All Forum Posts by: Thomas Rutkowski

Stating that life insurance is too complicated is simply a cop out. You simply can't get past your bias against life insurance. I have no idea what spawned it or why you hold on to such issues, but you are flat out wrong.

A permanent life insurance policy is not a complicated product. Since the insurance company KNOWS that they will have to pay a claim some day, part of the premium goes into a savings component. The cash value is basically the policy owner saving up the death benefit over the insured's expected lifetime. And as that savings steadily grows and compounds over time, the insurance company has to pool resources to cover the delta between the death benefit and the cash value. The risk is slowly transferred from the insurance company to the policy owner. The insurance company is quite literally buying term and investing the difference. Only they can do it much more efficiently than you can.

And here's what everyone forgets: The cash value belongs to the policy owner. If they surrender the policy, it is returned to them. How can it be "expensive" if it is your own money?

As for the leverage, that is pretty simple too. As I've repeatedly showed throughout this post, if you can get a loan against your policy's cash value and use that loan to invest in real estate, you can put your money to work in two places at one time: The Double Play. You will build wealth faster by putting your money into a properly-designed life insurance policy and leveraging the cash value to invest in "A" than simply taking your money and investing in "A". 

If you, with your PhD, cannot understand the business model, that's on you. It works regardless of what you may think or can comprehend.

You are also confusing minimally-funded, traditional Whole life policy with the maximum over-funded, cash value monsters that we use for real estate investors. Death benefits and commissions are held to an absolute minimum. 

 I've repeatedly stated throughout this thread that the Guarantee is just a worst case scenario. It is not what the insurance companies actually pay. The insurance companies invest their assets in bonds and mortgages. Their dividends are a function of what they make on those investments. You should never buy a life insurance policy based on just the guarantee. Its nice to know its there, but I would be very disappointed if my policy actually performed that poorly. 

It is reasonable to expect the cash value of indexed universal life to earn between 6 - 8%. Returns are a function of the debt markets only to the extent that the interest from their fixed investments gives the insurance company's hedgers the budget they need to purchase options to capture index movement. If interest rates drop, they have less money for hedging and caps drop. If interest rates rise, they have more money for hedging and caps rise. 

You can't compare traditional investments to life insurance. The cash value of life insurance can provide 2 to 3 times the INCOME in retirement as money in a brokerage account. Every heard of the 4%-Rule? Life insurance is more like 7-8%. Why? because you are not taking money out of the policy. You are borrowing against it. It keeps growing even while you are taking income. 

This is why the Buy Term and Invest the Difference myth is so easy to bust. Mutual funds may outperform an IUL growing at only 6%, but unless you have 2 to 3 times the assets by the time you retire, the IUL will provide more after tax income. Account statements don't pay bills. Income pays bills.

Its incumbent upon the agent to make sure that their clients fully understand the product. There are 2 ways to access the cash value: policy loans and withdrawals. Many agents incorrectly use the term "take money out of the policy" when referring to policy loans. Many inexperienced agents don't understand that policy loans are the insurance company's money with the cash value serving as collateral.

Its incumbent upon the policy owner to do their own homework and find a good policy. If you're paying loan interest at 8% while your cash value is earning a 5% dividend, you're going backward and you might, as it sounds like you do, have a poor opinion of policy loans as a means to access the cash value. But, as in the case of Mass Mutual, for example, you can get a variable loan at 5% while your cash value is currently earning a 6% dividend. I trust you can see the advantage in that.

I've saved many people from this problem by showing them banks where they can refinance their high interest rate policy loan with a low interest rate 3d party loan. Banks love cash value as collateral because their loans are fully collateralized and they can get an assignment.

I have no idea what you are talking about. Would you rather have $40,000 growing at 9% or $50,000 growing at 6%. That's what this all comes down to. The power of time and compounding interest. 

I think its pretty simple and totally accounts for your $50,000 premium turning into $40,000 of cash value. Its not close at all. It will only take a few years for Life Insurance plus side fund value to cross over the alternative scenario. 

Show me the numbers or where you think I'm wrong.

Brian - That's not what I'm stating at all. The cash value is part of the death benefit. For example, if you have a $1M death benefit and $500,000 of cash value, your beneficiary is going to get $1M. The insurance company is not keeping the cash value, the cash value will make up the first $500,000 of the death benefit and the "mortality costs" pay for the other $500,000. 

As the cash value accumulates over time, the net amount at risk to the insurance company steadily and predictably declines. If you are 40 years old, for example, the "mortality cost" represents the amount of money that must be pooled in order to pay all of the expected claims on all of their 40 year insureds. So while the cost of insurance increases each year, the net amount at risk to the insurance company is declining over time. [So the myth that IULs are going to lapse due to rising mortality costs is just that, a myth. The mortality costs stay relatively constant as a percentage of cash value. Whole life companies work off of the same mortality tables.]

This graph shows the cash value and death benefit over time. The delta between the death benefit and the cash value is the net amount at risk to the insurance company. This also illustrates why a company who's cash value grows at a faster rate (i.e. an IUL) will actually have lower cost of insurance, not higher. The gap will be smaller because the cash value will close the gap with the death benefit faster. (Note: This is a Minimally-funded policy. i.e. what most people think of when they think of "Whole Life") This is not an example of an maximum over-funded policy design that you would use for leveraging into real estate.]

Given the same $1M policy, if you had taken out a policy loan for $500,000 on that $1M policy, your beneficiary would only receive $500,000. That's not because "the loans reduce the Death Benefit" as many people incorrectly state. The death benefit is still $1M ($500K of which is the cash value), but the loan must be satisfied. So the "net" death benefit received by the beneficiary is $500,000. 

This is the proof that the insurance company does not keep the cash value, which is another popular myth constantly repeated by people who don't understand how life insurance works.

So using your own math: 

If $50K went into premium, and we get $40,000 of cash value, we now have access to a line of credit of $40,000. 4% is the guaranteed rate, not the rate that the companies actually pay. Several companies are still paying over a 6% dividend. IULs can easily earn 6% annualized. This is the growth on the cash value and it can be clearly seen on your policy statements... at least for IULs. WL is more of a black box.

So let's say I can invest in a 12 month notes earning 10%. If I use my cash value line of credit to fund a $40,000 purchase and my loan rate is 5%, I am going to finish the year with $4000, right? I can deduct the interest, so my taxable income is $2000. If I'm paying a marginal tax rate of 40%, I'm paying $800 to the IRS and I'm left with a net gain of $1,200. If you combine the "side fund" gain with the dividend gain inside the policy, you have a total of $3600 of gain. 

If you took your $50,000 and invested directly in the same notes, you would finish the year with $5000. At 40% tax, you would write a check to the IRS for $2000 leaving you with a net after tax income of $3000.

Do you see the difference?

Do you understand the power of compounding interest?

Would you rather have $50,000 growing at a net of 6%? or $40,000 growing at a net of 9%

I think its a no-brainer.

You made the case for life insurance all by yourself. 

So using your own math: 

If $50K went into premium, and we get $40,000 of cash value, we now have access to a line of credit of $40,000. 4% is the guaranteed rate, not the rate that the companies actually pay. Several companies are still paying over a 6% dividend. IULs can easily earn 6% annualized. This is the growth on the cash value and it can be clearly seen on your policy statements... at least for IULs. WL is more of a black box.

So let's say I can invest in a 12 month notes earning 10%. If I use my cash value line of credit to fund a $40,000 purchase and my loan rate is 5%, I am going to finish the year with $4000, right? I can deduct the interest, so my taxable income is $2000. If I'm paying a marginal tax rate of 40%, I'm paying $800 to the IRS and I'm left with a net gain of $1,200. If you combine the "side fund" gain with the dividend gain inside the policy, you have a total of $3600 of gain. 

If you took your $50,000 and invested directly in the same notes, you would finish the year with $5000. At 40% tax, you would write a check to the IRS for $2000 leaving you with a net after tax income of $3000.

Do you see the difference?

Do you understand the power of compounding interest?

Would you rather have $50,000 growing at a net of 6%? or $40,000 growing at a net of 9%

I think its a no-brainer.

You made the case for life insurance all by yourself. 

Brian - The cash value is quite literally the policy owner saving up the death benefit for the insured over their expected lifetime. So as the cash value increases over time, the net amount at risk to the insurance company goes down. To a certain extent, the insurance company is buying term and investing the difference. Only they can do it more efficiently than you can. They need to cover the delta between the cash value and the death benefit. 

When the death benefit is paid, it is the sum of the cash value and the additional coverage provided by the company. If you have borrowed against you policy, the insurance company will pay off that loan from the death benefit and your beneficiary gets the remainder. The insurance company does not keep the cash value. That is a myth perpetuated by people who don't understand life insurance.

@Shaun R. 

Some life insurance agent probably pee'd in @Joe Splitrock's wheaties in a prior life. He hates life insurance and doesn't seem to understand the difference between a minimally-funded policy and one that is designed for maximum cash value for these types of private banking strategies. He'd rather hate life insurance than employ a strategy that actually results in building more wealth. 

You're on the right track, just be careful, any agent touting the "guaranteed" rates, may not know his business. The Guaranteed Rate is a worst-case scenario. The dividend rate of most whole life companies is well in excess of the Guaranteed Rate. The cash value in a permanent life insurance policy truly represents the policy owner saving up the death benefit for the insured. As a result, you can see that the insurance company would have a vested interest in the cash value performing as well as possible. They use the Guaranteed Rate only for pricing out the policies. They don't expect to ever have to pay it.

This topic was beat to death on this thread: https://www.biggerpockets.com/forums/519/topics/245380-paradigm-life-infinite-banking-whole-life-insurance?page=3

If you want to network with people successfully utilizing "The Double Play", just let me know. I have a user's group with well over a hundred members.

Joe,

The key is that the policy must be designed to be a maximum over-funded life insurance policy (whether Whole Life or Indexed UL). You know it is designed right when your 1st year cash value to premium ratio is about 85% when you look at the illustration. You literally cannot buy any less death benefit for the money and still meet the definition of life insurance. If you flip that around, it also means that you cannot put any more cash (premium) into the policy than what you put in the first year. To be the most efficient, you want the premium to be at that level every single year for at least 5 years. At that point you can exit out by dropping the term rider and doing a reduced paid-up. On an IUL you simply reduce the DB to drive out the cost related to the Death Benefit.

Most IBC policies are not designed this way. They are designed to leave room under the limit for paid up additions from outside the policy in future years. This policy design is inefficient for real estate investors because you want as many of your dollars working in two places at once as is possible. It results in higher internal costs in order to support the higher death benefit that results.

Since you are a flipper, I doubt you would be willing to commit to a high annual premium for at least five years. It would be better to find that amount that you can comfortably commit to every year.

While you cannot drop in a lump sum, I do want to clarify that you CAN leverage the cash value immediately when the policy is issued and funded. For example, if you designed a policy for 5 years of $50,000 per year in premium, you would have access to a line of credit of over $40K right from the beginning. And each new increment of $40K+ on each policy anniversary.