All Forum Posts by: Thomas Rutkowski

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.

How much of the premiums paid are accessible in the first 5 years or so?

@Thomas Rutkowski

Hi Thomas

Which part of my math is wrong?

1) that the property I purchased went up by several hundred thousands?

I used the money that was going to go into the WL insurance to acquire a property but before acquiring it, I added value to it by bringing a national food tenant that is still operating there till now and doing well even through COVID-19 with a corporate guarantee

2) that my cash return on my cash downpayment and rehab was enough to buy me twice the coverage for less money using a level term insurance for 20 years?

3) that I just refinanced and cashed out all my money plus some?

4) That I got the insurance literally for free and had infinite rates of returns from day one?

5) That 20 years later the property will be free and clear and worth a lot more?

The 2 things you want working for you are:

1) increase in net-worth

2) increase in cash flow

My math is right and is not biased because I am not selling any life insurance. Btw I know life insurances very well and had applied for a real private license for a bank in the past so all these infinite banking concepts etc can easily be exposed once you compare them to the right real estate strategies

I know such product may help those who are not in real estate but on BiggerPockets I think quite a few people here are exposing the truth about WL and borrowing 85% against 100% to make 6% (That May be correct math but it is a terrible return, if you call that a return!)

I do this but mostly as a way to float liquidity between investments.

Its mostly for investors over 500k net worth as those with less should focus all liquidity to actual investing.

@Tom Jensen

I calculated this several times in the past including other type of insurance structures that are also for UHNW individuals and all came out short.

There are so many hidden and fully disclosed fees by the insurance companies that it is impossible to beat the following strategy that I ended up doing and will share with you below:

1) I put a single tenant commercial property under contract with a 45 day due diligence (to inspect the property with no obligation to purchase it)

2) I contacted national tenants (I follow a very specific system) and got one committed to lease the space for 10 years with a NNN lease (NNN means: Tenant pays the lease plus taxes, insurance and maintenance) and a corporate guarantee (lease is guaranteed for the duration and backed by their financing bank like Wells Fargo) and they asked me to spend some money to offset some of their TI (Tenant Improvement for the location)

3) I took the cash I was going to put in to buy in full a WL insurance and instead I just put it as a downpayment for a 20 year commercial loan at very low interest rate and I used some of the money left over to pay for the TI/rehab cost to improve the single tenant retail property as agreed with the national tenant.

4) After we signed the lease the property went up in value from $850k (when it was vacant under contract) to $1.5Mil (with the national tenant in it with the NNN 10 year lease with the corporate guarantee and escalations)

5) My cash on cash was very high and helped me afford double the life insurance coverage for a lower premium because I got instead a level term life insurance with guaranteed sane premium for 20 years)

6) Once the 20 years are over, the loan would be paid off, I would still have the building at even higher value and the rent would easily be at least double what it was when I started

7) I did this approximately 4 years ago and a few weeks ago I refinanced the property and cashed out all the money I had put in, plus some, and I compared my strategy to those whom I know that went for the WL insurance coverage and the financial difference is huge due to the insurance fees, the limitations on what can be borrowed and limitations on income etc etc

You can do the same with other type of properties of course. I like Single Tenant Buildings because they are almost hassle free with no ongoing fees for operations or management etc

Hope this helps

Cherif Medawar

SFIFund

I'd like to be convinced otherwise of the merits of WL. I've looked into it in the past and decided it wasn't for me...but I'm always open to looking at it again to see if there was something I missed. If you insist the time value of money is not a factor, I'd like some details....

What percentage of the premiums paid are available for withdrawal and use for the first years of the policy until 100% of the premiums paid are available? An annual breakdown of the actual amounts would be very helpful.

Is there any charge or interest to borrow against your policy?

What happens if you don't pay the money back to your policy? How does that affect the death benefit?

What do you mean when you say it's like making $1 do the job of $2? Surely, you aren't saying that the 2.83% IRR of the cash value of the policy means $1 is doing the job of $2? Because that's less than inflation and you'd actually be losing ground by keeping that cash. Believe me.... with the way our government is operating, $100K in premiums paid today is going to seem a lot less ten years from now.

Again, folks who understand the time value of money will opt for much better ways to allocate their money. 

I agree that 2.83% seems very low... but I was just using the numbers that were given to me by a person who was strongly advocating for WL. If you see something wrong with my formula, please let me know. I can only go by the numbers that were given to me by another agent. That's why I think most of the WL benefits don't amount to much for a saavy real estate investor who can put their capital to much higher utility. Perhaps for the average person who doesn't actively invest, WL would not be a bad thing. But for most of us who are hungry to grow their capital as quickly as possible, WL is a waste of time and money.