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. 

Originally posted by @Tom Jensen :

@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.

 You’re right. The policy will continue to grow. You make income from both places - and have a life insurance policy. 

Originally posted by @Pete M. :

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.

 Way to go getting that policy on your son. It’s hard to “optimize” a policy for a child, but the cost of insurance is so cheap, it makes a ton of sense. My daughter has the same - paid off early, earning dividends with a benefit  filled fraternal company. 

I just spoke with a client yesterday in his 60’s asking why the guy who sold him his term policy 20 years ago didn’t bring this up. 

Originally posted by @Lane Kawaoka :

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.

 So, you should never be paying 15-30% in fees. You will be paying that between fees and the cost of insurance, but not in fees. Within a few years it should outgrow the setup cost. 

Using a life permanent life insurance policy cash value as a line of credit for your investment is a great way to have your money working at two places at the same time. Basically you have your money in the life insurance policy that earns tax free 4 to 6% each year, while at the same time, you use it as collateral for a loan that you take around prime rate. You are making an arbitrage already by 1 to 2%.
But then, if you are using a bank to get that line of credit, and use the loan to invest, your interests are deductible.
You then reinvest that money that will provide enough cash flow to pay the interest and continues to grow also.

I would suggest that you check @Thomas Rutkowski website and Youtube channel

You can use a Whole Life or an Index Universal Life Insurance for this strategy. On the long term each of them has the same total fee, but they are packaged differently and their earning mechanism are also different.

It is true that the front load of these product is high. Also they need to be set up properly as if not optimized the fee are even higher. You should expect in the first year to only see 85% of the money that you put in. The best way to set them up is to commit a set amount of money for a certain number of years (at least 5). You can't put all the money at once in year one. So to use this strategy fully it would take a few years to put in place.

In the later years of your policy, the fee are very low (in the 0.25% range). Over the life of your policy, the average fee payed is lower than most 401k mutual fund.

So is it really advantageous to put 100 of your money in a life insurance policy, to only see 85 in the cash value, and borrowing 75 out to reinvest?

Not in the first few years as investing directly the 100 in an outside investment would give you back more money. But around three to five years down the road, this strategy is catching up and later on grows much faster.

And on top of it, you get a big life insurance that will provide your family a financial security in case of your death.

I believe in this strategy. But in my view it will properly work if you are committed to it as it needs to be properly and regularly funded on the long run. While the life insurance policies by themselves are sold as being flexible, with this usage, they are not. If you change your mind on the way, or can't put in the amount decided initially, your policy may become too expensive for its returns and collapse on itself.

@Tom Jensen terrible idea. There is a reason WLI can be popular in insurance circles, but it has nothing to do with the performance of the policy, but the commission on the plan. Take a look over what smarter people that I have to share:

80%+ failure rates? Lower returns than market? Lack of fee transparency? No guarantee on funds invested?

https://www.whitecoatinvestor....

@Tom Jensen

I have a whole life insurance policy that was sold to me back before I knew anything approximately 5 years ago. In that time I have put in ~$230/ month. So $230 x 59 months is about $13,500. The cash value is sitting at about $8000. I recently read “How to be your own banker” by Nelson Nash since I already had a whole life policy and wanted to know if there was a way to salvage “my loss.” And I came up with not really, unless I wanted to pour a bunch of extra money into it. It has all the appropriate riders that Mr. Nash has discussed, but I really hesitate putting more of my money there. Maybe It will be more useful once it has been place longer, but in my opinion there are a bunch of sunk costs upfront for several years.

Originally posted by @Anna Sabbatini :

@Tom Jensen

I have a whole life insurance policy that was sold to me back before I knew anything approximately 5 years ago. In that time I have put in ~$230/ month. So $230 x 59 months is about $13,500. The cash value is sitting at about $8000. I recently read “How to be your own banker” by Nelson Nash since I already had a whole life policy and wanted to know if there was a way to salvage “my loss.” And I came up with not really, unless I wanted to pour a bunch of extra money into it. It has all the appropriate riders that Mr. Nash has discussed, but I really hesitate putting more of my money there. Maybe It will be more useful once it has been place longer, but in my opinion there are a bunch of sunk costs upfront for several years.

If you can put a lot of more money into it, it wasn't probably set up properly to minimize fee. The goal is to maximum overfund it. So if you told your agent that you wanted to put $230 a month, the policy should have been designed for that maximum amount. There should be no room left for more money. If there is, then your fee are probably eating a good part of your return.

If you have more money in later years to put in a policy, it is often suggested to open a new policy for these new flow of regular fund.

As far as I know, fees are set costs or no? It sounds like you are telling me you can tell your agent you don’t want to pay the hefty fees and they will just create a policy like that. Hmmm I should’ve known I needed to barter. If I over fund the maximum it would just make my fees a lower percentage of how much was put in which doesn’t negate the fact those fees are still there. Fat chance on me opening another policy. Don’t get me wrong, it probably is great for those that are uber rich and need a tax shelter for their heirs. But I really fail to see the benefit for a person getting started to help with wealth creation. 

Originally posted by @Anna Sabbatini :

As far as I know, fees are set costs or no? It sounds like you are telling me you can tell your agent you don’t want to pay the hefty fees and they will just create a policy like that. Hmmm I should’ve known I needed to barter. If I over fund the maximum it would just make my fees a lower percentage of how much was put in which doesn’t negate the fact those fees are still there. Fat chance on me opening another policy. Don’t get me wrong, it probably is great for those that are uber rich and need a tax shelter for their heirs. But I really fail to see the benefit for a person getting started to help with wealth creation. 

No the fee are set based on your death benefit and other riders that you take. The same policy from the same insurance company will have the same fee independent from who is your agent. The agent can not rebate the fee. But as you stated, the goal is to minimize the percentage of the fee based on your premium so you get a higher cash value that earns more interest and as such lower the total cost that you see the first years. If properly setup and funded, at year 5 you should have the cash value very close or above the total amount that you have put in and overtaking it thereafter.

Your situation is unfortunately an example of not using fully your policy. You are not alone in that situation as you can see a lot of online comments about people having the same issue. Was it your agent who did not fully understand or explain to you how to properly use it? Maybe, only a few agents are very knowledgeable in these specific uses of WL or IUL. Most of them are just looking at the life insurance portion of it, without seeing the use of the cash value as a powerful tool.

Also, even when the policy is properly set up, a lot of policy holders don't have the dedication to fully commit to steady payments as planned initially.

So as I said earlier, I do believe that it is a great product, but you need proper help to set it up, and then you need to follow up with your plan. I don't think that you have to be uber wealthy for it. It works with a few hundred dollars a month or hundred of thousand of dollars a year. It is just that with smaller amount of money, it is more difficult to reinvest to gain meaningful return out of the policy.

Originally posted by @Cliff H. :

@Tom Jensen terrible idea. There is a reason WLI can be popular in insurance circles, but it has nothing to do with the performance of the policy, but the commission on the plan. Take a look over what smarter people that I have to share:

80%+ failure rates? Lower returns than market? Lack of fee transparency? No guarantee on funds invested?

https://www.whitecoatinvestor....

 Everything you’ve said is incorrect. Read my above post. Life insurance should not be considered an investment. It’s a place to store cash.

Oh and it’s another thing too: *Life insurance.*

Which is why it doesn’t perform like an investment. It’s a totally different asset class.

@John Perrings

Agreed John. While the article does make some great points the author is coming at it from the wrong angle... and is a bit extreme in his beliefs (if you read the comments thread).

I certainly don’t view it as an investment, but a place to store cash that can be leveraged while still gaining interest. It’s basically a tax deferred savings account with some death benefits - of course the insurance company will profit on you, but if you are smart it won’t outweigh your gains.

I think another benefit in the real estate space is a scenario like COVID. If you have tenants who can’t pay rent, but have a WL policy with cash value, you can leverage it to pay your mortgage so you don’t have to sell the property in a down economy.

Originally posted by @Lane Kawaoka :

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.

This.  If anything, starting out you will not have the capital to 'overfund' and will just end up with an expensive insurance policy most likely. 

Keep it simple. These policies are complex. If you want to overfund something,  overfund your opportunity account.  Buy a little value add investment house or plex.  Smart leverage, smart improvements.  Rinse and repeat👍

Not hard to have your money and assets working in multiple places without insurance later on. 

Ah, just what this forum needs. I knew it had been some time since this forum's last discussion on whole life insurance....

On one hand you have insurance agents or financial planners pushing the idea trying to convince us that it's a great deal. And on the other side you have folks who have done the math and understand the time value of money and have quickly realized that your money is better allocated into an actual real estate investment and purchasing a much cheaper term policy on the side.

WL policies are absolute crap for RE investors who have much better avenues in which to invest their money. 

In a recent thread, I took the numbers from an agent that was vehemently pushing the benefits of WL and came up with an IRR of 2.83% after ten years with a screenshot of the spreadsheet I used. I asked him if the numbers were correct... instead of refuting my numbers (of course he can't, he's the one who gave them to me, lol), he insisted that I was "missing the whole point" (LOL, no joke!). That thread is linked below.

https://www.biggerpockets.com/forums/519/topics/838746-why-do-rei-dislike-or-avoid-life-insurance?page=2

And this is not even taking into account that it takes years for the cash value of your policy to match the money that you put in. If a 2.83% return AFTER TEN YEARS, which is basically a negative return if you account for inflation, is something that's appealing to you....then by all means...go for the WL policy.