Infinite Banking Concept
Rental Property Investor · Waterville, ME · Member since 2018 · 36 posts · 19 votes
Infinite Banking Concept
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Specialist · Grand Rapids, MI · Member since 2020 · 116 posts · 80 votes
3y@Will Fraser infinite banking is actually using life insurance as an asset to lend against when over funded.
79 Replies
- 3yThomas RutkowskiPro MemberFinancial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
Quote from @Jeffrey Evans:
Mine is working well and I don't regret getting it. If I can put money in and borrow it out to invest yet that amount continues to grow as if I didn't borrow any at around 5.5% and the loan is 4.5% and I can make 10+% on what I invest it in I am happy . And the payment is flexible. Its not like a car payment that has to be made every month. Of course the sooner you pay it back the better but don't have to pay it back at all if you don't want.
Just remember, you're not "borrowing it out". It is a loan against the cash value. Your cash value is the collateral and never leaves the policy. That's the magic that makes this work.
- 3yThomas RutkowskiPro MemberFinancial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
Quote from @John Clark:
Quote from @Thomas Rutkowski:
You are borrowing money from the insurance company that is secured by the cash value of the policy. The cash value continues to earn dividends/interest crediting. So if your cash value is earning 6%, but you can get a line of credit secured by that cash value at 5%. . .This is where "infinite bankers" cue the unicorns. Finding a lender trapped by an old insurance policy into paying a fixed rate and at the same time forced to lend at a lower rate due to market conditions is like finding fleas on an iron dog. Give it up and spend your time finding real financing.
Except that @Jeffrey Evans just shared his actual numbers.
Lending rates are almost always lower than the dividend/interest crediting rates. Banks loan against cash value at Prime. Insurance company policy loans are indexed to the Moody's Corporate Bond Yield. The insurance company's overall investment pool does better than just the AAA rated bond portion.
- Investor · San Jose Ca · Member since 2020 · 125 posts · 115 votes3y
Mine served 2 purposes. I wanted something to help me put money away that I could use when I want to do a deal. And my wife is super afraid of me investing and afraid of what will happen if something happens to me and I get hit by a bus. The policy helped me comfort her and will help me get deals when they arise. VS just saving the $ in a bank.
- Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes3y
So the "actual numbers" involve earning 1% of the cash value after arbitrage? That's not even going to cover the random fees and expenses involved with setting up and maintaining a life insurance policy. There is no reason to introduce countless extra steps when the gain isn't even going to cover the costs.
Not to mention you typically can't borrow the full cash value of the policy, which means you have less money to actually invest into real estate than if you had not paid into the cash value at all. Whole life insurance is complicated to understand, has a very high monthly premium that can be problematic during financial down turns, and yields low rates of return when not using a loan. Many people probably wouldn't otherwise obtain life insurance at all so they are otherwise paying for something they didn't really want in the first place, and could have simply invested the premiums instead into appreciating assets and enjoyed those assets while alive as well as passing them on to heirs should they pass. Lastly a loan needs to be repaid, which is going to cut into monthly cashflow.
In short its just way too much work and effort for essentially no rewards after you account for policy fees and costs. If you really want life insurance then just get a regular policy and skip all the nonsense. There are plenty of other good ways to obtain a loan against assets you own without going down this rabbit hole.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Ben Zimmerman:
:-)
sometimes I just want to buy a share of the insurance company that sells this kind of policy. - Investor · San Jose Ca · Member since 2020 · 125 posts · 115 votes3y
Quote from @Ben Zimmerman:
So the "actual numbers" involve earning 1% of the cash value after arbitrage? That's not even going to cover the random fees and expenses involved with setting up and maintaining a life insurance policy. There is no reason to introduce countless extra steps when the gain isn't even going to cover the costs.
Not to mention you typically can't borrow the full cash value of the policy, which means you have less money to actually invest into real estate than if you had not paid into the cash value at all. Whole life insurance is complicated to understand, has a very high monthly premium that can be problematic during financial down turns, and yields low rates of return when not using a loan. Many people probably wouldn't otherwise obtain life insurance at all so they are otherwise paying for something they didn't really want in the first place, and could have simply invested the premiums instead into appreciating assets and enjoyed those assets while alive as well as passing them on to heirs should they pass. Lastly a loan needs to be repaid, which is going to cut into monthly cashflow.
In short its just way too much work and effort for essentially no rewards after you account for policy fees and costs. If you really want life insurance then just get a regular policy and skip all the nonsense. There are plenty of other good ways to obtain a loan against assets you own without going down this rabbit hole.
There is an inflection point, usually around 6-7yrs were you will have access to more money then what you have put in. Yes the spread is only about 1% from the growth and the loan but the entire amount is still compounding none stop at 5.5-6% as if you didn't borrow any. What else can you do that with? I have borrowed from my 403b but with it i had strict payment schedule every month and the money I borrowed out stopped working and growing in the retirement account until I put it back in. Plus the growth in the IBC policy is all tax free. Payment is flexible. I can pay as little as 430$ a month or as much as 44k a yr. and you can stop contributing at all if you want after 7 yrs. But at that point you have an instant return on you money you put in and can access more then the amount put in. So most people want to keep putting money into it at that point. The death benefit is tax free to you family. Plus the policy is protected from law suits ect.
Its just another tool that works for some and not for others. My only regret is I didn't get a policy sooner.
- Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes3y
Quote from @Jeffrey Evans:
Its just another tool that works for some and not for others. My only regret is I didn't get a policy sooner.
Glad you like it, personally I would scream if I had to wait 6-7 years just so that my investment is back to the break even stage.
Had I simply put that money in the stock market in 7 years, I wouldn't just be breaking even, instead the money have grown significantly at an average CAGR of roughly 10%. If I was doing something more productive than the stock market, such as buying real estate for those 6-7 years then I am now lightyears ahead of you and your breaking even.
Not to mention all of the other downsides that myself and others have already pointed out. Life insurance that is as "little as $430 a month" isn't a "little" amount and can seriously jeopardize many families if they lose a job and are unable to pay. They could have got a term policy for 20-30 bucks if they felt like they needed life insurance and invest the other 400 elsewhere and start earning an immediate return instead of waiting 7 years just to break even.
The opportunity cost of wasting 6-7 years worth of investing time just so you can break even is simply too large such that a passive 1% arbitrage will never be able to compensate for the massive head start that I already have over you.
You can't borrow the full cash value and can usually only borrow around 90%. So if you contribute 430/mo and break even after year 7 you have about 36k cash value, and based on the 90% loan you can actually invest about 32,400 into other projects.
Meanwhile if I buy term life insurance for 30/mo, and invest 400/mo at 10% interest I now have 48,000 available after year 7 which is 50% more than the 32k you have.
So not only do I have 50% more money to start investing into real estate with, but I don't have a loan that I have to repay, so all of my cashflow can be immediately funneled back into investing in more and more real estate, where you need to use your cashflow to make payments on the loan you made which delays your ability to purchase additional real estate.
These whole life policies can be good for someone like my parents who are not investors and are actually scared of investing any money at all because they fear that they might lose it, and instead they are perfectly happy with a slow and steady 5-6% guaranteed growth on their money with no risk and still have access to some of the money if they ever have an emergency. But they are primarily just going to leave the money in the account and not try to arbitrage it by constantly taking loans.
However as an actual investor that is willing to put in the time and effort to find deals and is willing to take even a trivial amount of risk by investing in real estate, the investor will be hindered by such a policy, not helped. - Investor · San Jose Ca · Member since 2020 · 125 posts · 115 votes3y
@Ben Zimmerman the whole idea is to do both.
if you had 50k to dump in the stock market at say 10% you would make 5k annually
if you put that same 50k in to an overfunded whole life policy and borrowed the 90% (45k) and put in the same investment you would make appr 5500 annually. the 50k still earns the 6%-4.5% which is a spread of 1-1.5% plus the 10% on the investment of the 45k. This spread grows and increases the amount you would make the longer you have the policy.
It is an expense though to keep the policy active that has to be accounted for. Def wouldn't want to do it and end up letting the policy default.
- Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes3y
Quote from @Jeffrey Evans:
if you put that same 50k in to an overfunded whole life policy and borrowed the 90% (45k) and put in the same investment you would make appr 5500 annually. the 50k still earns the 6%-4.5% which is a spread of 1-1.5% plus the 10% on the investment of the 45k. This spread grows and increases the amount you would make the longer you have the policy.
Your math is off. 1% arbitrage of 50k is $500. So if you take the 500 and the 4500 you get from stock increases on the 45k loan then you have 5k/yr not 5500, which is the same total profit as simply taking 50k into the market at 10%. You would need a constant 2% arbitrage to get the 5500 you cited which is higher than any arbitrage numbers that you or anyone else has mentioned so far as being possible. The difference is that you still need to worry about repaying the loan each month, and I don't. I can immediately use any cashflow from my investments to buy more investments, while you are stuck trying to repay the loan. So you are repaying the loan as money back into a policy earning 6%, and my funds are going into an investment earning 10%, (although its technically significantly more than 10% since money would actually go to real estate and not the silly stock market).
But even then, that STILL only works if we start our calculations at year 7 after you have already broken even from policy fees and costs. But if we actually start at year 1, then by the time year 7 roles around, I already have a significant head start on you because you are just now breaking even and I have had 7 years of compound growth. You can't just plop down 50k on day 1 of an insurance policy and call it an overfunded policy, it will convert to a MEC and lose al of its tax benefits.
If you are breaking even at year 7, then I already have 50% more available capital than you do per my previous post. Even if you were able to arbitrage at a significant 2-4% rate (not possible), you would still never catch up to me if I have a 50% head start and your future investments are being constantly delayed due to these loan repayments. - 3yJim PfeiferBusiness MemberInvestor · Dublin, OH · Member since 2014 · 241 posts · 495 votes
These policies are not investments, but they are great places to store cash for use later. You can get 4-5% tax free cash on cash return and you get additional benefits like a death benefit, tax free withdrawals, long term care coverage and more.
I use these policies to invest in passive real estate syndications and private lending. It's a great way to borrow money at a lower rate and invest it in something with a higher rate. Putting money in a whole life insurance policy is not an investment, but it can certainly turbocharge your other investments. It is completely flexible and allows you to use your "lazy money".
The key is to find the right agent to help you structure your policy - this is the most important part of the entire process. Most life insurance agents are trained to sell the standard type policy that their firm wants them to sell. Usually this means a policy targeted at someone who has a 401k and works a W2 - most agents don't know how to structure a policy for someone who wants to do use the cash value for investments. Also, if an agent sets up an infinite banking type policy correctly, they will earn a commission up to 80% lower than they would the "normal" policy. You need to find an agent that is willing to give up that commission and understand your specific goals and strategy for the policy. The best way to find a quality agent is the same way you find a quality syndicator, attorney, CPA or plumber - get a referral from someone you know, like and trust who is a member of your Community. Just another reason to belong to a Community of like-minded people who are looking to build wealth in a similar way that you are!
Good luck! - Insurance Agent · Orinda, CA · Member since 2016 · 77 posts · 113 votes3y
Quote from @Ben Zimmerman:
Quote from @Jeffrey Evans:
if you put that same 50k in to an overfunded whole life policy and borrowed the 90% (45k) and put in the same investment you would make appr 5500 annually. the 50k still earns the 6%-4.5% which is a spread of 1-1.5% plus the 10% on the investment of the 45k. This spread grows and increases the amount you would make the longer you have the policy.
Your math is off. 1% arbitrage of 50k is $500. So if you take the 500 and the 4500 you get from stock increases on the 45k loan then you have 5k/yr not 5500, which is the same total profit as simply taking 50k into the market at 10%. You would need a constant 2% arbitrage to get the 5500 you cited which is higher than any arbitrage numbers that you or anyone else has mentioned so far as being possible. The difference is that you still need to worry about repaying the loan each month, and I don't. I can immediately use any cashflow from my investments to buy more investments, while you are stuck trying to repay the loan. So you are repaying the loan as money back into a policy earning 6%, and my funds are going into an investment earning 10%, (although its technically significantly more than 10% since money would actually go to real estate and not the silly stock market).
But even then, that STILL only works if we start our calculations at year 7 after you have already broken even from policy fees and costs. But if we actually start at year 1, then by the time year 7 roles around, I already have a significant head start on you because you are just now breaking even and I have had 7 years of compound growth. You can't just plop down 50k on day 1 of an insurance policy and call it an overfunded policy, it will convert to a MEC and lose al of its tax benefits.
If you are breaking even at year 7, then I already have 50% more available capital than you do per my previous post. Even if you were able to arbitrage at a significant 2-4% rate (not possible), you would still never catch up to me if I have a 50% head start and your future investments are being constantly delayed due to these loan repayments.@Ben Zimmerman and @Jeffrey Evans
Hi guys - If I may, maybe the following will help:
I'm not sure I understand how you're looking at the 1% arbitrage you're talking about. The arbitrage between the life insurance loan rate and the growth rate is there, of course, and all it means is that if you're borrowing money at 5% and the policy is earning 4%, for example, you're effectively borrowing money at 1%.
However, the more correct way to view life insurance arbitrage, in my opinion, is to compare the growth rates to other growth rates of similar assets and loan rates to other loan rates.
Depending on the bank account, life insurance could grow ~40x that of a typical bank (0.1% vs 4% for example). So, as a place to store cash, the growth is significantly greater. But the growth of the policy is not the end goal. The growth just allows you to expand your system of capital more efficiently so more investments can be made.
On the loan side, the correct comparison, again, is not between the loan rate and growth rate, but between the policy loan rate and other loan rates. As interest rates rise, there could be arbitrage between a policy loan rate and the going bank loan rate. If bank rates stay below policy loan rates, another possibility is there could be some arbitrage on hard money. Say you finance 80% with the bank and the rest with a hard money loan, that hard money might cost you 8-10%? You could instead finance that through a policy loan at, say 5%, and pay yourself the market rate of 10%, capturing the spread. Now you're making money as the RE investor *and* as the hard money lender. This would expand your system of capital using money you would have paid to someone else anyway. These are just a couple of examples.
Some more intangible benefits include no payback terms on the loan. You can pay it back (or not) whenever you want. That could be pretty valuable if you're doing BRRRR.
What often happens is people think of life insurance as an "either/or" but it's an "and" asset. You can buy life insurance *and* you can buy real estate.
Also, you do not have to "break even" before you can use the cash value. This is a common misunderstanding. A good portion of your cash value is available to use via policy loans to buy RE from day 1. In the range of around 50%-90%. The available cash value will often surpass a typical bank account before that break even point of the policy happens.
If you can think past 3 or 4 years, whole life insurance becomes a liquidity rocket ship, where every $1 you pay in premium creates more than $1 in cash value. In a mature policy, for example, you could pay $50k in premium for the year and have $100K or $150K in new cash value for that year. This is not an exaggeration. It's a serious advantage over people using regular cash. You just have to change your thinking from "rate of return" of the policy to "available capital" (liquidity).
It's not about the rate of return of the policy (other than the fact that it's better than a bank), it's about the ability to expand your system of capital and then leverage that capital to create returns that dwarf anything you can get using your own cash.
Most people love the idea of using other peoples' money - that's all we're doing with life insurance. We just have to capitalize the policy first.
I've run the numbers. You can buy all the RE you would have purchased any other way, and over a 30-year period you'll come out *way* ahead.
By the way, fun fact: It's possible to create additional present values from the death benefit of a whole life insurance policy that will accelerate scale in ways no one here is thinking about.
- Investor · San Jose Ca · Member since 2020 · 125 posts · 115 votes3y
@John Perrings Well said. When it comes down to it I am just using it as a place to store money and get a return but have access to when a deal arises that I want to do.
- 3yThomas RutkowskiPro MemberFinancial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
Quote from @Ben Zimmerman:
Quote from @Jeffrey Evans:
if you put that same 50k in to an overfunded whole life policy and borrowed the 90% (45k) and put in the same investment you would make appr 5500 annually. the 50k still earns the 6%-4.5% which is a spread of 1-1.5% plus the 10% on the investment of the 45k. This spread grows and increases the amount you would make the longer you have the policy.
Your math is off. 1% arbitrage of 50k is $500. So if you take the 500 and the 4500 you get from stock increases on the 45k loan then you have 5k/yr not 5500, which is the same total profit as simply taking 50k into the market at 10%. You would need a constant 2% arbitrage to get the 5500 you cited which is higher than any arbitrage numbers that you or anyone else has mentioned so far as being possible. The difference is that you still need to worry about repaying the loan each month, and I don't. I can immediately use any cashflow from my investments to buy more investments, while you are stuck trying to repay the loan. So you are repaying the loan as money back into a policy earning 6%, and my funds are going into an investment earning 10%, (although its technically significantly more than 10% since money would actually go to real estate and not the silly stock market).
But even then, that STILL only works if we start our calculations at year 7 after you have already broken even from policy fees and costs. But if we actually start at year 1, then by the time year 7 roles around, I already have a significant head start on you because you are just now breaking even and I have had 7 years of compound growth. You can't just plop down 50k on day 1 of an insurance policy and call it an overfunded policy, it will convert to a MEC and lose al of its tax benefits.
If you are breaking even at year 7, then I already have 50% more available capital than you do per my previous post. Even if you were able to arbitrage at a significant 2-4% rate (not possible), you would still never catch up to me if I have a 50% head start and your future investments are being constantly delayed due to these loan repayments.The arbitrage is not on the inside of the policy. It is on the outside. If I can borrow at 5% and invest it and earn 10%, I make a 5% spread before taxes. In a 40% tax bracket, I'm giving 2% of that to the IRS and netting 3%. That's 3% on top of whatever the cash value made. If its a 6% dividend, then that's a combined 9% return.
Had you taken your cash and invested it in a hard money loan at 10% for example, you would have given 4% of that to the IRS leaving you with only 6%.
I don't know about you, but I'll take 9% over 6% all day long. This is all about putting your money to work in two places at one time. Life Insurance is not the "investment". It simply helps you make more money at your real estate investing.
And you can absolutely fund a policy with $50K, or even $100K annually. You can't drop in one single lump sum, but I can easily design a policy around only 5 annual premiums of whatever amount someone wants to commit to this approach. Many of my clients fund their policies with over $100K of annual premium. The only requirement is that there needs to be a legitimate purpose for the death benefit.
- 3yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
“Most people love the idea of using other peoples' money - that's all we're doing with life insurance. We just have to capitalize the policy first.”
How is borrowing from yourself using other people’s money? Isn’t much more like borrowing against your investment?
- Insurance Agent · Orinda, CA · Member since 2016 · 77 posts · 113 votes3y
Quote from @Don Konipol:
“Most people love the idea of using other peoples' money - that's all we're doing with life insurance. We just have to capitalize the policy first.”
How is borrowing from yourself using other people’s money? Isn’t much more like borrowing against your investment?
Policy loans are loans from the insurance company, not from yourself. you are borrowing the insurance company’s money, collateralized by the cash surrender value. Since you don’t take your own money out of the policy, it continues to grow while the loaned money is out there working for you.
- Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes3y
Quote from @Thomas Rutkowski:
Technically that would translate into an 8.7% return, but beyond that your overly simplified calculations leave out numerous very important facts, namely the policy fees and how the loan repayments negatively effect your ability to scale your real estate holdings.
I'm going to rearrange the percentages slightly because I don't know of many people who are wealthy that are going to put their money into active income investments like hard money and get taxed at 40% when a passive stock market only pays 20%, plus stock investing is much more familiar and likely to actually happen for readers of the post as opposed to hard money which is a niche industry. Now you are no longer paying 2% and netting 3%, instead you are now paying 1% of that to the IRS, and netting 4%.
You can generally only borrow up to 90% of the cash value, so you aren't leveraging your entire amount. On a hypothetical 100k investment and 10% annual stock growth your returns are (.4* 90k) + (.06*100k) = $9,600. (which is a 9.6% total return)
If I don't do anything fancy and just straight invest the 100k, I get .08 * 100k = $8,000 after tax
Rates may vary from brokerage accounts, but I was able to get a 50% margin loan from M1 Finance for several years at 2% rate. In that case my numbers now become (.08*150k)-(.02 *50k) = $11,000 easily beating the infinite banking concept.
But these calculations are still very much oversimplified because we STILL haven't factored in one of the most important aspects which is the random fees that you incurred in setting up and maintaining this policy. A sample policy for a 35 male can be found here https://www.investopedia.com/a... In that sample policy after 5 years you have paid in $5890 in premiums, but your cash value is only $3738, so only about 64% of your premium payments are going towards cash value. Because of these fees, it takes several years of you earning interest on the cash value just to break even with the amount you have paid into the policy. The sample policy broke even after 10 years. So a more accurate calculation wouldn't have us both starting with the same 100k, because I should always start with more money than you because you will always need to pay fees. In this thread people have claimed that you can break even after 7 years, but most websites list 10 years as the break even point. Regardless, we'll be nice and assume it only takes 7 years to break even and we'll assume I don't even attempt to leverage my account and just go with vanilla stock investing at 8% after taxSo by the time you have 100k in your policy, I'll have 150k thanks to a 7 year head start on investing because I didn't need to pay those fees. At that rate even if you earn 9.6% per year and I only earn a vanilla 8%, it would take you 36 years to catch up to me. And I'll smoke you if I do any sort of leveraging myself such as that margin loan from M1 Finance because I start with more, and also earn a higher interest % each year.
Now it is true that I only have a full 7 year head start if you don't overfund your account. The more you overfund your account, the less of a head start I get since the overfunding portion of your payment is going straight to cash value and not eaten by fees. I will always get a head start of some sort since no matter how much you overfund, you're still paying those base fees. Even if you overfund by $1m the first month, you will still have to pay fees on month 2, 3, 4 etc, so I still get an advantage it just becomes harder to calculate.
But the numbers become MUCH worse if we factor in an investment like real estate where the total returns are significantly higher than 10% of the stock market because I can utilize my entire account balance where you can only effectively utilize 90% of it. If long term inflation is roughly 3% per year, then a 20% down payment mortgage translates into a 15% ROI just from appreciation alone. With equity paydown and cashflow we'll assume a relatively modest 20% total ROI which puts your final investment numbers at (.15*90k) + (.06*100k) = 19.5k and puts my numbers at (.2*150k) = 30k If I get the 7 year head start. Even if we magically erase 100% of your fees and don't give myself any head start at all I still earn more at (.2*100k)=20k.
Finally, I will be able to scale my real estate holdings faster than you, in part because your monthly cash flow is automatically reduced because you need to make payments on your policy loan each month and because part of your next months policy premium is being eaten by fees instead of increasing cash value making it harder to save for the next down payment. Meanwhile all of my earnings can immediately be redeployed towards the down payment of my next property.In short, infinite banking is NOT going to amplify the rate at which you build wealth, especially if you plan on investing in real estate.
- Insurance Agent · Orinda, CA · Member since 2016 · 77 posts · 113 votes3y
Quote from @Ben Zimmerman:
Quote from @Thomas Rutkowski:
Technically that would translate into an 8.7% return, but beyond that your overly simplified calculations leave out numerous very important facts, namely the policy fees and how the loan repayments negatively effect your ability to scale your real estate holdings.
I'm going to rearrange the percentages slightly because I don't know of many people who are wealthy that are going to put their money into active income investments like hard money and get taxed at 40% when a passive stock market only pays 20%, plus stock investing is much more familiar and likely to actually happen for readers of the post as opposed to hard money which is a niche industry. Now you are no longer paying 2% and netting 3%, instead you are now paying 1% of that to the IRS, and netting 4%.
You can generally only borrow up to 90% of the cash value, so you aren't leveraging your entire amount. On a hypothetical 100k investment and 10% annual stock growth your returns are (.4* 90k) + (.06*100k) = $9,600. (which is a 9.6% total return)
If I don't do anything fancy and just straight invest the 100k, I get .08 * 100k = $8,000 after tax
Rates may vary from brokerage accounts, but I was able to get a 50% margin loan from M1 Finance for several years at 2% rate. In that case my numbers now become (.08*150k)-(.02 *50k) = $11,000 easily beating the infinite banking concept.
But these calculations are still very much oversimplified because we STILL haven't factored in one of the most important aspects which is the random fees that you incurred in setting up and maintaining this policy. A sample policy for a 35 male can be found here https://www.investopedia.com/a... In that sample policy after 5 years you have paid in $5890 in premiums, but your cash value is only $3738, so only about 64% of your premium payments are going towards cash value. Because of these fees, it takes several years of you earning interest on the cash value just to break even with the amount you have paid into the policy. The sample policy broke even after 10 years. So a more accurate calculation wouldn't have us both starting with the same 100k, because I should always start with more money than you because you will always need to pay fees. In this thread people have claimed that you can break even after 7 years, but most websites list 10 years as the break even point. Regardless, we'll be nice and assume it only takes 7 years to break even and we'll assume I don't even attempt to leverage my account and just go with vanilla stock investing at 8% after taxSo by the time you have 100k in your policy, I'll have 150k thanks to a 7 year head start on investing because I didn't need to pay those fees. At that rate even if you earn 9.6% per year and I only earn a vanilla 8%, it would take you 36 years to catch up to me. And I'll smoke you if I do any sort of leveraging myself such as that margin loan from M1 Finance because I start with more, and also earn a higher interest % each year.
Now it is true that I only have a full 7 year head start if you don't overfund your account. The more you overfund your account, the less of a head start I get since the overfunding portion of your payment is going straight to cash value and not eaten by fees. I will always get a head start of some sort since no matter how much you overfund, you're still paying those base fees. Even if you overfund by $1m the first month, you will still have to pay fees on month 2, 3, 4 etc, so I still get an advantage it just becomes harder to calculate.
But the numbers become MUCH worse if we factor in an investment like real estate where the total returns are significantly higher than 10% of the stock market because I can utilize my entire account balance where you can only effectively utilize 90% of it. If long term inflation is roughly 3% per year, then a 20% down payment mortgage translates into a 15% ROI just from appreciation alone. With equity paydown and cashflow we'll assume a relatively modest 20% total ROI which puts your final investment numbers at (.15*90k) + (.06*100k) = 19.5k and puts my numbers at (.2*150k) = 30k If I get the 7 year head start. Even if we magically erase 100% of your fees and don't give myself any head start at all I still earn more at (.2*100k)=20k.
Finally, I will be able to scale my real estate holdings faster than you, in part because your monthly cash flow is automatically reduced because you need to make payments on your policy loan each month and because part of your next months policy premium is being eaten by fees instead of increasing cash value making it harder to save for the next down payment. Meanwhile all of my earnings can immediately be redeployed towards the down payment of my next property.In short, infinite banking is NOT going to amplify the rate at which you build wealth, especially if you plan on investing in real estate.
Your numbers are off, bud.
If you can borrow $5 to net $8, that's a 60% rate of return.
Some key points are being missed here.
1. You are not borrowing your own money. You are borrowing the insurance company's money and you're paying interest for the money you borrow. The benefit is that you never lose the guaranteed growth on the whole life cash value while you have the outstanding loan. Just like you'd not give up the appreciation on a property using a HELOC.
2. It doesn't matter what the spread is between your loan rate and your growth rate. They are two totally separate things that are happening. When you go to get a HELOC, you don't analyze the value of that move by comparing the HELOC rate to the appreciation of of the property. You make decisions based on the rate, compared to other rates, and terms of the line.
3. While it's true that there is a percentage of the cash value that can be borrowed against (actually, up to 98% that I've seen), what you're missing is that, because of the superior growth of the policy compared to cash, the 90% borrowing cap far outpaces anything you can do with a bank. The 90% of cash value = more dollars than the 100% of savings account dollars.
4. 50% margin loans - no one is saying policy loans are always the best answer or the lowest rate. However, comparing policy loans to margin loans by only looking at the rate is a little unfair. First of all, you just tried to bash policy loans for only being able to access 90% of the cash value. Now you're praising a 50% margin loan - kind of moving the goal posts here... Second, policy loans are very different in the fact that the underlying collateral of the policy loan is the cash value - which is *guaranteed* by the lender (the insurance company). Unlike margin loans, policy loans cannot be called. The risk profiles are completely different.
5. "Random fees." There are fees, but they are certainly not random. Life insurance is a 200 year old product. It's well thought out and not random at all. In fact, that's what actuarial science is all about. Creating certain outcomes out of random events. Additionally, all the numbers you see in a whole life insurance illustration are NET of all costs, fees, commissions, etc.
In your Investopedia example, you're choosing to focus only on the first year. While it's true there is less cash value than what you paid in premiums in the early years of the policy, that changes in the first few years. After year 3 or so, every $1 in premium paid creates MORE than $1 of new cash value.
See my previous post about this. In a mature policy, it's like taking $1 from your right pocket and putting it in your left pocket. But by the time it gets to your left pocket, it has turned into $2 or $3.
If you can think past 3 or 4 years, life insurance becomes a monster of liquidity where every dollar that enters your system starts doing the job of 2, 3, or 4 dollars.
6. It's true you are "behind the curve" compared to keeping your money in a bank - but only for a relatively short period of time. What is being missed is the fact that it gets better every single year. The superior growth of cash value far outpaces a savings account. Yes, there are a few years where it's not as good as cash. What about the next 50 years or 70 years?
7. "I will be able to scale my real estate holdings faster" - No, you will not. Not in the long-run. How could you? Every dollar put into whole life is creating more than one dollar of new cash value. Once a policy owner is past the capitalization phase of a policy, their available capital will blow you out of the water. It's just math...
There will be a point where, when you get $50K and deposit that in your savings account, you'll have $50k of new money. When a policy owner pays $50K in premium, they get $100K or $150K in new cash value.
Here are two images:
1. The first compares a savings account to life insurance cash value over 10 years. You can see that the "head start" you have in your mind is not really that great.
2. The second image compares a savings account to life insurance cash value over 30 years. You can see that the difference here is immense! When zoomed out, the difference in liquidity in the early years, which is what you're stuck on, barely registers.
There is simply no way you can scale better than a policy owner, in the long run. Their access to capital is so much greater.
And this doesn't even account for additional liquidity that can be created from the death benefit itself to buy assets.
- 3yThomas RutkowskiPro MemberFinancial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
Quote from @Ben Zimmerman:
Quote from @Thomas Rutkowski:
Technically that would translate into an 8.7% return, but beyond that your overly simplified calculations leave out numerous very important facts, namely the policy fees and how the loan repayments negatively effect your ability to scale your real estate holdings.
I'm going to rearrange the percentages slightly because I don't know of many people who are wealthy that are going to put their money into active income investments like hard money and get taxed at 40% when a passive stock market only pays 20%, plus stock investing is much more familiar and likely to actually happen for readers of the post as opposed to hard money which is a niche industry. Now you are no longer paying 2% and netting 3%, instead you are now paying 1% of that to the IRS, and netting 4%.
You can generally only borrow up to 90% of the cash value, so you aren't leveraging your entire amount. On a hypothetical 100k investment and 10% annual stock growth your returns are (.4* 90k) + (.06*100k) = $9,600. (which is a 9.6% total return)
If I don't do anything fancy and just straight invest the 100k, I get .08 * 100k = $8,000 after tax
Rates may vary from brokerage accounts, but I was able to get a 50% margin loan from M1 Finance for several years at 2% rate. In that case my numbers now become (.08*150k)-(.02 *50k) = $11,000 easily beating the infinite banking concept.
But these calculations are still very much oversimplified because we STILL haven't factored in one of the most important aspects which is the random fees that you incurred in setting up and maintaining this policy. A sample policy for a 35 male can be found here https://www.investopedia.com/a... In that sample policy after 5 years you have paid in $5890 in premiums, but your cash value is only $3738, so only about 64% of your premium payments are going towards cash value. Because of these fees, it takes several years of you earning interest on the cash value just to break even with the amount you have paid into the policy. The sample policy broke even after 10 years. So a more accurate calculation wouldn't have us both starting with the same 100k, because I should always start with more money than you because you will always need to pay fees. In this thread people have claimed that you can break even after 7 years, but most websites list 10 years as the break even point. Regardless, we'll be nice and assume it only takes 7 years to break even and we'll assume I don't even attempt to leverage my account and just go with vanilla stock investing at 8% after taxSo by the time you have 100k in your policy, I'll have 150k thanks to a 7 year head start on investing because I didn't need to pay those fees. At that rate even if you earn 9.6% per year and I only earn a vanilla 8%, it would take you 36 years to catch up to me. And I'll smoke you if I do any sort of leveraging myself such as that margin loan from M1 Finance because I start with more, and also earn a higher interest % each year.
Now it is true that I only have a full 7 year head start if you don't overfund your account. The more you overfund your account, the less of a head start I get since the overfunding portion of your payment is going straight to cash value and not eaten by fees. I will always get a head start of some sort since no matter how much you overfund, you're still paying those base fees. Even if you overfund by $1m the first month, you will still have to pay fees on month 2, 3, 4 etc, so I still get an advantage it just becomes harder to calculate.
But the numbers become MUCH worse if we factor in an investment like real estate where the total returns are significantly higher than 10% of the stock market because I can utilize my entire account balance where you can only effectively utilize 90% of it. If long term inflation is roughly 3% per year, then a 20% down payment mortgage translates into a 15% ROI just from appreciation alone. With equity paydown and cashflow we'll assume a relatively modest 20% total ROI which puts your final investment numbers at (.15*90k) + (.06*100k) = 19.5k and puts my numbers at (.2*150k) = 30k If I get the 7 year head start. Even if we magically erase 100% of your fees and don't give myself any head start at all I still earn more at (.2*100k)=20k.
Finally, I will be able to scale my real estate holdings faster than you, in part because your monthly cash flow is automatically reduced because you need to make payments on your policy loan each month and because part of your next months policy premium is being eaten by fees instead of increasing cash value making it harder to save for the next down payment. Meanwhile all of my earnings can immediately be redeployed towards the down payment of my next property.In short, infinite banking is NOT going to amplify the rate at which you build wealth, especially if you plan on investing in real estate.
LOL. I'll keep playing this game as long as you want. I'm sure I won't get through to you, but my responses are for all the people following the discussion. @John Perrings did a great job responding to your faulty math.
I'll add this:
The thing you need to keep in mind is that these are not your typical life insurance policies. You need to understand that these are Maximum Over-funded policies. This means that about 85% of the premium is going to go to the cash value. So 15% is lost to fees. That's it. Your fee schedule from Investopedia is meaningless with regard to these policies. These are not typical life insurance policies.
So would you rather have 85% of your money growing at 9% or 100% of your money growing at 6%? Over time the compounding interest is going to win.
- Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes3y
1. I didn't miss a key point here, I am fully aware that you are borrowing from the insurance company which is why there was two separate calculations when computing the returns and why the full amount of the hypothetical 100k initial investment is still growing at 6% annually. QUOTE: (.4* 90k) + (.06*100k) = $9,600. (which is a 9.6% total return). Please ensure that my math is actually wrong before jumping in to correct me that I 'missed' something.
2. It 1000% absolutely matters what the spread is. If you're borrowing at 8% and earning 6%, then you are losing money every time you take a policy loan. In this situation it would simply be more beneficial to have never put the money into the insurance policy in the first place. It only makes fiscal sense if you can borrow at a lower rate than your guaranteed earning and thus earn an arbitrage spread. It would be silly to put money into an insurance policy, just to take out a loan and lose money in the process so you can go invest, when you could just skip the insurance policy altogether and just skip straight to investing and not lose any money to loan interest fees.
3. Why are you bringing up savings account dollars? Who puts money into a savings account earning .01% interest?4a. I didn't bash the 90% borrowing capability of the insurance loan and then praise the 50% borrowing capability of a margin loan, I don't care what the loan limit is, or what the overall strategy is, I only care about whether or not the method used actually makes money. Comparing the financial outcome of the 90% loan vs the 50% margin loan, the margin loan earned significantly more total money which is why I prefer that method and praised it.
4b. Risk profiles aren't all that different. While the cash value is guaranteed to grow, the 90% of value that you took as a loan no longer has a guarantee associated with it essentially putting 90% of your net worth at risk. If you withdraw 90k and put it in the stock market you could theoretically lose all 90k with bad decisions leaving you with a 100k policy and a 90k debt which translates into only 10k of net worth. I can theoretically lose 100% of my net worth, and you can lose 90% of your net worth, not exactly a significantly different risk profile.
5. A full paragraph to complain about my choice of verbiage of 'random' fees, but the overall point remains that life insurance has very high fees associated with it. @Thomas Rutkowski lists the fees at 15%. If you are putting 500 into your policy each month, only 425 is cash value, of which you can take a 90% loan of $382 to invest in real estate. I however have a full $500 to invest in real estate. So not only do I have an extra 118 to put towards real estate each month, but you still have to make loan payments each month which further negatively impacts your ability to save towards a down payment.
5b. "After year 3 or so, every $1 in premium paid creates MORE than $1 of new cash value." ... Yes, it's called compound interest and you are gaining 6% annually. This is how you are eventually able to break even after around year 7 when your total cash value finally balances out with the amount you have contributed to the policy. This isn't exactly magic, nor is it unique. You act like you are the only one earning compound interest and everyone else is just putting money in a savings account (which you mention MULTIPLE times in this thread). You deposit 500 which turns into 425 of cash value after fees and earn 6% on 425, while I earn 10% of the full 500. This is how I get a head start with my investing. After 7 years you finally break even with your contributions, meaning you have now contributed roughly 12*7*500 = 42k and your cash value is also roughly 42k after 7 years. But I don't need to break even since I don't pay any fees, all of my money is able to start compound growth from day 1 which is how I have a 7 year head start on my growth versus a non-overfunded account. The more you overfund your account the less of an effective head start I get, but I always get a head start of some amount since I never have fees and you do.6. Once again, WHY are we bringing up a savings account?
7. "Its just math", I am able to earn compound interest too. Stop running numbers where you earn 6% and I earn 0.01% by keeping the money in a bank. So run the math again with me actually properly investing my money instead of putting it into the bank at 0.01% interest and lets see what "just math" says.
7b. "deposit $50k to get 100k or 150k in new cash value" There is never a point where your money instantly or magically doubles or 3x's itself into new cash value. What happens is you eventually build up to lets say a million dollar cash value, and then deposit an extra 50k, and your balance turns into 1.11m because you earned 6% or 60k interest on the 1m plus your new deposit so your value goes up by 110k. Once again this phenomenon is called compound interest and it is not unique to infinite banking or to insurance policies. I earn compound interest just like you do if you would stop running scenarios where I just put my money in a bank.Images 1/2: One last time, WHY are you showing two charts showing a growth of a policy versus holding money in a savings account? Nobody has ever advocated putting your money in a savings account and earning sub 1% interest. That's why you keep thinking your method is so great is because you are allowing yourself to earn compound interest while comparing that to a scenario that doesn't earn any interest and just holds money in a bank. No offense but you continually trying to compare IB investing to just putting money in a savings account is laughable.
@Thomas Rutkowski Yes, setting up an incredibly difficult to understand insurance policy and letting it sit for around for a few decades will eventually beat doing absolutely nothing special but investing in hard money loans.
However, there is nothing that specifies that I have to do plain vanilla investing. If you are actively doing something with your money and setting up different insurance policies then it seems perfectly legitimate to compare it to me doing something similar and setting up a margin account as in my previous post which easily outperformed the infinite banking even without any of your fees calculated into the equation with your 9.6% total earnings versus my 11% total earnings. If we add the fees back in the numbers get a lot worse for you.
But since we are on BP, it also a fair comparison to look at actually investing in real estate, and even without taking into account any policy fees I still come out ahead because I can invest 100% of my funds into high yielding real estate where you can only invest 90%.
You: (.15*90k) + (.06*100k) = 19.5kvs
Me: (.2*100k)=20k.
So both the margin loan, and straight real estate investing both outperform IB even without any fees calculated in. This means it doesn't matter what your Maximum Over-Funding rate is because even with no fees whatsoever the method still isn't as efficient as other investment strategies.If we are to further this conversation, someone is going to need to show some sort of a realistic example, fees included, where you are actively doing something with your IB funds that outperforms someone else that is actively performing some sort of similarly complex strategy.
- Member since 2022 · 3 posts · 1 vote3y
I'm a long time user of the Infinite Banking Concept and am glad to talk with you about it.
I'd highly encourage you to read Nelson Nash's "Be Your Own Banker", it's pretty dry- but worth reading more than once to get a good idea of the best way to make use of it successfully. - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
@Ben Zimmerman it will not and anyone that tells you it will is not being honest.
I am looking at policies right now because I want more life insurance and also I have a c Corp so it’s a way to have a policy but also an asset for the company.
I look at it as another tool in your tool belt. But it doesn’t mean it’s a bad thing. When you get to a certain point either age or financially you will look to things that may offer less risk and some additional diversity.
7e investments53 Reviews - 3yThomas RutkowskiPro MemberFinancial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
Quote from @Ben Zimmerman:
1. I didn't miss a key point here, I am fully aware that you are borrowing from the insurance company which is why there was two separate calculations when computing the returns and why the full amount of the hypothetical 100k initial investment is still growing at 6% annually. QUOTE: (.4* 90k) + (.06*100k) = $9,600. (which is a 9.6% total return). Please ensure that my math is actually wrong before jumping in to correct me that I 'missed' something.
2. It 1000% absolutely matters what the spread is. If you're borrowing at 8% and earning 6%, then you are losing money every time you take a policy loan. In this situation it would simply be more beneficial to have never put the money into the insurance policy in the first place. It only makes fiscal sense if you can borrow at a lower rate than your guaranteed earning and thus earn an arbitrage spread. It would be silly to put money into an insurance policy, just to take out a loan and lose money in the process so you can go invest, when you could just skip the insurance policy altogether and just skip straight to investing and not lose any money to loan interest fees.
3. Why are you bringing up savings account dollars? Who puts money into a savings account earning .01% interest?4a. I didn't bash the 90% borrowing capability of the insurance loan and then praise the 50% borrowing capability of a margin loan, I don't care what the loan limit is, or what the overall strategy is, I only care about whether or not the method used actually makes money. Comparing the financial outcome of the 90% loan vs the 50% margin loan, the margin loan earned significantly more total money which is why I prefer that method and praised it.
4b. Risk profiles aren't all that different. While the cash value is guaranteed to grow, the 90% of value that you took as a loan no longer has a guarantee associated with it essentially putting 90% of your net worth at risk. If you withdraw 90k and put it in the stock market you could theoretically lose all 90k with bad decisions leaving you with a 100k policy and a 90k debt which translates into only 10k of net worth. I can theoretically lose 100% of my net worth, and you can lose 90% of your net worth, not exactly a significantly different risk profile.
5. A full paragraph to complain about my choice of verbiage of 'random' fees, but the overall point remains that life insurance has very high fees associated with it. @Thomas Rutkowski lists the fees at 15%. If you are putting 500 into your policy each month, only 425 is cash value, of which you can take a 90% loan of $382 to invest in real estate. I however have a full $500 to invest in real estate. So not only do I have an extra 118 to put towards real estate each month, but you still have to make loan payments each month which further negatively impacts your ability to save towards a down payment.
5b. "After year 3 or so, every $1 in premium paid creates MORE than $1 of new cash value." ... Yes, it's called compound interest and you are gaining 6% annually. This is how you are eventually able to break even after around year 7 when your total cash value finally balances out with the amount you have contributed to the policy. This isn't exactly magic, nor is it unique. You act like you are the only one earning compound interest and everyone else is just putting money in a savings account (which you mention MULTIPLE times in this thread). You deposit 500 which turns into 425 of cash value after fees and earn 6% on 425, while I earn 10% of the full 500. This is how I get a head start with my investing. After 7 years you finally break even with your contributions, meaning you have now contributed roughly 12*7*500 = 42k and your cash value is also roughly 42k after 7 years. But I don't need to break even since I don't pay any fees, all of my money is able to start compound growth from day 1 which is how I have a 7 year head start on my growth versus a non-overfunded account. The more you overfund your account the less of an effective head start I get, but I always get a head start of some amount since I never have fees and you do.6. Once again, WHY are we bringing up a savings account?
7. "Its just math", I am able to earn compound interest too. Stop running numbers where you earn 6% and I earn 0.01% by keeping the money in a bank. So run the math again with me actually properly investing my money instead of putting it into the bank at 0.01% interest and lets see what "just math" says.
7b. "deposit $50k to get 100k or 150k in new cash value" There is never a point where your money instantly or magically doubles or 3x's itself into new cash value. What happens is you eventually build up to lets say a million dollar cash value, and then deposit an extra 50k, and your balance turns into 1.11m because you earned 6% or 60k interest on the 1m plus your new deposit so your value goes up by 110k. Once again this phenomenon is called compound interest and it is not unique to infinite banking or to insurance policies. I earn compound interest just like you do if you would stop running scenarios where I just put my money in a bank.Images 1/2: One last time, WHY are you showing two charts showing a growth of a policy versus holding money in a savings account? Nobody has ever advocated putting your money in a savings account and earning sub 1% interest. That's why you keep thinking your method is so great is because you are allowing yourself to earn compound interest while comparing that to a scenario that doesn't earn any interest and just holds money in a bank. No offense but you continually trying to compare IB investing to just putting money in a savings account is laughable.
@Thomas Rutkowski Yes, setting up an incredibly difficult to understand insurance policy and letting it sit for around for a few decades will eventually beat doing absolutely nothing special but investing in hard money loans.
However, there is nothing that specifies that I have to do plain vanilla investing. If you are actively doing something with your money and setting up different insurance policies then it seems perfectly legitimate to compare it to me doing something similar and setting up a margin account as in my previous post which easily outperformed the infinite banking even without any of your fees calculated into the equation with your 9.6% total earnings versus my 11% total earnings. If we add the fees back in the numbers get a lot worse for you.
But since we are on BP, it also a fair comparison to look at actually investing in real estate, and even without taking into account any policy fees I still come out ahead because I can invest 100% of my funds into high yielding real estate where you can only invest 90%.
You: (.15*90k) + (.06*100k) = 19.5kvs
Me: (.2*100k)=20k.
So both the margin loan, and straight real estate investing both outperform IB even without any fees calculated in. This means it doesn't matter what your Maximum Over-Funding rate is because even with no fees whatsoever the method still isn't as efficient as other investment strategies.If we are to further this conversation, someone is going to need to show some sort of a realistic example, fees included, where you are actively doing something with your IB funds that outperforms someone else that is actively performing some sort of similarly complex strategy.
Wow! I wanna live in your world with no taxes. That looks awesome.
But here on Earth and in the US, we have to pay taxes.
Slides from an old presentation.
This is presuming someone with existing cash value, but the fact remains, $85,000 growing at 9% WILL catch up to and surpass $100,000 growing at 6%. Play with the tax rate if you don't think its accurate. It doesn't matter. What does matter is the policy design. A poorly-designed policy with less than 85% cash value will take forever to catch up. I believe this is the type of life insurance policy you are thinking about.
- Insurance Agent · all 50 states · Member since 2022 · 184 posts · 122 votes3y
This is turning into an extremely amusing fight of lets break down some hypothetical numbers and argue over who is right or who is wrong.
Life insurance is a contract between the client and the insurance company. The Carrier is guaranteeing you certain things will happen if you pay into a policy. (depending on policy structure the outcomes vary greatly)
Life insurance is not an investment and doesn't and shouldn't take the place of your other investments. Cash Value Life Insurance is an augmented savings plan that happens to have an Internal Rate of Return. That said, if you only earn an extra 1% (until the day you die) on the money that you are using to invest, is that not worth it? All you did was create a pitstop for your investment money, yes it does cost some of that money in the 1st 5-7 years. But it also allows you excess leverage that you otherwise would not have access to.
But don't forget there are other things that life insurance does. Like a death benefit. That benefit is going to go to your beneficiaries when you die. There are 2 things in the world that are guaranteed right now, death and taxes. So if you could capitalize on the amount of money that you are able to leave your heirs tax free is that worth something to you? Life insurance also has protections for divorce, bankruptcy, and taxes while you are alive, and there are living benefits if you are to become disabled, or get cancer, or lose a limb.
Yes you can get Term insurance for super cheap. But term insurance is only cheap when you are young. For a 60 year old, 60 isn't that old anymore, I have friends who are over 60 and can out hike, mountain bike and climb me and I am 34. So 60, in fantastic health to get $1,000,000 in death benefit with some living benefits you are going to spend almost $6,000/year and this is for a 10 year policy. The average age of someone going into an assisted living facility is 85 years old. Which means that the client that buys the $5,000/year for 10 year policy is going to spend $50,000 and likely never make a claim or use this life insurance policy.
- Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes3y
Quote from @Thomas Rutkowski:
But here on Earth and in the US, we have to pay taxes.
Taxes were included in all of my calculations except when investing solely in real estate since it's impossible to assign a universal tax rate to RE. However, the vast majority of people pay little or no taxes on real estate thanks to a plethora of deductions. Personally I have never had to pay taxes on any of my RE holdings.
Yes, I have already conceded that in the scenario you describe, you do eventually catch up. However that is assuming "Investor B' makes 3 consecutive investing mistakes and invests in a strategy that is taxed at a ridiculously high tax rate, and doesn't do anything fancy with his money, and settles for a very low 10% rate of return in the hard money world. If he is a smart investor, then he still easily beats your rate of return as I have already shown with a simple margin loan that takes 2 seconds to set up and anyone is able to understand.
You: (.4* 90k) + (.06*100k) = $9,600
Me: (.08*150k)-(.02 *50k) = $11,000
@Aaron Porter Being able to lock in insurance rates when you are young certainly has merits, and if we want to discuss the merits of having insurance, or which policy (term/whole/whatever) is best under a particular set of circumstances, then that is a separate conversation and one that might make sense for some people depending on their situation. My issue with IB is people continually claiming that it out earns other investing methods which it clearly does not. For any IB strategy someone wants to devise, I can devise a plan to outperform it, and I can guarantee that my plan is simpler to set up and understand.
For a while I had a term life policy because it was dirt cheap. I used that policy for a few years until my net worth grew large enough that if I were to die today, my family would already be set for life. After that point I would rather not have life insurance at all and not pay any premiums, and instead keep investing that money and letting it continue to grow so that I can also enjoy it while i'm still alive. A million dollar life insurance policy is pretty amazing if your family is broke, but as investors it's likely that most of us will already leave a significant nest egg behind when we pass, greatly reducing a reliance on an insurance policy.
There is nothing wrong with insurance, but people need to stop implying that an overly complicated IB strategy will out earn other investment methods. - 3yThomas RutkowskiPro MemberFinancial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
Quote from @Ben Zimmerman:
Quote from @Thomas Rutkowski:
But here on Earth and in the US, we have to pay taxes.
Taxes were included in all of my calculations except when investing solely in real estate since it's impossible to assign a universal tax rate to RE. However, the vast majority of people pay little or no taxes on real estate thanks to a plethora of deductions. Personally I have never had to pay taxes on any of my RE holdings.
Yes, I have already conceded that in the scenario you describe, you do eventually catch up. However that is assuming "Investor B' makes 3 consecutive investing mistakes and invests in a strategy that is taxed at a ridiculously high tax rate, and doesn't do anything fancy with his money, and settles for a very low 10% rate of return in the hard money world. If he is a smart investor, then he still easily beats your rate of return as I have already shown with a simple margin loan that takes 2 seconds to set up and anyone is able to understand.
You: (.4* 90k) + (.06*100k) = $9,600
Me: (.08*150k)-(.02 *50k) = $11,000
@Aaron Porter Being able to lock in insurance rates when you are young certainly has merits, and if we want to discuss the merits of having insurance, or which policy (term/whole/whatever) is best under a particular set of circumstances, then that is a separate conversation and one that might make sense for some people depending on their situation. My issue with IB is people continually claiming that it out earns other investing methods which it clearly does not. For any IB strategy someone wants to devise, I can devise a plan to outperform it, and I can guarantee that my plan is simpler to set up and understand.
For a while I had a term life policy because it was dirt cheap. I used that policy for a few years until my net worth grew large enough that if I were to die today, my family would already be set for life. After that point I would rather not have life insurance at all and not pay any premiums, and instead keep investing that money and letting it continue to grow so that I can also enjoy it while i'm still alive. A million dollar life insurance policy is pretty amazing if your family is broke, but as investors it's likely that most of us will already leave a significant nest egg behind when we pass, greatly reducing a reliance on an insurance policy.
There is nothing wrong with insurance, but people need to stop implying that an overly complicated IB strategy will out earn other investment methods.Seriously dude, the numbers weren't meant to be taken literally or to represent all investing situations. It was an EXAMPLE. You can plug in whatever tax rate or rate of return you want and you'll still get the same results. Not everyone invests in rental real estate with large tax deductions. Some invest in syndications and private placements, some invest in tax liens and certificates, some do private lending. Income from all of those is taxed at ordinary income tax rates. Many of my clients are in those tax brackets when you combine state and federal.
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