All Forum Posts by: Thomas Rutkowski

 You are comparing apples and oranges. Real estate investors use maximum over-funded policies when they intend to leverage the cash value for real estate investing. Only a minimally-funded policy could possibly require additional premium at a later date... and that would only be because interest rates have fallen well below what was forecast and the policyowner underfunded the policy.

I don't think you understand how life insurance works. You do not borrow your own money. The insurance company is loaning you THEIR money and your cash value is the collateral securing the loan. It is not a net profit of 2%. Your cash value earns whatever it earns PLUS the spread between your investment return and your cost of money. This results in a higher return than you would have made investing your own cash directly.

 The product sold by the "MLM" agencies are the same products used by most everyone. It is the policy design that matters. If you are interested in high death benefit, you'll get a product with little cash value and very high fees... that death benefit costs money. However, if you want a product geared toward private banking, the exact same product can be designed for minimum death benefit and maximum cash value.

Your idea that it should be used by those with $2-4M net worth is just nonsense. Wealth is relative. The Double Play, i.e. leveraging the cash value of a maximum over-funded life insurance policy to invest in real estate, is a way to build wealth faster than simply investing directly with your own cash. EVERYONE can benefit from this. It is the easiest and best way to get to that $2-4M net worth you mention.

Regarding Whole Life vs IUL: for two policies that are designed exactly the same, an IUL will outperform a whole life over time. The idea that it is riskier or that the cost of insurance will cause the policy to lapse is pure nonsense. We are talking about maximum over-funded policies that are obviously maximum over-funded and have way more cash value than they'll need to cover the cost of insurance.

Its not a scam. The only thing that may be a pyramid scheme is how some of the agencies out there are more focused on recruiting agents, than writing new business. They try to get every new client to become an agent. Then they get that new agent to recruit even more new agents. Obviously the agent at the top are getting overrides on all the business the pyramid generates.

Who is the agency? and insurance company?

 If your cash value is growing at 5% and you can borrow against it at 3% (prime), then whatever you do with that 3% money is adding value on top of the 5%. I don't know how you can try to tell guys like @Mike S. that what they are actually doing is not working. I'm sure he's laughing all the way to the bank. 

There is also a tax advantage because the interest on the loan is a business expense.

@Shawn McKinney

I don't consider a deferred sales trust as creative financing. Its more like creative selling. It is a way to sell a property and defer the capital gains taxes. It's one of several different approaches to tax-effectively dispose of a highly appreciated asset.

@John Acheson

I think most people prefer to get a lump sum of cash that they can re-invest into another deal. The deferred sales trust creates an income stream like an annuity. I think the better approach is to combine an installment sale (453) with a monetization loan. That approach gives the seller a lump sum of cash that can be redeployed into anything and any asset class.

@Anique Akhtar

2) Then there is the question of fees. I have been told IUL usually charges 6% in fees on the premiums while WL would have a flat yearly fee of less than $100 year. This would mean that IUL would grow at a slower rate. However, I recall from reading on forums elsewhere that IUL grows more because it doesn't have hidden fees and should have lower fees. But at this moment, I am not sure who to believe. Could you elaborate on that?

All policies have a premium charge. It is disclosed on the illustration and in the policy documents. Its not always 6%. It's usually closer to 8%... even on whole life. The fee structure is virtually identical for both WL and IUL. Think about it. For 2 identically-designed policies: same premium, same insured, etc., the insurance companies face the exact same risk and have the exact same resources to cover that risk. Understand that in the real world, there are company to company differences in fees/costs, but the risks are the same.

3) Is it possible to look at the IUL vs WL returns for the past 10 years or so. Maybe not include returns from 30 years ago or something. I would be interested in knowing how IUL and WL performed in the past decade or so.

This isn't really possible. I can give you historical interest and dividend crediting rates, but understand that each policy has a different mix of indexing strategies, different anniversary dates, etc. You would have to compare 2 maximum over-funded policies for a truly apples to apples comparison.

4) Then there is someone claiming IUL should have the same returns as WL. Since in IUL they take away the dividends from the Indexes. so making S&P returns like 4% or so.

LOL. I hear this one all the time. I have a YouTube video on just this subject. Anyone who repeats this BS doesn't understand IUL. The goal of an IUL IS NOT to match the performance of the underlying market index. The goal is to simply earn a premium over the Dividend Rate that they WOULD HAVE paid, had they not effectively used the dividend for hedging. As interest rates rise or fall, the return on an IUL will rise or fall, but should maintain a 1-2% premium over the debt market rate of return.

5) Then there is the question of how much money can you borrow against your cash value. So if 85% of the premiums+interests go into the cash value, then you can only take out 90% in loan from that 85% cash value. Is that true? so the actual loan would be like 76.5% of the premium+interests?

It depends. Not sure where you got that 90% number. An insurance company may hold back the 1st year interest, but other than that, you can access all of the cash value. If you use a cash value line of credit from a third party bank, they will loan 90% of what is on your account values statement. But its important to understand that the fees are subtracted on a monthly basis. This means that at the beginning of the year, the cash value balance is much higher than the 85% it will ultimately be at the end of the year. Its 90% of the beginning of year balance.

6) I am reading that the 90% loan you take on the cash value needs to be paid back properly. Otherwise, if the compounding interest reaches your cash value, the policy will lapse. I'll assume if the cash value is growing at a higher rate than the loan interest rates and is also increasing due to the premiums, then there shouldn't be a danger of the policy lapsing. But apparently, people are saying it is very common.

The interest needs to be paid. If you are leveraging the cash value to invest in real estate (The Double Play), then you should be treating your policy loan just as you would a bank loan. You pay the interest. Its your cost of money. As long as you pay the interest, the loan can stay there forever. The loan balance remains constant and the cash value forever compounds. Compounding interest a beautiful thing.

 Exactly!

@Anique Akhtar

1) The first question is regarding WL and IUL. I understand that it really comes down to how much risk I want to take. I was more comfortable with WL but if the guaranteed rate has dropped to 2%, IUL seems a lot more convincing. So the first question is, why has the guaranteed rate in WL decreased? At my age (32) wouldn't the "more risky" IUL make more sense?

Guaranteed rates have gone down because insurance companies CANT make 4% in the current debt market. Interest rates are very low. 

Both IUL and WL will work for any kind of private banking strategy. However, if you ask me which one I use and which one I think is better, I will tell you that it is the IUL. For any two apples to apples policy designs, the IUL will outperform a WL. The insurance company is essentially taking the dividend that they would have paid you and they are using it to hedge index options. The goal is to capture as much movement in the market as they can get with the money they have to spend. This is why you see a Cap and a Floor with IUL. The cap is the strike price of the options. The floor is zero because the options expire worthless if the index declines. An IUL may have more year to year volatility, but it WILL earn a premium over the dividend rate over time. Otherwise why do the hedging? Since the cash value will grow faster, there is actually less risk in an IUL. 

The myth around IUL being risky comes from back in the 1980s when interest rates were super high. At that time you could buy a lot of death benefit for very low premium if you counted on the high interest rates to make up for a lower premium. However, as rates started going down, agents and policy owners didn't make up for the declining interest by increasng premiums, thus policies were underfunded. This is a function of the flexibility in a UL policy, not any kind of inherent risk, But agents who don't understand this try to paint the whole industry with a broad brush. We are dealing with Maximum Over-funded policies, not Minimally-funded policies. These are completely different animals.

2) Would taking the loan out directly from the insurance company be a better idea or getting a CVLOC from a third-party lender at a prime rate a better idea? I am reading that the interest you pay on the policy loan goes back into the insurance's cash value. Is that true? If it is true, wouldn't taking a loan against your policy through insurance be a better idea rather than getting a lower APR loan from third-party lenders?

Interest does not go back into the policy. Interest is paid to the insurance company to compensate THEM for the money they loaned you. The "Trick" of infinite banking is that they get you to think that paying extra Paid Up Additions is Paying Yourself Interest. Its deceiving and BS.

3) Can the dividends pay for the premiums or do I have to regularly pay $1k every month for the rest of my life?

Yes. You can stop making premium payments at any time after about the 5th year. You still need to build up a critical mass of cash value so that the fixed policy issue charges don't consume all the cash value. If you are interested, we can review the cost structure of policies so that this makes better sense.

4) I am also a bit concerned about flexible payments and the MEC limit. I don't fully understand the MEC limits yet and what that entails. So trying to understand that. Please correct me if I am wrong in my calculations. In my case, if I am putting in $1k per month into the policy and I want to get maximum cash value. I believe my MEC limit should be $12k per year. Does that mean I cannot put more than $12k into my insurance? 

Correct. You can always pay less, but you cannot exceed $12K without increasing the death benefit. You are paying the absolute legal maximum per unit of death benefit. The policy barely meets the definition of life insurance.

Also is it possible to do flexible payments? 

Yes. Just understand that to the extent that you do not max out the premium, the fees are spread out over few dollars... higher fees per dollar of premium.

How would each of these scenarios work assuming my premiums are $12k which is the same as the MEC limit:

• A) If I pay $14k during a year.
• Can't pay $14K. $12K is max.
• B) If I pay $10k during a year.
• You have fees based on $12K, but spread out over only $10K. Policy will be fine otherwise. In fact you can make up the shortfall in future years.
• C) If I pay $12k in the first month and don't pay anything the rest of the year.
• This is the best way to do it. The money is working from day one!
• D) If I pay $6k the first month and pay $6k on the 9th month of the year.
• This is fine. You can pay on whatever schedule you want: monthly, quarterly, semiannually or annually.