Whole Life Insurance as a Foundation for Real Estate Investing

211 Replies

I’ve recently come across the concept of “personal banking” through “overfunding” whole life insurance policies and leveraging the cash value to buy assets.

In theory it sounds like a can’t loose situation. You have a savings account tax deferred that always generates growth & yields dividends. You borrow from yourself and pay yourself back.

Has anyone had any experience with this strategy - I’ve only ever heard bad things about insurance, but it sounds like a very smart financial base, especially if you are looking to build a massive real estate portfolio.

I recently had a conversation about this strategy with a financial planner.  I had not heard of it previously.  I too had always had a bias towards whole life being a bad investment.  A couple take aways I recall:

-Life insurance is a bad investment if you look at fees and returns and compare it to stocks or real estate, for example.  On average the payout is 4% or so over the life of the policy.  4% sounds pretty good when compared to bonds, and it is basically a guaranteed dividend, so long as the company backing it remains solvent. 

-In addition, you get a death benefit for your surviving family. There are a lot of scenarios and coverages to choose from that affect the cost.  

-You can borrow against the policy for "free", but if the money is not in the policy, your death benefit would be less if you were to pass while it was out. Borrow up to 90% was what I was told.

What I didn't quite grasp is the starting value of the policy.  I believe the death benefit is front loaded as a cost, so you may put in $50K and have a $35K balance to start and there may be a lock-up period where you can't access the money.  

Not an expert, but saw your post and thought I would chime in while the info was fresh in my mind.  I'm considering it, but have access to lines of credit and am concerned about tying up from an opportunity cost stand-point.  Still have my biases about life insurance until I get more eduction. 

@Tom Jensen and @Paul Shannon ,

Yes, it's a strategy that my real estate clients use. Think of whole life insurance as a place to store cash rather than an investment.

That cash can then be used to perform your real estate investment activities.

The benefit is that you do not have to liquidate your cash account (life insurance cash value). You can borrow against your cash to make the investment. Making $1 do the job of $2 or $3 dollars.

One clarification - you cannot borrow against your policy for free. You are borrowing the insurance company's money and they do charge you interest. But there are several benefits - one being there are no pay-back terms on the loan.

And of course it's all tax-deferred (or tax-free is used properly).

Hope that helps!

I do this but mostly as a way to float liquidity between investments.

Its mostly for investors over 500k net worth as those with less should focus all liquidity to actual investing.

@John Perrings

Good to hear that others are leveraging this strategy. Great point about interest payments back to the insurance company.

But you still come out on top as your cash value continues to grow while you are paying the loan back - since the money doesn’t technically leave your account so it can accrue interest & dividends.

@Lane Kawaoka

Would you not consider it as a potential starting platform?

For example - If I had ~$100k -$150k to put as a down payment on my first multi-family. Instead, put it in a whole

life policy, take a loan out against it, use that for the down payment, and have the policy gain interest while simultaneously acquiring a tangible asset and using rent to pay back the loan.

@Tom Jensen Hi Tom, I like whole life policies for a lot of reasons. Some RE related, some not.

1) Availability to borrow against - I'm not sure if I can borrow my accumulated cash value to date (or more to my policy value). I haven't looked into it yet but I like that I have this option.

2) when I'm gone the policy value will go to my loved ones avoiding probate - direct check to beneficiaries tax free.

3) if I do borrow from the policy its not 'free' - you'd have to pay interest, but if the reason I'm taking it out is making more in returns than the interest I owe, it is essentially free to access.

4) general comfort in having the policy - just make sure to keep it active by making all payments on time

Its kind of like your own line of credit (LOC), no?

Check out "Heads I Win, Tails You Lose" by Patrick Donohue, or the infinite banking series by R Nelson Nash.

We use a LOC collaterized against the actual cash value of the policies for my wife and myself. Since a WL policy is generally very safe, the LOC LTV will be high. We use a separate LOC since the interest rate is lower than if we borrowed directly out of the policy.

Keep in mind you can only put in so much each year, based on your income and other variables, so can take time to build up. You can have multiple policies on the same person. I even have a $250k policy on my 2yr old son! There are costs to set it up and less of the initial money goes to the ACV, but still worth it.

WL policies mean I can have death benefit coverage while still using most of that money for other things, like RE investing, and it's not tied to my W2 job.

You can do that but no one talks about how you loaded that policy and had to pay 15-30% in fees in the first year. There is loss opportunity costs.

Originally posted by @Paul Shannon :

I recently had a conversation about this strategy with a financial planner.  I had not heard of it previously.  I too had always had a bias towards whole life being a bad investment.  A couple take aways I recall:

-Life insurance is a bad investment if you look at fees and returns and compare it to stocks or real estate, for example.  On average the payout is 4% or so over the life of the policy.  4% sounds pretty good when compared to bonds, and it is basically a guaranteed dividend, so long as the company backing it remains solvent. 

-In addition, you get a death benefit for your surviving family. There are a lot of scenarios and coverages to choose from that affect the cost.  

-You can borrow against the policy for "free", but if the money is not in the policy, your death benefit would be less if you were to pass while it was out. Borrow up to 90% was what I was told.

What I didn't quite grasp is the starting value of the policy.  I believe the death benefit is front loaded as a cost, so you may put in $50K and have a $35K balance to start and there may be a lock-up period where you can't access the money.  

Not an expert, but saw your post and thought I would chime in while the info was fresh in my mind.  I'm considering it, but have access to lines of credit and am concerned about tying up from an opportunity cost stand-point.  Still have my biases about life insurance until I get more eduction. 

 Paul, 

Anytime you want to get into a policy like this you want more than guaranteed interest of 4%. You want a policy with a dividend as well. The dividend is not guaranteed, but I can’t think of a major Mutual or Fraternal that hasn’t paid one the past 20 years or so. You either want a company that pays a dividend on top of guaranteed interest or an IUL that will share in stock market growth. 

Policies don’t carry as much in “fees”, but there are insurance costs. Obviously if you buy a $500k WL policy, make one payment, the company guarantees the current death benefit based on your purchased insurance and contributed paid up premium in cash value. 

The guaranteed interest of the stock market is -100% and there’s no death benefit. Comparing the costs of the two options isn’t fair considering all growth in a WL policy is protected. If you get a good rate on a savings account, that rate isn’t guaranteed for the rest of your life. Someone recently told me about an offer from Ally that was around 2.4%. They don’t have that offer anymore. People that took that offer are no longer getting that interest rate.

If your policy is bing properly funded most of your cash from the first few years should remain in the policy. 

I know some people will disagree with me, but life insurance is not meant to be an investment. It’s a hedge against your investments. Life insurance has no minimum distributions like retirement accounts, but can be used to supplement your retirement if you’d like. 

Hope that helps. It’s tough finding people who know how to write these policies well.