Has anybody used a IBC, CFB, or BOY policy to purchase real estate and use the returns to pay back the policy at higher interest rates than the policy charges? If so, what are the pros and cons? What are your thoughts about IBC, CFB, or BOY? Thanks.
Interesting responses from those who admittedly have only HEARD about the idea but have no practical understanding of how Privatized Banking actually works. Those who think the Infinite Banking Concept is about life insurance (AKA Death Benefit) are missing the concept all together.
Banking is a CONCEPT, not a product. Infinite Banking is designed around the radical idea that YOU (the owner of policy designed for maximum efficiency) should be the First Beneficiary of the policy; with your family being the secondary beneficiaries. As the first beneficiary you have access to guaranteed cash values that form the basis of what will become your privatized financing system. Properly designed and used, a Dividend Paying Whole Life Contract from a Mutual Insurance Company makes an incomparably great base from which to conduct a financing BUSINESS (right alongside your Real Estate Investing Business).
HOLDING your cash in a tax-advantaged environment until you USE it for banking purposes during your accumulation years, then converting profits from your Real Estate into tax free dollars at retirement provides privileged access to cash on demand with non-structured loan repayments... that may even be tax deductible.
When you understand and can emulate the way traditional banks have made money for the past 5,000+ years, you suddenly realize that owning your own tax-advantaged financing system will make your good (Real Estate) investment even better, and that financing may well be more profitable to you than your investment.
Did you spend time learning how to successfully invest in Real Estate? Then you spend time and energy to understand Privatized Banking from someone who has used this concept with REAL deals. For example, with banking, there are two Internal Rates of return, plus the External Rate of Return and the Death Benefit (the Eternal Rate of Return). Learning the benefits and uses of all four, beats solely relying on Real Estate Returns.
I have never heard of these phrases and my first thought is they must be some guru pitched financing methods. Can you further explain these terms?
It is a bit complicated, but you purchase dividend paying whole life insurance. After several years, depending on how much premium you pay into the policy then you can borrow against the policies cash value. The policy continues to grow even though you borrow the cash value against the policy when it is designed with a non direct recognition. I don't know if this is all making sense. I have read Nelson Nash's "Becoming Your Own Banker", Pamela Yellen's "Bank on Yourself" and have watched countless videos. One website that is pretty comprehensive so far is: http://www.paradigmlife.net/infinite-101/
Let me know what your thoughts are on this.
Wai Fung Many people (not all, but a fair amount) regard these "concepts" as scams. Why would you pay money for an overpriced whole life policy, just so you can borrow the money back? By using those concepts, you likely wouldn't make anyone rich other than your insurance sales agent. There's far simpler (and better) ways to get into real estate investing.
I haven't read the books. My opinion is based solely on my own research. (The concepts have been around for years.) I don't really have any interest in reading a whole book on the subject.
However, with that being said, the only thing I feel strongly about is that it's not for me. I have no idea if it's right for you. (I still don't care much for the general philosophy behind the concepts though.)
Let me ask you, is there something that particularly interests you about it over other, more conventional, ways of borrowing for real estate purchases?
Wai Fung are you trying to decide whether or not to buy the insurance then borrow or are you saying you have already bought it?
In either case you will need to analyze the RE deal to see if it is good. As far as the insurance goes this may not be the best place to debate insurance, although there are a few agents that hang out here.
I apologize for starting this thread I see older threads where this comment would have been answered. My plan was to fund this policy and use the cash value from it to purchase REI and use the cash flow to pay back the loans I take out to grow the CV. Then repeat this as many times as possible.
No apologies necessary. Speaking of older threads, here's one that might be of interest to you:
http://www.biggerpockets.com/forums/56/topics/57761-whole-life-insurance-real-estate
Absolutely, it works! I have personally used Infinite Banking to improve cash flow, increase overall rate of return, provide immediate privledged access to capital, while providing a tax free place to return my profits for future use. Granted, there is a lot of mis-information about this concept on the web and it is NOT for everyone. But those willing to invest the time to learn the basics of banking find it wil improve every investment they make. My only regret is that I did not learn about this 30 years ago! It is a concept... don't get hung up on the promoters and thinking it is about insurance. If you do, you won't be able to see what it really is. Think about it... what would a tax free trust be worth to you in your business and to your investments?
I read this thread recently and was very interested in the topic and responses. It seems to me that there may be some misunderstandings about this topic. I will do my best to address the issues that have been brought by everybody.
The 1st thing that a life insurance policy is for, is just that, a life policy for the benefit of the survivors needs. That said, some life policies have additional features that lead a person to think of them as an investment. They are NOT an investment, however they have some features like investments, but they are not investments.
2nd is the argument of term vs. whole life. Here is the best way to determine what you really need; If you need a life policy for a specified period of time, but it may not be around when you pass, then term is most likely your best bet, but not always. For instance, most terms are bought as 10, 20, 30 year policies. Another little known fact is that term is typically not allowed past the age of 80, so if you want it when you die, and your family has a longevity history well beyond 80, a term may not be the best choice. If you can tell me exactly the day you will die, I can get you exactly the correct policy, if you cant, then you need to hedge your bets and make sure its there when you need it. Thats where some form of whole life comes in.
If you want to be assured that the policy will be there when you die, the only way to do that is with some form of whole life policy, and make sure the premiums are paid or its in a paid up status, so it is active when you pass. That said, lets talk about some of the features of a whole life and why or why not, it may be a useful to for you in life and real estate?
Whole life has 3 major components from a buyers standpoint, 1) life insurance policy 2) cash value 3) dividends
If you decide to borrow from the cash value, 1st you dont have to qualify like other loans, you just request the money against what value you have in there without lapsing the policy. If you only do policy loans, you will not be taxed. The only time you will ever be taxed on your gains is if you surrender or lapse the policy, but policy loans are not a taxable event. You can decide if you want to pay the loan back, when you want to pay it back, and at what amounts you want to pay it back. Lots of nice features there.
My company currently pays a guarnteed rate of 3% on your cash value, in addition you typically get dividends. Now dividends are not guarnteed, but in the 75 years of offering life policies, we have never NOT paid a dividend. Currently our dividend rate is between 2-2.5%. That means that your internal rate of return is 5-5.5% and can be taken out non taxed, that would be equivilant to a 5.88 - 9% in the market. However at least 3% of our is guarnteed, nothing in the market is guarnteed.
The other major feature about a whole life policy is that you can choose from many dividend options. The one I like and set most of my clients up with is the dividends buy additional paid up life insurance. This will then grow your death benefit over the years as well, so if you do take out policy loans, it then will be against a higher death benefit and cash value.
I own a large amount of whole life on my whole family. My wife and I are going to use the cash value to help supplement our retirement and yet there will always be a certain amount of death benefit left for our heirs.
Now am I saying that a whole life policy is the best tool for real estate investing, no I'm not, I'm sure there are many other tools that can be used, but I am saying, that you 1st truly need to understand it, and yes, I feel it can be one of a few great tools in your tool belt to accomplish many of lifes goals, including investing in real estate.
Interesting responses from those who admittedly have only HEARD about the idea but have no practical understanding of how Privatized Banking actually works. Those who think the Infinite Banking Concept is about life insurance (AKA Death Benefit) are missing the concept all together.
Banking is a CONCEPT, not a product. Infinite Banking is designed around the radical idea that YOU (the owner of policy designed for maximum efficiency) should be the First Beneficiary of the policy; with your family being the secondary beneficiaries. As the first beneficiary you have access to guaranteed cash values that form the basis of what will become your privatized financing system. Properly designed and used, a Dividend Paying Whole Life Contract from a Mutual Insurance Company makes an incomparably great base from which to conduct a financing BUSINESS (right alongside your Real Estate Investing Business).
HOLDING your cash in a tax-advantaged environment until you USE it for banking purposes during your accumulation years, then converting profits from your Real Estate into tax free dollars at retirement provides privileged access to cash on demand with non-structured loan repayments... that may even be tax deductible.
When you understand and can emulate the way traditional banks have made money for the past 5,000+ years, you suddenly realize that owning your own tax-advantaged financing system will make your good (Real Estate) investment even better, and that financing may well be more profitable to you than your investment.
Did you spend time learning how to successfully invest in Real Estate? Then you spend time and energy to understand Privatized Banking from someone who has used this concept with REAL deals. For example, with banking, there are two Internal Rates of return, plus the External Rate of Return and the Death Benefit (the Eternal Rate of Return). Learning the benefits and uses of all four, beats solely relying on Real Estate Returns.
Short version... start a bank.
I am intrigued however I have seen no one here say what the advantage is.
You are investing your own money in a policy, you borrow it, and pay it back. What is the advantage of using your own money via a life insurance policy?
Wai, There are lots of ways to get started in real estate. I assume you mean where do you get the money to invest.
1) If you have the enough money to fund it via life insurance just skip that step and put it directly into real estate
2) Traditional bank financing. Although it is tough to get now if you have enough to fund via life insurenace you probably have enough to get traditional funding.
3)owner financing
4) Hard Money lenders
5) Partners
6) private lenders
Just some ideas to get your started - Ned
The advantage in using this technique to fund real estate and other needs in life is that 1st you are in need of a life policy and then you also get the added advantage of cash value with a guarnteed value, a dividend which increases your cash value and death benefit. This can be 2 tools in one. A CD, IRA, and most other financial tools may be great to use to park your money in to have available for when you need it, but none will give you a death benefit. This is for your heirs and also an effective estate planning tool.
Best of all, if used correctly you avoid taxes on the use of the money, and the interest on the loan payments may be tax deductible considering what you used the money for (check with your accountant).
Current marginal tax rates are near all time lows, that coupled with out of control government debt and spending. So ask yourself, where is the likely marginal tax rates headed in the coming years? You are going to need a way to minimize the taxes or best of all not pay any at all on your gains. Taxes and inflation are some of the biggest risks and hits we have to our investible pools of money.
Are you really saying you would rather have a 9% return that is not guarnteed in the market and then pay 25-39% taxes on that return, vs. having a 5-6% return through a life policy of which about 3% is guarnteed and all without any taxable events when done correctly, oh and not to mention that the market wont pay your family when you die other than what you had at risk in the market. The life policy keeps the family living at the lifestyle that they are accustomed to.
Again, its not the end all cure all, but it is a very useful tool when 1st understood, and 2nd used the most effectivley. A smart investor wouldnt just take what is being said here on the forums, they would truly investigate to determine if it is a worthwhile strategy and fits with their goals and plans.
The old buy term and invest the rest only works if you die during the 10,20 or 30 year term, and also if you truly invest the rest with great success. That may fit some peoples needs and if thats the case, I would recommend that, but for some, maybe even most people it just flat fails. Buy term and investe the rest, well if I did that I better be absolutley sure I'm going to die before 30 years or my 80th birthday or that whole line of thinking is a failure. Invest the rest, well for all people on this forum thats probably not an issue, you have the ability to save your money and use it specific puposes.......The vast majority of America doesnt have that ability, so what really happens, they buy term and spend the rest, somewhere along the line........
Suze Orman has been a buy term and invest the rest kind of gal for forever......I feel bad for her audience, so ask yourself why her parent company executives and the company its self owns millions in what......wait for it........WHOLE LIFE POLICIES........Huh......sounds interesting at best.....if not down right hypocritcal...
In the end is a whole life the only and best tool for everybody....no, it is a great tool, very effective at what it can do if used properly........I put my money in it and will continue to do so.
Kevin R. Thank you for such detailed information. I recently found out about this concept from a local real estate investment group. There was an insurance group there saying the tool to use was called a "High Cash Value Participating Dividend Paying Mutually-Owned Whole Life Insurance" policy. I have to admit, it sounded like a scam and to good to be true. I have done a lot of reading online and it does not seem like a scam and that it can be a great tool for the right situation. However, other than the groups from the meetup I've talked to two CPA's and neither of them knew about it. I am still tracking people down, attorneys and wealth managers that I know to get their take, but I'm wondering why more people don't understand this concept and push it as it seems fantastic. Do you know if there is a different general name to call something like this? I'd love to actually link up with a CPA, Attorney and Insurance broker that all understand the concepts here and using the whole life insurance as a tool to realize the concepts.
Does this work from a business stand point with the same benefits? If I have a business, say an LLC with one other member and we want to hold our operational cash in an account that allows us to do these things like the high CV whole life, but want to be able to give or pass the death benefit on to our employees... I'm not sure exactly what I'm getting at here other than trying to leverage the two together. Any thoughts?
Hi Michael
The names may be different with various insurance companies, but the product is basically the same. They are all whole life policies. There are usually a handful of dividend options on these. I set all my clients up with a dividend that buys additional paid up life insurance. This then also has a cash value and also gets dividends paid on it as well, so your cash value grows faster with this set up.
As far as using this for a business, its a great tool for that as well. We suggest this for many reasons. Business buy out agreements both with living or a partner who has passed. This will give the other partner the cash needed to buy the deceased partner out and pay the family.
This can also be used as a line of credit for the business, it is also used as Key Person insurance, executive bonus programs and many more.
The beauty of all this is that its tax free income if done as a policy loan. The terms of the pay back of that loan is totally up to the owners of the policy, if they want to pay it back at all and when and monthly payments of their choosing.
Another great thing about a policy loan is; lets say you have 100,000 in cash value and you want to take out a policy loan of 50,000. Our current rates are roughly 3.75% but we pay our garunteed rate of 3% on the CV and our dividends in the last year was about 2%, but we pay this on the 100,000 as if you never took out the loan. Looking at these features they can be hard to beat.
Want more info. check out this link. http://www.fischerfinancialgroup.com/335/401k-vs-whole-life-insurance-a-head-to-head-matchup/
Your best bet is to start by talking with your insurance agent, and then when you talk to a CPA or attorney or others, you would just call them a whole life policy. I can assure you they wont be up to speed with the features and benefits of these policies and what they can do for you unless they happen to have one themselves, but they are worth a lot if used correctly.
Hope that helps?
I did a lot of this for bean farmers, the loans were used to finance plantings and operations. You should never be the first beneficiary (owner) as stated above, doing so means any death benefit goes to your estate and that can taint the tax exemption. You use a power of attorney or in some states you can be a joint owner which will pass proceeds to the other owner as in a joint policy. Better yet, make the business the owner as a key man policy.
The thing was, at that time, these farmers had huge estate problems, the best way to fund that is with life insurance. So, first of all they needed the insurance. Doing this as just a "banking system" is a very bad idea, sounds like we may have folks here with a vested interest in pushing this insurance realm as well. I'm not too concerned really as anyone who can afford a policy that will have a CV immediately in the tens of thousands also has the money to seek legal and tax advice :)
You'll also find that a single pay premium policy may not be immediately available, but some are. As to whole-life, a standard policy won't kick in enough fast enough to finance premiums (usually done in about 7 years) for that it takes a policy that is "paid-up" at 65, not 80, 90 or 100. Use to be that interest on the loan was deductible, better at higher tax rates, so loans could be paid by a loan. Outstanding loans are taken from the death benefit, so an accumulation can significantly reduce the purpose of having insurance.
Unless you have a long term financing need for insurance I suggest you fund shorter term needs with term, not WL.
There is an old saying in the finance business, figures lie and liars figure, no company guarantees interest or dividends, but they do have a historic record that, for marketing purposes, needs to be paid. There are no guarantees in life or in life insurance.
The concept of using financed insurance is not really a scam, the problem is that unqualified agents or promoters get involved with misapplications or misrepresentations, so seek expert advice. :)
If you're interested in this topic, these guys are the best I've found:
http://theinsuranceproblog.com/
They go beyond the typical Infinite Banking (IB) crowd and introduce things like blending. (This combines both permanent life insurance and term insurance in one policy. This can add to the cash value when done correctly.) They're not sold out to any one concept, company or even type of policy (whole life vs. EUIL, though they lean towards whole life). Unlike most other agents, they don't try to force you into a one-policy-fits-all approach.
Great reply guys and lots of good info. being dispensed. I will say to Bill that our whole life product does have a garunteed rate on the cash value. This is garunteed for 1 year periods and can be adjusted from there. We have been at 3% garunteed for many years. Our dividend is based on our investing profits which mostly come from bonds, so as the interest rates go, so do the profits on bonds go. In other words if interest rates are low, then bonds profits tends to be lower, therefore our dividends during these years tends to be lower.
We are currently paying between 2-2.5% dividend rate which is one of the lowest dividend that we have historically paid (again due in part to the super low interest rates). Dividends are not garunteed to be paid in any one year, however we have never not paid a dividend in the last 75 years of life policies.
The way that an investor would take out a life policy and have an immediate cash value would as follows; 1st you must have a real need for life insurance, otherwise there are potentially better solutions for your money, but assuming you do have the need, and you have a chunk of change that you could put into it, you would then do the following; Use the lump sum cash to fund the paid up additions rider for your policy. By doing this, you will have an immediate access to this cash through you cash value as a policy loan.
With our product, this gives you about 95-98% of what you put into this rider, ie you put 50K into this rider, you would have an immediate access to 47500.00 to 49000.00 approximately. within 2-3 years, you cash value will exceed what you intially put into it depending on what dividends are paid out. You would also have an ongoing life policy that you would need to make payments on.
You have to be careful when setting this up to not over fund the paid up additions rider, otherwise the policy would be considered a MEC or Modified Endowment Contract, which is now a fully taxable policy. But if you balance out the amount of overall death benefit and premium payments with the paid up additions rider, it will not be considered a MEC.
I also love what we call a perm/term. This means a combination permanent policy (whole life) and a term rider. You get a lot of bang for the buck with this type of policy, meaning large death benefits, and the term can be converted to a whole life at any time during the term. The advantage in this is that the person doesnt have to go through medical examinations again. This can be a huge advantage if because of a medical condition, you are no longer medically insurable.
Real estate investors have times of cash in cash out, so if you have a need for a life insurance policy, and you have a chunk of money that you typically use to fund your transactions or at least part of them, then you could put it into the life policy and and create a permanent line of credit for yourself that you dont have to qualify for and can use virtually in any way you want all with no taxable events. You can also check with your accountant, but if you take out a policy loan and then use it fund real estate, when you pay back the loan and interest from the sale of the real estate, this can be a tax write off as well. So yes your paying 3.75% for the policy loan, but you can write that off, and yet we are paying you 3% garunteed, and a dividend on the highest cash value balance as if you have never taken that loan out. This combination can excellerate your CV very much. Yes while the money is out on loan it also reduces your death benefit, but when its paid back, it restores the death benedfit as well.
Can be a great to if used correctly.
Using your example... Are you paying 3.75% back to the policies' cash value or to the underwriter?
The 3.75% goes to the underwriter. But overall, as a tax write off, this gets significantly reduced and the internal interest rate of 3% that you receive on your CV negates most of the loan interest rate of 3.75% and leaves you with a minuscule actual loan rate. And dividends on top of that just accelerates your CV.
HI Wai,
I am a practitioner of the concept. I can see how it can be put off as a rip off or taboo since most do not understand how permanent life insurance(PLI) works or how it can be utilized in a comprehensive financial plan to protect your assets, increase your liquidity, access to cash, and grow your net worth.
Its more about the strategy than it is about the product. I've tried to utilize the infinite banking concept with other financial assets, but the unique characteristics needed to utilize this concept just arent afforded in other assets. Take real estate for example if I were to try to use a real estate property for the IBC strategy the below are the pros and cons:
- that real estate equity is not liquid, some will argue you can get a line of credit but that may only be up to 75% of market value leaving the other 25% equity/value sitting "idle," and lines of credit arent guaranteed access as banks can reserve the right to adjust your credit facility any time generally
- it however can be leveraged similar to your cash value in a life policy in that the value of real estate does not drop when you borrow money against it similar to obtaining a policy loan from the cash value of a permanent life insurance policy. If we tried this with a 401k we'd drop the value of the 401k plan by the amount borrowed so you in essence a 401k would be a "or," investment vehicle because you can invest in this or that while life or real estate would be considered a "and," vehicle because the money or cash value obtained can be in two places at once. This concept is the most powerful aspect to be understood when utilizing the strategy.
- PLI is a contract between you the owner upon an insured's life with a defined beneficiary in which proceeds go to bypassing probate upon the insureds death. Real estate would go to probate unless if there was a will or living trust to direct the asset at death.
- Real estate has great tax favored benefits such as 1031's, depreciation, and cap gains favorability in certain instances (primary residence) but its still taxed while PLI offers tax free use and access as long as the policy is in force during the duration of the life of the insured person
- Value and risk - real estate could lose value if the market tanks if we were to use real estate as the infinite banking asset to leverage as opposed to a PLI policy as a floor to stop loss so your cash value is secure or guaranteed to grow in the case of mutual WL via min return usually around 3-4% tax free.
Let me know if you have any questions regarding the strategy
I was pitched on an idea like this from Northwestern Mutual. It sounded interesting, but it took too long because the fees early on were too high for it make sense for an active investor. These may be different though.