How and what is Infinite Banking used for Real Estate.

Financial Advisor · Glendora, CA · Member since 2015 · 209 posts · 94 votes

Some of you might have heard of the term Infinite Banking before. There are the naysayers like Suzy Orman or Dave Ramsey but it is a viable strategy for real estate investing. The strategy is simple, using a whole life insurance policy when structured correctly can be a viable option to park cash for a future date when you need it for a down payment. The way it works is that when structuring a whole life policy, you'll want to minimize the premium and maximize what's known as a paid up addition (PUA). My adding money into the PUA, you'll build up a cash value much faster. This cash value grows tax deferred and the income you take out is also tax free. Also the money that is taken out as a loan does not affect the the cash values ability to grow. It is similar to a home loan, when a home is paid off, the home still grows with inflation and market fluctuations. When you take out a loan from the home, the home still appreciates at the full value of the home. You can choose to pay back the loan from the whole life policy or not. If you do not pay it back, the amount of the loan is subtracted from the death benefit. In essence this is a great way to grow money tax free.

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Randall AlanPro Member

Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes

@Yoochul C.

Conceptually, infinite banking is a valid concept... BUT... in practice it really only works if you either have a lot of time to wait, or are ultra-wealthy. If you look at your cash value on any typical consumer type whole life policy, it is going to grow by the hundreds of dollars each year. So if you want to "borrow from yourself" say $35,000 - ask yourself how long it will take for that policy to acquire that much of a cash value. It may be 20+ years!

But, if you are uber-wealthy, you can over-fund the policy at its inception - paying maybe $50,000 cash into the policy on a tax advantaged basis. You now have the ability to borrow against the equity in the policy in a reasonable timeframe where you could make a down-payment on a real estate purchase. By the way, what do you think the insurance company is going to do with your over-payment? They are going to go out and invest it in the stock market and earn 7-10% a year, while they let you have some smaller percentage as a gain on your investment within your whole life policy. So trust me, they know what they are doing too!

The reason that Suzy and Dave are 'naysayers' as you call it is that their audience is typical families and individuals in the $30,000 - $100,000 year income bracket whose disposable income is less than 10% of their yearly total income and they carry a lot of expensive consumer debt. Probably not even 1/10 of 1% of their audience has the money to over-fund a whole life policy to a degree where Infinite banking would even be plausible, so they would never want to point their audience toward such a product. Their whole premise is to get their audience out of debt and make smart use of your money using traditional, understandable concepts (401K, IRA, etc).

You might argue that infinite banking IS smart. And perhaps it is if you are a multimillionaire... but for the average consumer, it is not an achievable concept within any sort of usable timeframe. There is nothing special about infinite banking and real estate though. It's just a way to get an a low interest loan on your own money (if you are rich). The reason it is low interest is that there is literally no risk to the insurance company - they already hold more of your money than they are loaning you.

Randy

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Randall AlanPro Member
Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
3y
@Yoochul C.

Conceptually, infinite banking is a valid concept... BUT... in practice it really only works if you either have a lot of time to wait, or are ultra-wealthy. If you look at your cash value on any typical consumer type whole life policy, it is going to grow by the hundreds of dollars each year. So if you want to "borrow from yourself" say $35,000 - ask yourself how long it will take for that policy to acquire that much of a cash value. It may be 20+ years!

But, if you are uber-wealthy, you can over-fund the policy at its inception - paying maybe $50,000 cash into the policy on a tax advantaged basis. You now have the ability to borrow against the equity in the policy in a reasonable timeframe where you could make a down-payment on a real estate purchase. By the way, what do you think the insurance company is going to do with your over-payment? They are going to go out and invest it in the stock market and earn 7-10% a year, while they let you have some smaller percentage as a gain on your investment within your whole life policy. So trust me, they know what they are doing too!

The reason that Suzy and Dave are 'naysayers' as you call it is that their audience is typical families and individuals in the $30,000 - $100,000 year income bracket whose disposable income is less than 10% of their yearly total income and they carry a lot of expensive consumer debt. Probably not even 1/10 of 1% of their audience has the money to over-fund a whole life policy to a degree where Infinite banking would even be plausible, so they would never want to point their audience toward such a product. Their whole premise is to get their audience out of debt and make smart use of your money using traditional, understandable concepts (401K, IRA, etc).

You might argue that infinite banking IS smart. And perhaps it is if you are a multimillionaire... but for the average consumer, it is not an achievable concept within any sort of usable timeframe. There is nothing special about infinite banking and real estate though. It's just a way to get an a low interest loan on your own money (if you are rich). The reason it is low interest is that there is literally no risk to the insurance company - they already hold more of your money than they are loaning you.

Randy
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Thomas RutkowskiPro Member
Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
3y
Quote from @Randall Alan:

@Yoochul C.

Conceptually, infinite banking is a valid concept... BUT... in practice it really only works if you either have a lot of time to wait, or are ultra-wealthy. If you look at your cash value on any typical consumer type whole life policy, it is going to grow by the hundreds of dollars each year. So if you want to "borrow from yourself" say $35,000 - ask yourself how long it will take for that policy to acquire that much of a cash value. It may be 20+ years!

But, if you are uber-wealthy, you can over-fund the policy at its inception - paying maybe $50,000 cash into the policy on a tax advantaged basis. You now have the ability to borrow against the equity in the policy in a reasonable timeframe where you could make a down-payment on a real estate purchase. By the way, what do you think the insurance company is going to do with your over-payment? They are going to go out and invest it in the stock market and earn 7-10% a year, while they let you have some smaller percentage as a gain on your investment within your whole life policy. So trust me, they know what they are doing too!

The reason that Suzy and Dave are 'naysayers' as you call it is that their audience is typical families and individuals in the $30,000 - $100,000 year income bracket whose disposable income is less than 10% of their yearly total income and they carry a lot of expensive consumer debt. Probably not even 1/10 of 1% of their audience has the money to over-fund a whole life policy to a degree where Infinite banking would even be plausible, so they would never want to point their audience toward such a product. Their whole premise is to get their audience out of debt and make smart use of your money using traditional, understandable concepts (401K, IRA, etc).

You might argue that infinite banking IS smart. And perhaps it is if you are a multimillionaire... but for the average consumer, it is not an achievable concept within any sort of usable timeframe. There is nothing special about infinite banking and real estate though. It's just a way to get an a low interest loan on your own money (if you are rich). The reason it is low interest is that there is literally no risk to the insurance company - they already hold more of your money than they are loaning you.

Randy

If you fund a properly-designed, maximum over-funded policy with a $40,000 premium, you will have about $35,000 of cash value that you can immediately leverage. Your mistake is in using the term "Typical Policy". Typical policies are not maximum over-funded.
My clients put anywhere from $6,000 per year up to over $200,000 per year into policies like this. They are not "Uber Wealthy" because they can afford to put $100K to $200K per year toward growing their real estate businesses.
Insurance companies DO NOT put the money into the stock market. They buy bonds, mortgage backed securities, some preferred stocks, and they make secured loans. Since the cash value is really just the policy owner saving up the death benefit over the life of the insured, the insurance company has an incentive for the cash value to grow as fast as possible. It reduces their risk. They are not keeping the premium they earn as you suggest. The fees and expenses in a policy are explicitly stated in the policy and are simply withdrawn from the cash value.
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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
3y
Different insurance salesmen have been pushing this for at least the last 10 years. Click on the magnifying glass in the upper corner. At least with rising rates it’s gone from a HORRIBLE idea to a bad idea. It was reprehensible for it to be pushed for the last 9 years when rates were sub 4%.
I do love the defense that it’s not for the rich, just those with a spare $100-$200k PER year to put towards their real estate investments. You think that’s the top 1% of BP users? The top .1%?

But, I would bet 99% of the target audience is not those people who could afford to be taken advantage of but people with FAR too little money for the strategy to make sense. it’s definitely a bet on rates forever if the insurance companies are truly investing in bonds which have been just crushed and should return to 1-2% returns.

It’s fine to place these posts somewhere in marketplace or services for sale. But EVERY time it’s brought up by an OP it’s always talked about like some magic formula that’s been found. And not one of the highest Profit margin products an insurance company can sell you.
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
3y
I pay $200,000 to a company and they pay be 4% annual interest. (Obviously they’re going to invest it to earn more than 4%. Then they tell me it’s a wonderful product because I can borrow 80% of it back at 5%. So now I’m earning $8,000 annually and paying $8,000 per year in interest, so I’m earning 0 on the $40,000 net invested. The company throws in $500,000 life insurance worth about $600 a year in premiums, and I’m told to go out and invest the $160,000 in real estate, stock market, private equity, mortgage notes, etc. and earn 9%.
Why don’t I just forgo the ”infinite banking” and invest the full $200,000 in whatever to earn 9% and pay the $600 per year for the term coverage I need.? Well, one reason the purchase the insurance product is that there’s a deferred tax advantage, as the lobbyists for insurance companies have “persuaded” politicians to grant any investment product having a minimal of insurance attached tax advantaged status. However, beside the “drag” on returns that getting paid 4% and paying 5% to access your own money has, the insurance companies also have varies fees, costs, etc associated with this as well as any other product they sell. So, the insurance sales person selling you the product gets a commission, subtracted directly from the amount of your investment, and or future income earned by your investment. Many of these products have other fees involved, similar to the fees for self directed retirement accounts where each fee by itself doesn’t seem like a lot, but added up it kills your return.
The thing about these program pitches is that they always display that in 30 years you'll have x amount of capital, and to many investors it looks good. However, it needs to be compared to the amount of capital you'd have if you invested directly without utilizing this insurance product. If you used a retirement account or any other tax deferred investment account the comparison would be easy. If not you'd have to account for the difference in taxes paid along the way, which would probably lessen the "invest directly" advantage. Think of it this way, paying large fees can only be justified on a ROI basis with outsized returns. Insurance products offer the opposite, smaller than index fund returns. The difference is the costs and profit to the insurance co.
You want financial advice? Get it from an UNBIASED Source, like someone paid either an hourly fee or an ongoing percentage of assets under management, like one half of one percent. You don’t get unbiased advice from someone whose livelihood relies on selling you a specific COMMISSIONED INVESTMENT.
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Mike S.
Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
3y
You can expect a net long term IRR, after all fee, commission, etc of 3-5% with a properly set up whole life insurance and 5-8% with an Index Universal Life Insurance.

They are not terrific product regarding their return, but you don't have negative years like in the stock market, and they are tax free. They are also asset protected against creditor. And during retirement you can expect getting a 8% per year draw compared to the 3-4% recommended for IRA/401k as you are not withdrawing the money but borrowing it while the full cash value continues to grow uninterrupted. Also compared to retirement accounts you don't have to wait until you are older to get money out of it, you don't have required minimum distributions, and when you die you heirs are getting the death benefit tax free and don't have a set amount of time to use it.

Last, your rant about life insurance agents are bias and crooked because they get commission is old and hypocrite. You are a mortgage broker and getting commission on the mortgages you sell. So you are obviously biased and lying to you client when you recommend a mortgage. Real estate agent are getting commission so they are biased and lying to people when they recommend a house. Financials advisers are getting commissions when they recommend financial products so they are biased and lying to people when they sell.

Every profession has crooks. But every profession has respectful individuals who are doing right for their customers. Crooks usually don't stay long in business. That is the same with life insurance agent.

Yes some real unbiased source are recommending permanent life insurance as a way to diversify your asset. It is not for everyone as it is a complex product that needs a good execution. Same as real estate is not for everyone, nor stock market, nor options trading, nor commodities, nor futures, nor bonds, nor annuities, nor notes, ... But because a certain class of asset does not fit YOUR investment profile, it does not mean that it is bad or unfit for others. So stop denigrating a product that has plethora of advantages and educate yourself to understand it.

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Chris Davidson
Real Estate Agent · Boise, ID · Member since 2016 · 1k+ posts · 888 votes
3y
Love these post. So many different points and strong opinions. Would have to say I am in the camp of seems really complicated and like most investors I am cash poor all the time cause I am trying to put my resources to work. The idea of saving up 250K+ to put into a complex confusing insurance system does not get me excited compared to buying another property that will grow faster than the insurance and I will also be able to get loans against.
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
3y
Quote from @Mike S.:

You can expect a net long term IRR, after all fee, commission, etc of 3-5% with a properly set up whole life insurance and 5-8% with an Index Universal Life Insurance.

They are not terrific product regarding their return, but you don't have negative years like in the stock market, and they are tax free. They are also asset protected against creditor. And during retirement you can expect getting a 8% per year draw compared to the 3-4% recommended for IRA/401k as you are not withdrawing the money but borrowing it while the full cash value continues to grow uninterrupted. Also compared to retirement accounts you don't have to wait until you are older to get money out of it, you don't have required minimum distributions, and when you die you heirs are getting the death benefit tax free and don't have a set amount of time to use it.

Last, your rant about life insurance agents are bias and crooked because they get commission is old and hypocrite. You are a mortgage broker and getting commission on the mortgages you sell. So you are obviously biased and lying to you client when you recommend a mortgage. Real estate agent are getting commission so they are biased and lying to people when they recommend a house. Financials advisers are getting commissions when they recommend financial products so they are biased and lying to people when they sell.

Every profession has crooks. But every profession has respectful individuals who are doing right for their customers. Crooks usually don't stay long in business. That is the same with life insurance agent.

Yes some real unbiased source are recommending permanent life insurance as a way to diversify your asset. It is not for everyone as it is a complex product that needs a good execution. Same as real estate is not for everyone, nor stock market, nor options trading, nor commodities, nor futures, nor bonds, nor annuities, nor notes, ... But because a certain class of asset does not fit YOUR investment profile, it does not mean that it is bad or unfit for others. So stop denigrating a product that has plethora of advantages and educate yourself to understand it.

1 - I am not a mortgage broker, I am a direct lender
2 - Almost all financial advisors are compensated either by flat fees/hourly fees or as a percentage of assets under management - exactly because if they were paid commission their recommendations WOULD be bias
3- people contact real estate brokers already knowing they want to purchase property and how much they can/will spend. Real estate brokers are compensated the same regardless of which property the buyer purchases. They’re not compensated more to “steer” the borrower to a certain product.
4- Many insurance salespersons “disguise” themselves as financial advisors. Somehow despite there having the best interest of their “client” at heart their solution to every financial question is to purchase insurance.

I, like most people, have nothing against insurance, or insurance salespeople. What I don’t like is the use of the following sales/marketing tools used
1- overly complicated product designed so that consumer would need a graduate degree in finance to do proper evaluation
2- incomplete and bias analysis of product by sales person
3 - sales person disguising themselves as financial advisor
4- creating a catchy name for an insurance product that has nothing to do with what the product does or how it works

I’m always amused by the almost violent reaction proponents of these products exhibit when someone questions, or sheds light on the value of the product or on the ethics of the industry. The defense, as is your, almost always breaks done to “everyone else is bias and unethical too”. No, they’re not.

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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
On a real estate forum they will get questioned - why? Because they are not an investment strategy.
It’s an insurance policy and can be used to diversify a portfolio to hedge against some risk which is why some ultra wealthy use it if it guarantees a return slight above the risk free rate of return. If you have $1B you are not concerned with 4% vs 6% you are concerned with massive losses.
Long term it’s 1/2 the return of stocks and real estate which again - depending on your portfolio it may not be a bad thing just like people have bonds or your mutual fund has bonds in it.
Just make sure you understand the product
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Mike S.
Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
3y
Quote from @Don Konipol:
I’m always amused by the almost violent reaction proponents of these products exhibit when someone questions, or sheds light on the value of the product or on the ethics of the industry. The defense, as is your, almost always breaks done to “everyone else is bias and unethical too”. No, they’re not.

I am not amused by people making broad statements that life insurance is a scam and life insurance agents are scammers.
Again if you read my response, I am not saying everyone is unethical. It was a satirical answer using the same argument as yours.
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Mike S.
Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
3y
Quote from @Chris Seveney:

On a real estate forum they will get questioned - why? Because they are not an investment strategy.
It’s an insurance policy and can be used to diversify a portfolio to hedge against some risk which is why some ultra wealthy use it if it guarantees a return slight above the risk free rate of return. If you have $1B you are not concerned with 4% vs 6% you are concerned with massive losses.
Long term it’s 1/2 the return of stocks and real estate which again - depending on your portfolio it may not be a bad thing just like people have bonds or your mutual fund has bonds in it.
Just make sure you understand the product

It's not only for ultra wealthy. It works even with policy premium as low as $10k a year.
What you fail to understand is that you are getting these 5%+ tax free return in addition to your other investments. Because you can use the cash value as collateral for a loan, the same money is working at two places at the same time. It's like buying a house that is appreciating every year and taking a HELOC on it to reinvest the same money in other projects. By using that leverage, your money is growing faster. And if you are using a loan from a third party for investment purpose, you can deduct the loan interest as investment expense. So it is not per se an investment product, but it is a system to use with your investments.
On top of it, you get a life insurance that will protect your family in case of premature death and the life insurance is protected from creditor.
There are also other uses of these kind of life insurance for retirement purpose. While it grows slower (but with much less volatility) than an IRA or 401k, you can take more money out during retirement and for much longer.
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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
@Mike S.
I think what many are referring to is show us a model where someone invests $100k and get 8% per year and having a 30 year term policy for $1M vs a whole life policy for $1M and putting $100k in it. The former wins every time.
what you did not mention is when your money in you have to pay to borrow it and a HELOC is a good example.
To tag on the HELOC example it's like paying down your mortgage with $100k cash then take out a $100k HELOC loan and pay interest on that loan - the question is why would you do that ?
Full disclosure I have a whole life policy which I can use for this but they are not fantastic products like many tout them.
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Thomas RutkowskiPro Member
Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
3y
Quote from @Don Konipol:

I pay $200,000 to a company and they pay be 4% annual interest. (Obviously they’re going to invest it to earn more than 4%. Then they tell me it’s a wonderful product because I can borrow 80% of it back at 5%. So now I’m earning $8,000 annually and paying $8,000 per year in interest, so I’m earning 0 on the $40,000 net invested. The company throws in $500,000 life insurance worth about $600 a year in premiums, and I’m told to go out and invest the $160,000 in real estate, stock market, private equity, mortgage notes, etc. and earn 9%.
Why don’t I just forgo the ”infinite banking” and invest the full $200,000 in whatever to earn 9% and pay the $600 per year for the term coverage I need.? Well, one reason the purchase the insurance product is that there’s a deferred tax advantage, as the lobbyists for insurance companies have “persuaded” politicians to grant any investment product having a minimal of insurance attached tax advantaged status. However, beside the “drag” on returns that getting paid 4% and paying 5% to access your own money has, the insurance companies also have varies fees, costs, etc associated with this as well as any other product they sell. So, the insurance sales person selling you the product gets a commission, subtracted directly from the amount of your investment, and or future income earned by your investment. Many of these products have other fees involved, similar to the fees for self directed retirement accounts where each fee by itself doesn’t seem like a lot, but added up it kills your return.
The thing about these program pitches is that they always display that in 30 years you'll have x amount of capital, and to many investors it looks good. However, it needs to be compared to the amount of capital you'd have if you invested directly without utilizing this insurance product. If you used a retirement account or any other tax deferred investment account the comparison would be easy. If not you'd have to account for the difference in taxes paid along the way, which would probably lessen the "invest directly" advantage. Think of it this way, paying large fees can only be justified on a ROI basis with outsized returns. Insurance products offer the opposite, smaller than index fund returns. The difference is the costs and profit to the insurance co.
You want financial advice? Get it from an UNBIASED Source, like someone paid either an hourly fee or an ongoing percentage of assets under management, like one half of one percent. You don’t get unbiased advice from someone whose livelihood relies on selling you a specific COMMISSIONED INVESTMENT.

I love how people who have no idea how this works will take time and write screenfulls of text to incorrectly state the business model. People will do it because they will make more money over the long term than if they used their own money. This has been shown to you with examples in previous discussions here, but here you are spouting misinformation... again. @Mike S. is actually doing this and I'm pretty confident he KNOWS he is making more money.
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Thomas RutkowskiPro Member
Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
3y
Quote from @Chris Seveney:

@Mike S.
I think what many are referring to is show us a model where someone invests $100k and get 8% per year and having a 30 year term policy for $1M vs a whole life policy for $1M and putting $100k in it. The former wins every time.
what you did not mention is when your money in you have to pay to borrow it and a HELOC is a good example.
To tag on the HELOC example it's like paying down your mortgage with $100k cash then take out a $100k HELOC loan and pay interest on that loan - the question is why would you do that ?
Full disclosure I have a whole life policy which I can use for this but they are not fantastic products like many tout them.

You may have a whole life policy, but real estate investors who leverage their cash value use "Maximum Over-funded" life insurance policies. These are not the same thing. You don't get a $1M policy and put $100,000 into it. You start with the $100,000 that you want to pay in premium and you work backward to find the lowest possible death benefit.
In your example, $100,000 at 8% will return $8,000. If we presume no depreciation, like a flip, loan, syndication, tax lien, etc, then that $8,000 is taxable. So in a 40% tax bracket, you will write a check to the IRS for $3200 and keep $5800. Your NET return is only 5.8%.
If I did the same with a Maximum over-funded policy and a $100,000 premium, the numbers look like this. $100,000 premium will result in about $85,000 of cash value. If that cash value earns a 6% dividend, the policy will earn $5,100 the first year.
Now let's say that immediately upon setting up the policy, you leverage the cash value and take a loan of $80,000 and use it for the same 8% investment. You will have the $6,400 at the end of the year. Since the interest on the loan is a business expense, you will write that off. So let's say the loan interest is 5%. Your taxable income is now only $2400 ($6,400 minus $4000). You'll write a check to the irs for $960 and net $1440. $1,440 and $5,100 is $6,540.
That is $740 greater than when you used your own money. Is this going to change the world? No. You are not hitting the ball out of the park on one deal or in one year. But that additional growth is going to compound with every passing year and you WILL build more wealth over time. The growth rate is 12.7% higher (6540/5800).
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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
@Thomas Rutkowski
When did the 40% tax bracket come out and when did these policies start giving 6%.
If you are going to use real numbers then use real numbers.
Many funds have depreciation and mine for example is dividends so it’s 20% (not 40%) and most real estate investments with a 100k investment is around 9-10%.
Last 20 years what has been the average yield on an insurance policy?
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Thomas RutkowskiPro Member
Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
3y
Quote from @Chris Seveney:

@Thomas Rutkowski
When did the 40% tax bracket come out and when did these policies start giving 6%.
If you are going to use real numbers then use real numbers.
Many funds have depreciation and mine for example is dividends so it’s 20% (not 40%) and most real estate investments with a 100k investment is around 9-10%.
Last 20 years what has been the average yield on an insurance policy?

I should have expected that someone would get wrapped up in the details rather than look at the big picture. These are reasonable assumptions. They are not going to fit EVERYONE's case. The model still works, just try swapping out the numbers in my example. It shouldn't take more than 2 minutes. Less time than it took to respond with your unique situation which doesn't fit anyone else.
I go through these numbers several times every single week with new prospective clients. No one has ever complained that the numbers are unreasonable. The numbers can always be adjusted to fit the unique circumstances of each client.
1. Mass Mutual pays a 6% dividend. Penn Mutual is 5.75%. Most IULs should perform at least at 6%.
2. You can use whatever tax rate you want, it still works. I picked a number out of the air to represent ordinary income tax rates as a hybrid of state and federal. You need to look at your marginal tax bracket, not your average tax rate. But the higher the tax rate, the greater the tax advantage of this concept.
3. Use whatever investment rate you want. It still works. Again, I'd hate for someone to fixate on just the number I used rather than the concept.
4. Dividend rates are at historic lows because interest rates in the bond markets were at historically low levels until last year. If rates stay high, you'll see dividend rates begin to rise as well. Dividend rates track interest rates in the bond markets. That's where insurance companies invest their reserves.
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Jeffrey Evans
Investor · San Jose Ca · Member since 2020 · 125 posts · 115 votes
3y
Man these post are like copy and paste. People either hate them or love them. Kinda like politics these days I guess.
Everyone is different and has different goals and situations. I have one and I like it. It has exceeded my expectations from when I got it. I am able to move money back and forth within a day so its pretty liquid. yet all the money continues compounding as if I didn't remove it, where else can you do that other then perhaps a heloc. With a heloc you have to pay the minimal monthly payment back. With IBC policy its up to you to pay as fast as slow or never if you can't (although I recommend paying at least the interest)
I pretty much use it similar to a savings account. It allows me to have liquid funds for deals. It allowed me to give my wife some piece of mind knowing if I get hit by a bus she can pay off the properties ect, it allows me to pass on tax free money to my kids, and it motivates me to save money I otherwise may not have.
The policy only gets better the longer you have it. Once you pass the tipping point of having a higher cash value then you have paid into it then any money you put into it you get an instant return on it and can draw out more then you put in that yr.
There are no fees to borrow. I think most IUL policy's have a surrender fee. You would never want to set a policy up that had surrender fees if wanting to use it for investing purposes.
I am not a life insurance agent or a financial advisor. Just a normal guy. to each there own.
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Thomas RutkowskiPro Member
Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
3y
Quote from @Jeffrey Evans:

Man these post are like copy and paste. People either hate them or love them. Kinda like politics these days I guess.
Everyone is different and has different goals and situations. I have one and I like it. It has exceeded my expectations from when I got it. I am able to move money back and forth within a day so its pretty liquid. yet all the money continues compounding as if I didn't remove it, where else can you do that other then perhaps a heloc. With a heloc you have to pay the minimal monthly payment back. With IBC policy its up to you to pay as fast as slow or never if you can't (although I recommend paying at least the interest)
I pretty much use it similar to a savings account. It allows me to have liquid funds for deals. It allowed me to give my wife some piece of mind knowing if I get hit by a bus she can pay off the properties ect, it allows me to pass on tax free money to my kids, and it motivates me to save money I otherwise may not have.
The policy only gets better the longer you have it. Once you pass the tipping point of having a higher cash value then you have paid into it then any money you put into it you get an instant return on it and can draw out more then you put in that yr.
There are no fees to borrow. I think most IUL policy's have a surrender fee. You would never want to set a policy up that had surrender fees if wanting to use it for investing purposes.
I am not a life insurance agent or a financial advisor. Just a normal guy. to each there own.
Just to be clear, you are never "taking money out". All policy loans are loans against the policy's cash value. That is the reason that the cash value is still credited with dividends.

Also, be aware that all policies have surrender charges. But when we design maximum over-funded policies, the surrender charges don't apply to paid up additions. And in the case of an IUL, I will use a rider that waives the surrender charges. There is no difference in the ability to access the cash value between the two types of policies.
2 Reply
Yoochul C.
OP
Financial Advisor · Glendora, CA · Member since 2015 · 209 posts · 94 votes
3y
Quote from @Thomas Rutkowski:

Quote from @Jeffrey Evans:

Man these post are like copy and paste. People either hate them or love them. Kinda like politics these days I guess.
Everyone is different and has different goals and situations. I have one and I like it. It has exceeded my expectations from when I got it. I am able to move money back and forth within a day so its pretty liquid. yet all the money continues compounding as if I didn't remove it, where else can you do that other then perhaps a heloc. With a heloc you have to pay the minimal monthly payment back. With IBC policy its up to you to pay as fast as slow or never if you can't (although I recommend paying at least the interest)
I pretty much use it similar to a savings account. It allows me to have liquid funds for deals. It allowed me to give my wife some piece of mind knowing if I get hit by a bus she can pay off the properties ect, it allows me to pass on tax free money to my kids, and it motivates me to save money I otherwise may not have.
The policy only gets better the longer you have it. Once you pass the tipping point of having a higher cash value then you have paid into it then any money you put into it you get an instant return on it and can draw out more then you put in that yr.
There are no fees to borrow. I think most IUL policy's have a surrender fee. You would never want to set a policy up that had surrender fees if wanting to use it for investing purposes.
I am not a life insurance agent or a financial advisor. Just a normal guy. to each there own.
Just to be clear, you are never "taking money out". All policy loans are loans against the policy's cash value. That is the reason that the cash value is still credited with dividends.

Also, be aware that all policies have surrender charges. But when we design maximum over-funded policies, the surrender charges don't apply to paid up additions. And in the case of an IUL, I will use a rider that waives the surrender charges. There is no difference in the ability to access the cash value between the two types of policies.

Thanks Thomas for making sense of this topic. I was away from this post for a while and I was unable to respond. Thanks for being the advocate for me.
Yooch

1 Reply
Yoochul C.
OP
Financial Advisor · Glendora, CA · Member since 2015 · 209 posts · 94 votes
3y
Quote from @Mike S.:

You can expect a net long term IRR, after all fee, commission, etc of 3-5% with a properly set up whole life insurance and 5-8% with an Index Universal Life Insurance.

They are not terrific product regarding their return, but you don't have negative years like in the stock market, and they are tax free. They are also asset protected against creditor. And during retirement you can expect getting a 8% per year draw compared to the 3-4% recommended for IRA/401k as you are not withdrawing the money but borrowing it while the full cash value continues to grow uninterrupted. Also compared to retirement accounts you don't have to wait until you are older to get money out of it, you don't have required minimum distributions, and when you die you heirs are getting the death benefit tax free and don't have a set amount of time to use it.

Last, your rant about life insurance agents are bias and crooked because they get commission is old and hypocrite. You are a mortgage broker and getting commission on the mortgages you sell. So you are obviously biased and lying to you client when you recommend a mortgage. Real estate agent are getting commission so they are biased and lying to people when they recommend a house. Financials advisers are getting commissions when they recommend financial products so they are biased and lying to people when they sell.

Every profession has crooks. But every profession has respectful individuals who are doing right for their customers. Crooks usually don't stay long in business. That is the same with life insurance agent.

Yes some real unbiased source are recommending permanent life insurance as a way to diversify your asset. It is not for everyone as it is a complex product that needs a good execution. Same as real estate is not for everyone, nor stock market, nor options trading, nor commodities, nor futures, nor bonds, nor annuities, nor notes, ... But because a certain class of asset does not fit YOUR investment profile, it does not mean that it is bad or unfit for others. So stop denigrating a product that has plethora of advantages and educate yourself to understand it.

Hi Mike,
Be careful with IUL's, the issues with them is that the cost of insurances rises every year while the premium is the same. There will be a time when the cost of insurance will be greater than the premium. Their difference when the cost is greater than the premium will come out of the cash value. If there is a down market or bad investments, the possibility of your cash value eroding is a strong possibility.
Yooch
0 Reply
Yoochul C.
OP
Financial Advisor · Glendora, CA · Member since 2015 · 209 posts · 94 votes
3y
Quote from @Thomas Rutkowski:

Quote from @Chris Seveney:

@Thomas Rutkowski
When did the 40% tax bracket come out and when did these policies start giving 6%.
If you are going to use real numbers then use real numbers.
Many funds have depreciation and mine for example is dividends so it’s 20% (not 40%) and most real estate investments with a 100k investment is around 9-10%.
Last 20 years what has been the average yield on an insurance policy?

I should have expected that someone would get wrapped up in the details rather than look at the big picture. These are reasonable assumptions. They are not going to fit EVERYONE's case. The model still works, just try swapping out the numbers in my example. It shouldn't take more than 2 minutes. Less time than it took to respond with your unique situation which doesn't fit anyone else.
I go through these numbers several times every single week with new prospective clients. No one has ever complained that the numbers are unreasonable. The numbers can always be adjusted to fit the unique circumstances of each client.
1. Mass Mutual pays a 6% dividend. Penn Mutual is 5.75%. Most IULs should perform at least at 6%.
2. You can use whatever tax rate you want, it still works. I picked a number out of the air to represent ordinary income tax rates as a hybrid of state and federal. You need to look at your marginal tax bracket, not your average tax rate. But the higher the tax rate, the greater the tax advantage of this concept.
3. Use whatever investment rate you want. It still works. Again, I'd hate for someone to fixate on just the number I used rather than the concept.
4. Dividend rates are at historic lows because interest rates in the bond markets were at historically low levels until last year. If rates stay high, you'll see dividend rates begin to rise as well. Dividend rates track interest rates in the bond markets. That's where insurance companies invest their reserves.

Hi Thomas,
I'm not a fan of IUL because at some point the cost of insurance will be greater than the premium. At that point, it will start to erode the cash value. I just usually stick with Whole Life for my clients because the cost of insurance does not rise. I also use Guardian and their dividends having been rising. I use this Cash Value Whole Life as a proxy for bonds for my clients who wish to invest more aggressively in their brokerage accounts while using WL as a hedge against risk.
Yooch
0 Reply
Thomas RutkowskiPro Member
Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
3y
Quote from @Yoochul C.:

Quote from @Thomas Rutkowski:

Quote from @Chris Seveney:

@Thomas Rutkowski
When did the 40% tax bracket come out and when did these policies start giving 6%.
If you are going to use real numbers then use real numbers.
Many funds have depreciation and mine for example is dividends so it’s 20% (not 40%) and most real estate investments with a 100k investment is around 9-10%.
Last 20 years what has been the average yield on an insurance policy?

I should have expected that someone would get wrapped up in the details rather than look at the big picture. These are reasonable assumptions. They are not going to fit EVERYONE's case. The model still works, just try swapping out the numbers in my example. It shouldn't take more than 2 minutes. Less time than it took to respond with your unique situation which doesn't fit anyone else.
I go through these numbers several times every single week with new prospective clients. No one has ever complained that the numbers are unreasonable. The numbers can always be adjusted to fit the unique circumstances of each client.
1. Mass Mutual pays a 6% dividend. Penn Mutual is 5.75%. Most IULs should perform at least at 6%.
2. You can use whatever tax rate you want, it still works. I picked a number out of the air to represent ordinary income tax rates as a hybrid of state and federal. You need to look at your marginal tax bracket, not your average tax rate. But the higher the tax rate, the greater the tax advantage of this concept.
3. Use whatever investment rate you want. It still works. Again, I'd hate for someone to fixate on just the number I used rather than the concept.
4. Dividend rates are at historic lows because interest rates in the bond markets were at historically low levels until last year. If rates stay high, you'll see dividend rates begin to rise as well. Dividend rates track interest rates in the bond markets. That's where insurance companies invest their reserves.

Hi Thomas,
I'm not a fan of IUL because at some point the cost of insurance will be greater than the premium. At that point, it will start to erode the cash value. I just usually stick with Whole Life for my clients because the cost of insurance does not rise. I also use Guardian and their dividends having been rising. I use this Cash Value Whole Life as a proxy for bonds for my clients who wish to invest more aggressively in their brokerage accounts while using WL as a hedge against risk.
Yooch

@Yoochul C.

I use both indexed, universal life and whole life in my business. I don't believe there is any difference in how these policies work for real estate investors. Frankly, if you ask me which one I use for myself and which one I would recommend, it is the index universal life.

What you are saying is just not true in a properly-designed policy. Once the premium funding period is over, the death benefit should be reduced to minimum non-MEC. This is the functional equivalent of doing a reduced paid up in a whole life policy.

This will reduce the total policy expenses to less than 1/4 of 1% of the cash value in any given year. This is extremely efficient and will not cause the policy to lapse.

You don't know what the cost of insurance is in whole life because you can't see it. But rest assured, it is nearly identical to that of an index universal life. All permanent life insurance works the same way. Funds are pooled to pay claims every year.

if you lay a whole life illustration alongside an IUL illustration given the same exact inputs, you will find that the cash value accumulation is relatively equal, except for any slight difference in expenses between the two companies. As a result, you can safely presume that the policy fees are roughly equal between the two different types of policies.

You are repeating a whole life myth that has been disproven many times.

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