All Forum Posts by: Thomas Rutkowski

Quote from @Aaron Porter:

@Evelyn Liaw  Whole Life insurance is not a scam.  Just like a good investment if you set it up properly and take care of it over time the reward can be significant. 

@Thomas Rutkowski was right about a few things.  in the beginning the cash value to premium paid into the policy should be close to 90% (policies differ depending on the carrier and how the policy is structured)  In most cases to non MEC a policy you cannot fund it faster than 7 years.  So if that is the strategy you are going for then paying in the $100k over 7 years would be a better strategy. 

However if you are ok with your policy falling under MEC rules then you can do a single premium payment of the full $100,000.  

MEC policies are very useful and valuable for certain strategies.  Just like a non MEC policy is very useful.  You would just need to understand the differences.

Also the money that you place into the policy can be available to you the same day that you "fund" the policy.  

The cash value will grow over time to being worth more than the premium paid in.  In most cases this happens around year 8 for a standard funded policy.  This is different for a MEC.

 You can absolutely fund a minimum non-MEC policy in less than seven years. I do 5-pay designs for all of my clients who are starting off with a lump sum that they want to get into a policy as quickly as possible. 5 years is the sweet spot. Any less and the policy issue charges eat away at too much of the cash value in the years after the premiums cease. Going longer reduces the fees, but the money just doesn't have as long to work. Too little is going to work in the early years.

And while you may see the first year cash value to premium ratio at 90% on the illustration, it is important to remember that the illustration is including the first year dividends or interest crediting. Once you back out the crediting, you'll find that the actual cash value is 85% give or take a few percent based on rating and age.

There is a time and a place for MEC policies. But since most of the people here are interested in leveraging the cash value to invest in real estate, it absolutely does not make sense to create a MEC on purpose. A single premium, non-MEC policy IS NOT a good idea.

@Yuri Shamsin

Unless you have another need for lifelong coverage, I would stick with using additional term life insurance for mortgage protection purposes.You could also assign the collateral of your existing policy.

@Evelyn Liaw

It's not that simple. It is not a good idea to make a large lump sum premium payment. This drives up the death benefit and fees inside the policy. I think that the ideal funding period (if you are trying to get a lump sum of saving into a policy) is 5 years. In your case, that would be a policy with $20K per year for 5 years.

But otherwise, Yes, if you had $100,000 of cash value, then you could get a loan for $100,000 that you could use to make a down payment on real estate. Realistically, most companies hold back the first year interest, so it would be just less than $100,000 that you could get. If you borrow from a bank with the policy as collateral, there is usually a 90% LTV.

In a properly-designed, maximum over-funded policy, about 85% of the premium goes to the cash value.

@Ray Hull

The concept of leveraging the cash value of life insurance has been well-covered here on BP. Here is one old thread that is pretty detailed:

https://www.biggerpockets.com/...

Quote from @Jeffrey Evans:

I got a policy recently and it has been great so far and lived up to they hype.  Like everyone says it just has to be set up correctly and all.  Many haters out there when they hear whole life insurance, but it has done everything I was promised and more.  I dumped some money in and 1 day after it funded I had 85% or so of it back in my checking account ready to invest.  Plus it helps put the wife at ease knowing it would pay her enough to pay off everything and keep the rentals for her income.  I advise watching as many vids and webinars ect as you can.  Take notes and write down questions.  Then talk to multiple people that specialized in building these policy's and ask them questions.  Go with the one you jive with better.

Just to be clear for others reading this, you did not get "your" money back. You got a loan from the insurance company that is secured by your cash value. THAT is what makes this such a powerful concept. Whatever you do with that borrowed money is creating value on top of the cash value of the life insurance. Your money is working in two places at once.

@Magdaleno Garcia

There are many, many discussions on this topic here on BP. This is a pretty detailed thread:

https://www.biggerpockets.com/...

Quote from @Ernesto Barragan JR:

Quote from @John Perrings:

Quote from @Dmitriy Fomichenko:

@Ernesto Barragan JR

Be very careful with the whole life insurance. Don't simply rely on the illustration by the insurance agent. They typically make commissions equivalent to one year of your premium payments and have a vested interest selling the policy to you, they do not have your interest at heart. If you know how to invest your money - whole life insurance is a rip off (it might work for those who have no idea how to invest or are unwilling to learn, so the forced saving component of the whole life insurance would provide them with so me benefits at the very high cost). 

Is the 401k with the current or past employer? If past - you are free to move that to a self-directed IRA. If current - you may not be able to access those funds at this time, contact your plan administrator and ask about "in-service distribution". 

You won't be able to combine your IRA investments with your personal investments (regardless if you are using equity in your home or savings). You need to have two separate plans: investing your retirement dollars and separately from that making personal investments.

It's not an either/or discussion. Life insurance is just another asset class. That means it's not an investment and shouldn't be compared to an investment. Having both investments and insurance is completely reasonable as part of an overall strategy.

Just like having investments and real estate is completely reasonable.

Having both investments and insurance will generally create better distribution outcomes in the future than either one can do by themselves.

 Whats your opinion on the concept of Infinite Banking through whole life insurance?

 The idea of leveraging the cash value of a life insurance policy was covered in depth in this BP discussion:

https://www.biggerpockets.com/...

If you are thinking seriously about it, I'd read through as much as you can take. The thread was pretty old when I first chimed in and it is still ongoing.

I think that it is important to get the idea of "Infinite Banking" out of your head. That's a trademarked "system". You should understand that leveraging the cash value to invest in real estate is different than simply treating a policy's cash value as a substitute for a credit card. This means that you want a policy that has as much cash value as legally possible right from day one. Most IBC policies are not Maximum Over-funded. The agents leave room for you to add more premium later under the guise of "paying yourself interest" And as @Mike S. states above, it can be done with either Whole Life or Indexed Universal Life. Much of what you'll hear is simply unsupported propaganda.

Quote from @Taylor L.:

I've had conversations with numerous people who sell the policies and a handful of people who use them. My main issue is that I feel the plans are somewhat recklessly promoted as the key to financial freedom that can't possibly backfire or have any downside.

The overall impression from the users that I've talked with is that these plans can be useful to help add a little juice to your overall investment returns. However, you need to be aware of how the cash value works, particularly in the early years. They're also not going to turn you into a gajillionaire overnight (as is heavily implied by some of the folks who sell the policies).

I also interviewed Richard Wilson of the Family Office Club & Billionaires.com last night and asked him about this exact topic. Essentially, whether those of high net worth really do use these policies. That is an extremely common common selling point by the people who sell the policies. His impression was that they're mostly used by people in the $3-$15 Million net worth range, but once you're above that point you're wealthy enough to be effectively self-insured and have many other options for your legacy. 

Any time I state these misgivings on BP I'm told almost immediately how dumb and misinformed I am, so let's see how long that takes.

 I promote and sell these types of policies and have never positioned it as a get rich quick scheme. I always tell my clients that you are not going to hit the ball out of the park. But it is a way to systematically, and over time, improve your returns by a few percent each year. That few percent makes a huge difference over time.

High net worth people very often use life insurance for estate tax minimization. Its either that or very sophisticated tax planning that often includes life insurance. But these are completely different policy designs from those used for private banking: minimum funded vs Maximum over-funded.

@Lance Mundo

The topic was well covered in this thread. https://www.biggerpockets.com/...

As long as your policy is well-designed, i.e. ~85-90% cash value to premium in year one on your illustration, then leveraging the cash value to do your investing will lead to greater wealth accumulation over time. You are literally putting your money to work in two places at one time.

Quote from @Lionel Thomas:

I just had this discussion a few weeks ago with a very knowledgeable Life Insurance advisor. Whole and Universal Insurance  allows you to withdraw, since they offer a cash value. This is not an overnight process, it takes years before you can actually withdraw the funds from your policy. 

Best of luck!

LT

Hmmm. I wonder what makes someone "very knowledgeable" That doesn't sound like a policy that a real estate investor would want. These are not your typical whole life policies where it takes years to build up cash value. If I design a policy for 5 years of $100,000 of premium, that policy is going to have about $85,000 of cash value that can be leveraged from day 1. Nobody would leverage life insurance to invest in real estate if they had to wait years to build up and access the cash value.

And they certainly wouldn't "Withdraw" it!!! The beauty in this approach i having your money work in two places at one time by Leveraging your cash value.