All Forum Posts by: Thomas Rutkowski

@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.

@Anique Akhtar

The important thing to understand is that you are not "taking money out of WLI to make a down payment". You are leveraging the cash value of the life insurance policy. This means that your cash value remains in the policy and continues to earn dividends. A policy loan is a loan from the insurance company with your cash value serving as collateral.

When you fully understand that this allows you to literally put your money to work in two places at one time, you need to ask yourself, "how much do I want to devote to this?" Only you can answer that question.

Regarding your #2:

Inflation will ultimately manifest itself in higher interest rates. Interest rates are being kept artificially low right now because the fed knows that raising rates will crash the economy. But I don't see any choice. Since insurance companies invest in debt instruments (bonds, treasuries, mortgage-backed securities), they will earn more on their general fund. This will lead to an increase in dividend rates.

Covid has been a media creation. Mortality hasn't significantly changed year over year. Vaccination deaths are on the rise, however. 

It sounds like you think that the guaranteed rate is the actual dividend rate. That is not the case. The guarantee is simply the minimum rate that the insurance company needs to achieve for the contracts to be fully funded to meet their liabilities. Its for actuarial and pricing purposes. Anything that they earn in excess of the guarantee is paid out as part of the dividend. Actual dividends are usually much higher than the guaranteed rate. And, BTW, guaranteed rates are now 2%, not 4%.

Understand that this strategy uses a maximum over-funded life insurance policy. Unlike 99% of life insurance policies, the goal is not to get the most death benefit for the money. It is to get the most cash value. And this comes from minimizing the death benefit. Commissions are tied to the death benefit of the product. When I design these policies, I have squeezed all of the fees and commissions out of it that I legally can. The fees are not as generous as you seem to think. 

You are assuming that all life insurance policies are the same. They are not.

@Malcolm Jackson

You're on the right track. Just keep in mind you can only borrow against the cash value of the policy, not the death benefit. You have to put the money into the policy before you can leverage it. And you're going to lose about 15% to the fees and expenses of the policy.

This subject was covered ad nauseam in this post/thread: https://www.biggerpockets.com/...

@Joshua Pietras This subject has been beat to death in these forums. This is one of the oldest and most thorough discussions.

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

It IS a good idea and it is legit. insurance companies are required by state statute to make loans to their policy owners secured by the cash value of the policy. You can also go to a third party lender and get a cash value line of credit. This means that you still earn dividends on your cash value plus the spread on your investments. The result is that your wealth is growing at a higher combined rate of return... if the policy is designed properly. You'll know its designed properly when the ratio of cash value to premium in Year 1 is ~85-90%.

Check out my profile for links to educational material. 

I think you missed the part where I stated that 85% of the premium in a properly-designed, maximum over-funded policy goes to the cash value. Obviously then, 100% can't be paid to the agent in commissions. I don't think you understand the difference between a traditional policy design and a maximum over-funded policy design. They are at the opposite ends of a spectrum.

ANY investment return that is greater than your cost of money is going to create value. This doesn't NEED a 10% return. It just needs greater than a 4% return to cover the cost of money. 

1. If he borrows money from bank and deal completely fails, he faces default and potential bankruptcy.

2. If he uses his own money and deal completely fails, he loses his own money.

3. If he leverages cash value and deal completely fails, he has zero surrender value, but the cash value is still there and the policy can remain in force with the loan forever collateralized by the cash value.