need a great game plan and have enough assets working you and your heirs because if they inherit the estate without adequate liquidity to pay the final expenses they would have to fire sale the assets/real estate in order to do so at a time when they probably wouldn't want to focus on those business particulars.
Then on top of that if you own more than the current 5.25 mil in assets you may have an estate tax issue as well subject to the current 40% rate + state if applicable.
If you would have fully funded your permanent policy adequately to the MEC (modified endowment contract) limits when insurance was cheaper such as at "birth," by the parents, by the time the kid is 8-12 they could have a policy that probably earns more than cost of the premium payment based off internal policy returns which would allow the policy to continue indefinitely assuming you have a professional review your policy annually and do analysis when you plan to take a withdrawal or a loan to make sure the policy is respected.
Did you dig up a really old post for this, these "programs" have had variations for 40+ years that I know of. A single pay premium and then borrow from the cash value and pay interest......you do realize that the amounts borrowed diminish the life coverage.
Regardless of what type of policy you might have, there is the real cost of covering the risk, that goes to the ins company, anything above and beyond begins to finance the game of the product and that too will have administrative expenses. The net may be available to you but you're paying it back even if the spin is paying yourself.
There are many good reasons to have life insurance, estate planning, funding buy-sell agreements, covering exposure in joint ventures/partnerships or assigning proceeds for collateral issues such as in an SBA loan.
At one time, interest paid on insurance loans was tax deductible and under those circumstances, front loaded policies provided pay up additions with cash value to net out loan costs and was a good source for tax deductible loans for short term business needs, like a farmer planting a crop and repay with rotating crops, but not now!
This scheme is not a good source of funding RE deals. It does sell insurance.
If you need insurance, get a small amount that survives your old age and fund the lion's share with term. Term is flexible by design and there are tricks to fill most any need at even lower costs, like don't use a mortgage term, use a uniform decreasing term policy which is much cheaper but that always covers the liability to insure. This means you're paying the lowest cost on insurance and admin costs.
Invest in other investments. Yes, drink the beer and sell the cans. A friend has been making a small killing in penny stock, go to crowdfunding, invest in local cell phone companies or loan money to a bakery for inventory, many car dealers will be happy to use your money. It may not be liquid but it can be as liquid as trying to get a check from your insurance agent and you'll be earning a lot less in insurance.
Buy term, if needed, invest the rest, bet I can make more with a hundred bucks than any insurance company would give me, any day of the week. :)
I noticed that you did mention that the interest charged from borrowing from a life contract cannot be deducted. I spoke to one of the tax professionals I work with and have yet to verify it with others or to find the IRC code but she mentioned that with interest tracing rules as long as the interest is used towards investment or business it can be deducted.
Usually after year 10 on a life policy, loans have a maximum net rate of .25% cost.
So even in the worst case if have "net cost," of .25%
(interest within the policy charged is 5.25% and policy is returning 5.00% annually = net .25% cost within the policy)
but the tax benefit of paying the 5.25% assuming a 40% tax bracket fed/state and using the funds for business/investment purposes can be claimed via your tax return outside of the policy to make the net after tax rate 3.15%. So you have a positive gain of 1.85% (5.25% - 3.15%) assuming you pay back the policy with these tax savings. This creates positive leverage within the policy and allows cash value to grow even further internally while you get to reinvest the funds you borrowed hopefully in a performing asset outside of the policy. Having your money work in multiple places at one time (real estate/investment, life policy).
Really? What Insurance company pays interest on cash values that have been borrowed out? Interest is not paid on cash value unless it remains in the policy. That puts you 5% off.
Let's mention to the policy needs to be owned by the business, have it's business purpose to be deducted, but not buying additional insurance, such as a Key Man policy to replace coverage that creates the amounts to borrow. Consumer interest is not deductible, except to education I believe.
Prudential had a policy, paid up at 65, that generated CV at 4 years that could buy additional paid up coverage, interest use to be deductible, it was rather a perpetually increasing policy and then CV could be borrowed without repayment and the interest deducted, in the 8th year.
What you're speaking of is the Variable Outlay Premium (VOP) program that I helped institute in 82 with Prudential. Many companies had early paid up policies that could be used. A straight WL to 100 won't be too effective. Not new. Not doable for individuals with consumer interest.
I'm not against life insurance, but it's not a bank! It's marketing, just as using the highest tax rate in your attempt at an example.
Instead of asking your "in office tax expert" you might pull interest tracing rules and show the auditing required to accomplish that with a business policy and its purpose. I won't be reading it, I'm familiar with auditing.
While you may try to promote this angle, my bet is that there are only about a dozen people on this site that would be able to set this up, in a business, have the funds for premiums, have the validated insurable interest to acquire a high coverage policy, account for proceeds without issues and use this method economically. Your rendition is off as interest isn't paid on CV that is borrowed out.
Now, insurance companies do lend money and they will use CV as collateral, totally a different borrowing out of the policy, made to a business interest could be deducted. This is much like getting a loan and using a CD as collateral. :)
@Lafi S. Did you ever buy an infinite banking policy? I bought one in Dec 2009 and am curious how yours is doing today.
@Bill Gulley If I understand it correctly insurance companies pay dividends on the entire cash value even if a portion is loaned to the policy owner. The reason for that is because the cash value loan is guaranteed by the death benefit of the policy which was engineered to be sustainable.
The mutual insurance company will always get paid first.
At death: Death benefit - outstanding loans = payout to beneficiaries
At policy lapse: Policy owner is only entitled to the cash value they have accumulated.
I'm currently working my way through the podcast from present day to the beginning and have yet to hear anything about the cost of using OPM. From what I've gathered so far 40+ episodes into this the average buy and hold RE investor takes that into consideration and is "ok" with that cost as long as the property has positive cash flow. Some of them try to refinance their properties so they can cash out their investment and others get the properties paid off quickly so they own them free and clear. I understand the reasons for this which are mostly personal and risk tolerance related.
Could you give me your thoughts on using the cash value in a WL insurance policy to finance real estate deals? I read through the thread but didn't see you mention anything about recapturing the mortgage (principal and interest) payments which increases cash flow and basically refills the pipe so the investor can pull the trigger on the next investment property?
PS: I'm new to this website and the concept of real estate investing and would love to get your thoughts especially since you have the experience you do!