Whole Life Insurance as a Foundation for Real Estate Investing

175 Replies

Originally posted by @Tony Kim :


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.

2.83% seems a little bit low. But how could you consider that a negative return, when that money at the same time is also invested outside of the policy. The interest that you get from the policy, while not very high I agree, is in addition to what you are making outside with the same money.

The whole concept of this strategy is that your cash value is still growing at its full value while you are at the same time taking a loan secured by it to reinvest outside the policy. You are making your money work at two places at the same time.

The only downside is that for the first few year you can only reinvest approximately 75% of your cash outside of the policy. So it takes a few years to catch up. After that, your total return is way higher than if you had invested directly in an outside investment. And on top of it you have a life insurance.

Now if you are telling me that you use a permanent life insurance policy just to keep money in it without using it, then yes, it is lousy investment, a little bit better than bonds, but with also in most state asset protection. So if you want to compare bonds to real estate investment, I believe that on this forum everyone will agree that the later is much better. But what would be better: real estate investment only, or the same real estate investment with some additional % of tax free return on top of it?

 

Originally posted by @Mike S. :
Originally posted by @Tony Kim:


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. 

2.83% seems a little bit low. But how could you consider that a negative return, when that money at the same time is also invested outside of the policy. The interest that you get from the policy, while not very high I agree, is in addition to what you are making outside with the same money.

The whole concept of this strategy is that your cash value is still growing at its full value while you are at the same time taking a loan secured by it to reinvest outside the policy. You are making your money work at two places at the same time.

The only downside is that for the first few year you can only reinvest approximately 75% of your cash outside of the policy. So it takes a few years to catch up. After that, your total return is way higher than if you had invested directly in an outside investment. And on top of it you have a life insurance.

Now if you are telling me that you use a permanent life insurance policy just to keep money in it without using it, then yes, it is lousy investment, a little bit better than bonds, but with also in most state asset protection. So if you want to compare bonds to real estate investment, I believe that on this forum everyone will agree that the later is much better. But what would be better: real estate investment only, or the same real estate investment with some additional % of tax free return on top of it?

Bingo, you nailed it on the head.  If you're trying to compare the return on the WL policy vs other strategies, then yes, it will look terrible.  But that's not the point.  It's a long-term strategy to basically make $1 do the job of $2--you get life insurance (not tied to your employment) AND you can still use those same dollars towards RE investing.  The problem is you do have to fund it heavily to get it there, so it can be a struggle for those without a lot of capital available.

 

Originally posted by @Pete M. :

The problem is you do have to fund it heavily to get it there, so it can be a struggle for those without a lot of capital available.

 

That is the point that I would disagree with. You can put $5k a year into a policy or $100k, the result is the same. However, your policy need to have been set up to be max overfunded with that $5k or $100k depending on what you were ready to commit to it.

But as I mentioned earlier, it is easier to find outside investments that will give you good return when you have $100k to invest rather than $5k.

So in my point of view, you don't have to have a high net worth to use this strategy, you just need to have a steady flow of money that you can commit to funnel through it over a few years.

 

@John Perrings So you’re saying the high surrender rates on WLI are not true? That data appears to be tracked and are pretty terrible. Why would I choose to invest in (and strategically have to overfund at the start) a policy that, if lapsed negates the strategy of using it in the first place? What could I do with that money if I bought term at 1/10 the cost and still got 7-10% return in other markets?

WLI as a strategy seems more aligned to high net worth individuals who already have $ to burn, already overfunded their Backdoor Roth IRAs, HSAs, and R/E investments versus the average investor that’s still working to reach $18k/year on matching 401k dollers.

“How many people are still holding their policies after 5, 10, 15, or 20 years?

Luckily, this data is tracked by the Society of Actuaries and is demonstrated in the chart below.

Whole Life Lapse Rates If we use an 11% lapse rate in year 1, 9% in year two, 7% in year three, 6% in year four, and 6% in year 5, that means that 1/3 of folks have surrendered their policies within just 5 years, long before breaking even. If we continue on to 10 years (using a 5% lapse rate for years 6-10) then we’re down to an overall lapse rate of 50%. Using an annual 4% lapse rate for years 11-20, the overall lapse rate is 60% at year 15 and 70% at year 20. By year 30 (using a 3% lapse rate for years 21+), about the time of retirement for someone buying one of these upon residency graduation in their early 30s, 77% of those who purchased their policies no longer own them.”

Source: https://www.whitecoatinvestor.com/the-statistic-whole-life-salesmen-dont-want-you-to-know/

We love our Whole life Insurance policies!! You get to use it in 3 different ways. One way is you can pull money out of it at any time. Yes, there is a fee on it but you do your due diligence on whatever your using the money for (investments I hope) and it is worth it. Secondly, it is a life insurance policy that pays dividend each year, that is important because in so many years it ends up paying for itself (WIN WIN). Thirdly, a huge tax break (check with CPA). 

There are more methods and the book "Becoming your own Banker" by Nelson Nash is a great start for your financial goals and getting out of the "rat race".  

Originally posted by @Tom Jensen :

@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.

 I think that’s a great way to look at it.

Hey @Tom Jensen , We have been looking at this option recently with our Insurance guy. The thing I like the most about this is it can act as a double investment. The funds you invest in the insurance will continue to grow while being able to take them out and utilize them towards REI. We are setting it up so that fees and interest paid will be an expense that our corporation will be able to write off. Leveraging yet another source to continue growing.

@Cliff H. The WCI article is 4”rather and biased flawed by someone who is not an expert. Its been ripped apart several times over the years. Independent research should be done by anyone looking at CFB. Some of my wealthiest clients thrive off it but they know exactly how to leverage it properly.

Originally posted by @Cliff H. :

@John Perrings So you’re saying the high surrender rates on WLI are not true? That data appears to be tracked and are pretty terrible. Why would I choose to invest in (and strategically have to overfund at the start) a policy that, if lapsed negates the strategy of using it in the first place? What could I do with that money if I bought term at 1/10 the cost and still got 7-10% return in other markets?


 Whether the surrender rates are high or not is irrelevant.  All that says is that the policyholders stopped paying and terminated their policies.  It's not like the underlying policy crashed or went bankrupt--the risk is in the policyholder not following through, not the policy itself.  The advantage is that for the same dollar, I can get both whole life insurance and use those same dollars for real estate investing.  It's not either/or.

@Pete M.

@Pete Mathias

Agreed it seems like the biggest risk is someone not fully understanding how the policy works, getting lazy/frustrated, and not following up with the laid out plan.

Most Americans are not financially literate or financially independent. As educated investors we can assume that we would be in the 33% to successfully navigate the complex trenches of WLI and take advantage of the liquidity offering.

@Cliff H.

Your argument doesn't fundamentally negate the basis of WLI as it has been presented in this thread. It simply states a large majority of WLI policy holders default on their investments for purposes not defined.

Take a look at the stock market today - retail investors flock towards bankrupt companies because it is a “good deal” that sounds like someone who doesn’t understand the premise of intelligent investing in the stock market - similar to those who may not understand how to leverage the 2 for 1 capabilities of a WLI policy.

Leveraging WLI as a primary investment is a terrible idea as you can generate safe reliable returns elsewhere, without having to pay fees.

Leveraging WLI as a place to store excess cash, generating better returns/dividends than a savings account, AND taking a loan out for ANOTHER investment vehicle WHILE retaining your accounts interest/dividends seems like an advantageous setup for someone with the capital and discipline to do so.

Originally posted by @Zachary Paschke :
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. 

 What are the chances I'd see you in a BP forum haha. 

Originally posted by @Mike S. :
Originally posted by @Tony Kim:


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. 

2.83% seems a little bit low. But how could you consider that a negative return, when that money at the same time is also invested outside of the policy. The interest that you get from the policy, while not very high I agree, is in addition to what you are making outside with the same money.

The whole concept of this strategy is that your cash value is still growing at its full value while you are at the same time taking a loan secured by it to reinvest outside the policy. You are making your money work at two places at the same time.

The only downside is that for the first few year you can only reinvest approximately 75% of your cash outside of the policy. So it takes a few years to catch up. 

 

Again, folks who understand the time value of money will opt for much better ways to allocate their money. 

I agree that 2.83% seems very low... but I was just using the numbers that were given to me by a person who was strongly advocating for WL. If you see something wrong with my formula, please let me know. I can only go by the numbers that were given to me by another agent. That's why I think most of the WL benefits don't amount to much for a saavy real estate investor who can put their capital to much higher utility. Perhaps for the average person who doesn't actively invest, WL would not be a bad thing. But for most of us who are hungry to grow their capital as quickly as possible, WL is a waste of time and money.

Originally posted by @Tony Kim

Again, folks who understand the time value of money will opt for much better ways to allocate their money. 

I agree that 2.83% seems very low... but I was just using the numbers that were given to me by a person who was strongly advocating for WL. If you see something wrong with my formula, please let me know. I can only go by the numbers that were given to me by another agent. That's why I think most of the WL benefits don't amount to much for a saavy real estate investor who can put their capital to much higher utility. Perhaps for the average person who doesn't actively invest, WL would not be a bad thing. But for most of us who are hungry to grow their capital as quickly as possible, WL is a waste of time and money.

There's no significant difference in the time-value of money in this situation, though.  You put money into the policy, and it's generally available very quickly to borrow back out.  It's not like you pay into it for X number of years, and then it becomes available; you have access to the ACV the whole time while it's growing.  Even if the returns were only 2.83% (which is low), that wouldn't be instead of gains you can get through real estate investing.  You can do both!  That's why I say it's like making $1 do the job of $2. 

I recently came across an INDEXED  UNIVERSAL LIFE INSURANCE POLICY as far as i understand it, just recently became available to the general public (used to only be available for the already wealthy) that I purchased for myself through a business so its a tax write off.

its Indexd meaning it goes up when the market goes up but stays even when the market goes down, (no losses in value)

sure it might "only make" about 6-7% and you could potentially make more money in another investmet, but along with the Death Benefit there are also Living Benefits, for illness or injury, which is a great hedge in an event someone become incapacitated in any way their family is still taken care of financially. thats the "isnurance" part of it that pays out "incase"

after I think 1-2 years of "loading it" it becomes very Liquid ..you can become your own personal Bank and borrow your investment from yourself, you`ll have to pay it back to yourself, but you again get the interest write off.

at the end of your retirement when you end up taking out your money out as "loan to yourself" instead of a draw so it not Taxed as income , essentially "Tax Free" 

I also understand that banks when lending also count your insurance policys cash value as an asset.which could help with loans from them

I was really impressed with how it was presented and was so far one of the best "off the shelf" retirement investment vehicles (compared to say a Roth IRA) im sure i left a few things out but thats how i understand an indexed universal life insurance policy

you can also "load it" pretty heavily evey year compared something like a Roth Ira which only allows you to load a max of 6k a year?

Originally posted by @Alfonso Montejano :

I recently came across an INDEXED  UNIVERSAL LIFE INSURANCE POLICY as far as i understand it, just recently became available to the general public (used to only be available for the already wealthy) that I purchased for myself through a business so its a tax write off.

its Indexd meaning it goes up when the market goes up but stays even when the market goes down, (no losses in value)

sure it might "only make" about 6-7% and you could potentially make more money in another investmet, but along with the Death Benefit there are also Living Benefits, for illness or injury, which is a great hedge in an event someone become incapacitated in any way their family is still taken care of financially. thats the "isnurance" part of it that pays out "incase"

after I think 1-2 years of "loading it" it becomes very Liquid ..you can become your own personal Bank and borrow your investment from yourself, you`ll have to pay it back to yourself, but you again get the interest write off.

at the end of your retirement when you end up taking out your money out as "loan to yourself" instead of a draw so it not Taxed as income , essentially "Tax Free" 

I also understand that banks when lending also count your insurance policys cash value as an asset.which could help with loans from them

I was really impressed with how it was presented and was so far one of the best "off the shelf" retirement investment vehicles (compared to say a Roth IRA) im sure i left a few things out but thats how i understand an indexed universal life insurance policy

you can also "load it" pretty heavily evey year compared something like a Roth Ira which only allows you to load a max of 6k a year?

 Alfonso, 


You’re right. Except for the “only recently available” to the average person thing. That sounds like a sales line. 

IULs allow you to get some upswing in the market without risking your initial investment. The investment plan can be tailored to your risk profile. 

They also make great supplementary retirement vehicles. Loans never have to be repaid and as with WL can be taken tax-free if the policy is properly set up. 

Most companies have living benefits for these kinds of policies. Living benefits are available in a lot of term policies as well. 

The nice thing with IULs is because the cost of insurance isn't fixed (like with WL) you can get a discount on your cost of insurance. IULs often offer preferred interest rates on loans after a certain amount of time.

Originally posted by @Linda Bar :

@Tom Jensen, does it make sense to use the whole life insurance cash value for down payment, being that you have to repay it with a significant interest

It does if the insurance company pays you more significant interest than you pay them.  

Originally posted by @Rob Lion :
Originally posted by @Zachary Paschke:
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. 

 What are the chances I'd see you in a BP forum haha. 

 Rob, 

Pretty good. 

@Alfonso Montejano

The premium into the policy is not tax write off.

The interests to the build-in policy loan are not tax write off.

Interest for a bank loan secured by the cash value could be a tax write off in certain conditions.

@Tony Kim interested on why you think some of the wealthiest RE investors, as well as companies, use this method if it doesn’t work? Check out the balance sheets of big banks. WH is not an investment agreed but cash flow banking is a tested system, IF, the investor studies and understands it.

I’ve always directed clients to study this for months before diving in. Studying does not include reading BP either!

@Tom Jensen

Sorry if i sound repetitive, but will try to wrap up some concepts.

1) WL IS not an investment. Its a smart product that gives protection beyond the usual investment. In the first years interest is lower to pay for the insurance embedded. After several years interest grows and the insurance declines ( your cash value is higher therefore your insurance needed declines)

2) having said that, WL should not be acquired TOWARDS to invest in RE.

3) if you have a WL, then your strategy works perfectly. You have a growth in your cash, and can use it to leverage your investment. Someone mentioned to access banks instead of use funds from the WL company. That probably will give the best flexibility and the best return. While bank will look as a safe asset and will charge low interest, company charges higher rates ( higher than paying you). Then you can use cash flow generated to pay back the bank’s loan. If you paid it down, you can always lump sum some money towards WL, but is limited to the size of the contract.

Dont get to think WL as investment. Its a savings account WITH insurance that guarantee your family in case of a death.

Finally, if you cant keep up with capital commitment you initially setup, you can always change the terms of your WL, dropping insurance targets AND capital commitment, with no major loss. I have done that and i am very happy with the new terms.

Best regards

@Linda Bar

Yes, but It would depend on how your policy is structured. I’ve heard 5% simple interest per year.

Ex. 100k cash value and take out 90k loan at 5% interest (per year) for a down payment on a multi-family. That 100k cash value makes 3-4% COMPOUND interest (it doesn’t drop to 10k bc you took out a loan) while the 90k is used to buy real estate and make 7-20% interest (or more). As you only owe 5% SIMPLE interest on the loan (interest on the initial loan amount not compounded over time) you can use the cash flow to pay down the mortgage and pay back the loan.

So while your cash value is building compounding interest AND you’ve bought a tangible asset to build your net worth I would say it’s okay that the insurance company profits for giving you that opportunity - everyone’s gotta eat.