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.
