All Forum Posts by: Thomas Rutkowski

 @Alina Trigub - You do not "borrow against" a 401(k). You "borrow from" a 401(k) plan. That is a huge difference. When you "borrow against", the borrower maintains control over the underlying collateral for the loan. If the collateral is an appreciating asset, as in the case of a HELOC or Cash Value Life Insurance, the borrower still benefits from that appreciation. That is not the case when you "borrow from). The depleted 401(k) earns nothing but the interest on the loan.

 There is an entire thread on BP devoted to exploring the leveraging of high cash value life insurance policies to invest in real estate...

https://www.biggerpockets.com/forums/519/topics/245380-paradigm-life-infinite-banking-whole-life-insurance?page=3

 The first part is correct. The loan is for 95% and there are 1.5% in loan origination fees. There is no 5% dealer fee taken out of the loan. Again, just as a bank maintains an LTV ratio, the third-party lender in this case will not loan 100% of the contract value. This is the "monetization" part of the monetized installment sale. You have to compare the monetization loan and the 30 years of tax deferral to paying the taxes in the year of the sale. If you are better off, do it. If not, don't.

The installment sale will proceed for 30 years. You'll receive interest-only for 30 years and at the end you will get a balloon payment with enough to satisfy the loan. THAT is where the qualified intermediary/dealer takes their fee. You agreed to this on the sales side of the transaction, not on the monetization loan side. A 5% fee taken 30 years in the future. The loan is what it is. If you can find a lender willing to do a 100% loan, please let me know!

 Just to be clear, the 6.5% is not a "cost". It does not include legal fees as you state. There is a 3d party lender making the monetization loan. The 93.5% is simply the maximum amount that they will loan. It is not a risk-free transaction for the lender. There is no collateral securing the loan because that would violate the "pledge" rule.

 Mark - I love that you are out here supporting the use of life insurance like this. But lets be clear for all of the people that are using this thread to research the subject...

1. Infinite Banking is a sales system. A quick search of the internet will find about a half-dozen other "systems". What we are really talking about are Over-funded Permanent Life Insurance policies. And this can be done with any permanent life insurance policy, not just Whole Life and not just from a "certified" IBC agent.

2. To be most effective for leverage into real estate, the life insurance policy has to be funded right up to the MEC limit and not over. There is a loss due to the fact that this is life insurance and there are fees and commissions. So you want as much of your money working in two places at once as possible. IBC designs are NOT funded right up the the MEC limit. They leave room under the MEC limit for the client to "pay themselves interest". This "interest" is used to purchase paid up additions for the policy. If there was room to put the premium into the policy up front, it should have been done at that time so the client could have leveraged it. The typical IBC design results in about 65% of the annual premium going to the cash value. If the policy is properly designed, that number should be closer to 85%. The charges in an IBC design are much higher because the death benefit (and sales commissions) are much higher.

Does it makes sense to buy a policy and leverage its cash value to make an investment or to simply make the alternative investment? I have a business model that makes this comparison. The model doesn't work when the policy is not optimized. It takes way too long for the combined accumulation to exceed what you could have done by simply doing the alternative. Even at 85%, it still takes a few years for the combined accumulation to exceed what you could have done by simply investing without insurance.

3. Whole Life versus IUL. Anyone agent who blindly states that WL is "better" than UL/IUL doesn't really understand how life insurance works. The only real difference between Whole Life and Universal Life is the fact that a UL is "unbundled", meaning the cash value and the mortality charges are explicit. A Whole Life is more of a Black Box. You don't see what is going on under the hood. Both types of policies are based on the exact same mortality tables.

Its important to understand that all permanent life insurance needs to be able to pay a claim some day. So how would you do that if you were the insurance company? First and foremost, I'd want to make sure the premiums were enough that the policy owner would save up their own death benefit over their own lifetime AND given an extremely conservative earning rate assumption.

I'd also want to purchase some sort of short "term" insurance that I would keep renewing each year just in case the client dies early.

This is exactly what happens under the hood of every permanent life insurance policy: WL or UL/IUL. The premiums are simply designed so that the client saves up their own death benefit over their lifetimes. That is the cash value. The insurance companies invest the cash to take advantage of compounding growth over a very long time.

In order to make sure that they have enough money saved up by the time the policyowner reaches their natural life expectancy, they assume a worst-case interest rate that they must achieve. This is the "Guaranteed Rate" that they stand behind. [Note: THIS would be a minimally-funded policy design. An over-funded policy design is an entirely different animal.]

The Guaranteed Rate is not a real number. There is not some secret bucket of money to pay those guaranteed rates. If interest rates decline below the guaranteed rates, you are probably going to start seeing insurance companies struggle. Its simply a worst-case scenario for the insurance company.

The insurance company also has the risk of the policy owner dying early. In a UL you can very clearly see that the insurance company is purchasing a 1-year term policy that gets renewed each year. In a Whole Life policy you cannot see the mortality charges, but you can infer the charges by closely examining the ratio of premium to cash value and dividend rate to actual accumulation.

The size of this 1-year term policy is the difference between the death benefit and the cash value. Remember, the cash value represents the policyowner saving up their own death benefit. Thus, the risk to the insurance company is the extent to which the death benefit exceeds the cash value.

So now that we understand that the basic mechanics of the policy are the same when you look under the hood, which type of policy would you want? One where the return on the cash value is tied to the returns in the "Debt" markets? Or one where the return on the cash value is more closely linked to the returns in the "Equity" markets? Equity returns should always exceed Debt market returns over the long run. The increased risk requires a premium.

The insurance company wants the cash value to grow as fast as possible and as safely as possible. Linking the returns to the equity markets by using call options on the indices allows the cash value to earn a higher return while protecting the principal.

A UL/IUL simply credits the interest that is earned. It is an entirely mechanical process. A WL dividend rate is based on the recommendation of the company's directors/executive team. But ultimately, they pay out what they make. Neither company is making money off of the cash value. They all want the cash value to grow as fast as possible so that their risk is removed.

Given that the return on the equity markets will likely be higher than the return on the debt markets, I believe that the cash value in an IUL will accumulate faster than the cash value in a WL. This is common sense once you understand how the policies work.

 This is a BP thread that does a deep dive on Infinite Banking and leveraging cash value for investing in real estate...

https://www.biggerpockets.com/forums/519/topics/24...

High cash value life insurance will do three things to help you accomplish your goals...

1. Generate Tax-Free Income. Permanent life insurance is like a Roth IRA. You are paying premiums with after-tax dollars, but the cash accumulation and income will be tax free. What makes it better than a Roth is that there is no limit to the contribution amount.

2. High income to savings ratio - Most people don't "get" this about life insurance. If you have money in a typical brokerage account, financial advisors recommend that you take no more than 3.5 - 4% (The 4%-Rule, google it). This allows your savings to keep up with inflation and ride out the ups and downs of the market. Cash value, on the other hand, can generate income at a 7-8% ratio. Why? Because you access cash value via policy loans. The collateral securing the loan is still growing and earning interest/dividends. You are not physically removing it like you would with any other type of typical retirement savings account. You can expect to get about 2 to 3 times the net income (after taxes) for the same amount of savings.

3. You can leverage the cash value every day between now and the day you retire to create additional wealth.

 Think about what is going on from the insurance company's point of view. A permanent insurance policy WILL pay a death benefit some day. The cash value of the policy is really nothing more than the insured saving up their own death benefit over their expected lifetime. They'll be investing that money at the same time, so they make a worst case assumption on what they think they can make in the debt markets. That is what is known as the "guaranteed" rate. Its just their worst-case scenario. They don't actually plan to pay that. The faster the cash value grows, the faster their risk is eliminated.

They also have the risk that the insured could die early. For this the simply tack on the price of a one-year renewable term policy. This covers the gap between the cash value and the face value of the policy. The more cash value, the less gap that needs coverage.

During the first 10 years, there are some additional charges. This is where the insurance company makes its money.

When the insured dies, the death benefit is paid from the cash value and from the term.

You can see these explicitly itemized in a Universal Life policy, but not in a whole life. But rest assured, that is what is going on under the hood.

 You should only do it if you want to build more wealth over your lifetime. You are quite literally putting your money to work in two places at once. It absolutely works as long as you have a policy that was designed right from the outset. And most IBC policy designs are NOT optimized for cash value, so be careful. If the illustration isn't showing about 85% cash value to premium at the end of the first year, it is not maximized. 

Think about it. If you have 85 cents of every dollar growing and earning interest. And you have a line of credit for 85 cents at Prime, any return on the borrowed money is in addition to the return on the cash value (dividends).

 Hi Lisa - This is a great way to invest in real estate. The subject has been thoroughly covered on this thread. 

https://www.biggerpockets.com/forums/519/topics/24...

This strategy is my specialty. I'd be happy to discuss with you.

 In 30 years the original installment sale is completed. The seller receives the last and final balloon payment. This is when the taxes are due and the seller will recognize the gain. The sales proceeds close out the monetization loan and the deal is complete.

Monetized Installment Sales were covered on BP here... https://www.biggerpockets.com/forums/51/topics/569...