All Forum Posts by: Thomas Rutkowski

Let's me try to explain  again of how to calculate the compounding of the return of the borrowed money, about the last three columns of the table. 

The borrowed money earns $4590(Column G) the first year, we assume it compounding at rate of 10%, it will continue compounding 11 times until it reach the 12th year, so the "Compounding Factor" in the column H: 1.1^11=2.853116706,  Column G*H = 13096, put another word, $4590 compounding 11 times at rate of 10% should be 13096.

For second year,  the earned money can only  compounding  10 times (only 10 years left),  so the "Compounding Factor" in the last column H: 1.1^10=2.59374246,

Of course for the third year it can only compounding 9 times
And the last year it can do not compound any more because it reach the term end
and so on......

We add all the last column together, which is $129235, this is the total compounding return of all the borrowed money.

SO it is a 9.6% vs 10% compounding game FOREVER, and in this example the 10% will always win, from year 1 to year 10000 !

Hi Brian, you are right, tax is a very important factor in investment, and I have to admit I do not know much about WL tax benefit though I have an impression it has huge advantage.

Real estates are also not that bad on taxes. For most long term buyer and hold landlords, you should not expect them to pay ANY tax unless they flip or sell properties. Depreciations will offset most of their taxable income. Most of their profit will be in capital gain and equity buildup when they sell them. They can also use 1031 exchange to defer taxes.

I am not saying we should not consider tax when we do investment. The problem is that some insurance sale people mislead people, for example, in the previous example, if you just look at the table, you will think the WL has much better return than real estate ( assume no tax), but in fact, if you carefully look at the numbers, you will know the real estate will have better return. I know in the above example if considering the tax, WL may be better, but the table is presented in a misleading way, or even cheating way.

My sense is if that you can get above 10% return, WL is probably not a good idea. Lots of real estate people can do far better than that, that’s why not lots of people like WL here in BP.

I know WL has other purposes. But from pure wealth building perspective, I think the math is pretty simple.

If you really can not find any other investments which can return much higher than 6~8%, WL may be not a bad choice. However, if you can find investment opportunity which can bring much higher rate than that, For example, with real estate it is not difficult to bring over 15% with leverage ( 3% appreciation with 75% LTV will enlarge the return to 12%, plus rent so get 15% is not that difficult). Will be a fool try to catch the 6~8%, even with tax advantage (real estate also not bad on tax).

Some WL people argue that you can always borrow your money out, but even if you can borrow 90% of your money that you have put in one day before, the 10% wasted money still can bring huge losses with higher opportunity cost. Take myself, in the past 8~9 years, my annual compounding return is over 35%, think about the potential losses if I wasted even one penny of my initial cash. I know I cannot repeat the 35% return in the future, but my point is very clear.

Most people on BP can achieve much higher returns, no wonder lots of them not fans of WL.

@John Perrings

Gotcha, so through premiums, dividends, interest, etc. the cash value grows to the DB amount.

Thanks John.

This idea and structure makes no financial sense whatsoever. You want to put money into a WL insurance and then borrow against your own money up to 85% our whatever amount they "allow" you without affecting the life insurance itself (many complicated rules there causing a 30% lapse within the first few years) and then you want to convince me that both entities are working for you? 

No.... the best way to do this is to use all your money to buy the real estate asset and increase its cash flow output then have the asset buy you a level term insurance which will cost you less money and over time your property will be paid off. 

That's when you will get the asset to finance your purchases including life insurance. You can even buy a WL insurance of that's what you want to do.

Ironically those who wrote in this thread that overfunding WL makes sense for the wealthy, they are also wrong. It makes sense for no one except the life insurance agents selling it (they call themselves "financial advisors") The wealthy buy PPLI (Private placement life insurance). Notice that the ones who repeatedly argue the worthiness of the WL over funding concept and private banking are the insurance agents or brokers whom I caution you again are called financial advisors and this misleading title is bestowed upon them by none other than the insurance companies. 

Their concepts are based on hypothetical numbers and unreal projections so their math is skewed, and yet they come into real estate websites to tout how great it is to borrow your own money at less than you gave the insurance company plus high fees because you have a life insurance. 

I repeat, your cash flowing asset can buy you the coverage and all your money can work for you for extra no fees! 

Read the replies of @Kim Jones and @Cliff H. and compare them to @Thomas Rutkowski (salesman) and other poor souls who do not understand how money works then you be the judge 

Very interesting topic. I also spent times reading some articles and books and try to get some understanding on it.

Well, WL's so called "double plays", allowing to borrow against the policy so can grow the policy's cash value at the same time also grow the borrowed money. This is nice, but it is not its OWN patent. Other ways such as real estate can do same or even better than that. Take real estate, using either HELOC or cashout refinance can achieve the same: old property is still growing while borrowed money can also grow itself. And considering WL's cash growth rate is only about 3~4%, real estate can do better than that. As some people mentioned before, you can also borrow against your other investment portfolio.

Now I think the only advantage of WL is its tax advantage ( for life insurance we can always buy a cheap term), disadvantages are cost and unexpected withdraw or cancel cost. This is hard to balance for me.

A savvy investor probably can do a far better job with no WL. As someone said before: Do not mix investment with insurance. Buy an insurance if necessary and then focus on your investment. I agree.

I see your calculation. You assume the life insurance policy pay a 6% return, while the insurance company charge you 4% to loan the money. Is this assumption realistic? Why would the insurance company pay you more than it can get from the loan? (i.e. if you borrow from them, and pay them with that money, you would earn 2%)

My understanding is as follow for (but I remember reading about some very narrow exceptions that may be different), as long as the policy does not become a MEC.

premium are not deductible (after tax).

grow of the cash value is tax deferred

Withdrawals from cash value are taxable above the premium basis (FIFO).

Death benefit to a beneficiary are tax free but are counted towards the total estate value for estate tax. If there are some loan outstanding, the death benefit will be reduced by the loans amount.

Loans from the policy are tax free.

Interests paid to an inside policy loan are not tax deductible, however the interests for a third party loan secured by the cash value may be tax deductible.

A lapse of the policy will trigger a taxable event.