All Forum Posts by: Thomas Rutkowski

 @Jack B. The concept of leveraging a high cash value life insurance policy has been covered in detail on this thread...https://www.biggerpockets.com/forums/519/topics/24...

The cash value in a policy is an asset that you can borrow against. You can take a loan directly from the insurance company or you can get a line of credit from a bank. Either way, the collateral for the loan is the cash value in the policy.

The beauty of this is that you can quite literally put your money to work in two places at one time. The cash value is growing and earning interest/dividends and so is the loan proceeds (assuming you are making more than the interest on the loan).

 I would rephrase this statement. 

Any properly designed Permanent Life Insurance policy is the best tool to have with REI. I don't drink the infinite banking kool-aid. These strategies work with any permanent life insurance.

The guarantees of a whole life are over-rated. Insurance companies don't ever intend to actually pay that rate.

If you were an insurance company, how would you design a permanent insurance product? I would want to make sure that the premiums were enough for the insured to save up their own death benefit over the course of their lifetime. And I would assume a worst-case interest assumption. THAT is all the guarantee represents.

Whether it is a whole life, a universal life, or an Indexed UL, every insurance company invests their cash in the same exact types of investments: bonds, treasuries, mortgages, etc. Within reasonable limits, they are all going to have the same returns. The only difference with an IUL is that the returns are used to purchase as much movement in market indices as possible using options. But their actual cash and reserves are invested in the same things.

The faster the insured saves up their own death benefit, the faster the risk is eliminated for the insurance company. 

Over time, the IUL is more likely to outperform whole life because the growth is linked to the equity markets rather than the debt markets.

 How difficult is it to be born with it? 

I don't buy your reasoning whatsoever. Its not a game. Its not about who can play and who can't. Where is that is the Act? My presumption is that the legislators simply want to protect unsophisticated investors. It all comes down to suitability. The advisor and/or investment sponsor should be liable if they sold or recommended an investment that is not suitable for the investor. This is already in the rules.

This is all ridiculous. A wannabe investor can come to BP, learn all about real estate investing, and then go out, leverage their home, and lose everything trying to do it on their own. Who's protecting them? Should we legislate that too? The "government" can't protect everyone from everything. Why all the concern over simply investing in a private security?

 By restricting the sale of private securities to "Accredited Investors" the current act is prohibiting sophisticated, but non-accredited investors from accessing what are potentially suitable investments for them. 

I can certainly appreciate the legislators wish to prevent unscrupulous financial advisors from preying on the elderly and other non-sophisticated investors, but as we know, unscrupulous financial advisors will still find a way to operate within any rules that are set. Just watch "the wolf of wall street".

The existing rules addressing "Suitability" are more than enough to address any investment: public or private. 

 The current proposal may not be adequate to your way of thinking, but the definition of accredited investor needs to be changed. Net Worth and Income have no causal relationship to Investment sophistication. There are plenty of people without any formal education who have self-educated and are fully capable of doing the due diligence to analyze sophisticated private securities. And there are plenty of millionaires who are dumber than a box of rocks.

 As I stated in my earlier post, you do not "take money out" of a life insurance policy. You borrow against it. So no, you cannot do that "inside" your policy. You invest outside of your policy with the line of credit against the cash value of your policy.

I don't know who your carrier is. Or if its a Whole Life or Indexed UL. Mass Mutual and Penn Mutual (Whole Life) are both currently paying a 6.4% dividend. You can also get a cash value line of credit at Prime.

So if you have $100,000 of cash value, then you can get a line of credit for, let's say, $90,000 or a policy loan for all $100,000. So using your numbers, that $90,000 could earn $13,500 at 15%. Prime is currently 4.5%, so your net return is 10.5% before tax. If you are in a 33% tax bracket, you'll give up 3.465% to the US Treasury. At the end of the year, you'll net $6,294 -- outside of your policy. And the cash value will earn $6,400 in dividends for a combined gain of $12,694. 

This is obviously not as good a return as you'll get in a Roth with Tax-free growth, but the cash value, if its there, is sitting idle and unused. There is no limit on how much premium you can put into a policy. A roth is limited by your contribution limits. Life insurance offers a death benefit (a self-completing plan).

 Carl - The earnings on a life insurance contract are only taxable if you withdraw it.

Regarding loans...You are not borrowing "your" money. All 50 states have language written into their state statutes that require insurance companies to make loans to their policy holders secured by the cash value of those policies. 

Here is Florida...

http://www.leg.state.fl.us/Statutes/index.cfm?App_...

Your cash value never leaves the policy.

It boils down to this... If you can put your money into an asset that is growing at 5-7%, and you can get a line of credit against that asset at Prime, then anything you do with that borrowed money that earns more than Prime is adding value on top of the dividend/interest crediting rate of the cash value in the policy. Do the math. You'll see that you will build more wealth by putting your money into an over-funded policy and then leveraging that cash value to do what you were going to do anyway.

Read the thread I shared on my reply to Matt's post.

 Matt - You don't need to convert your policies in order to take advantage of the leverage opportunity. If you've had your policies for 10 years now, they've probably accumulated significant cash value that you can leverage any time you want. If you convert to a policy optimized for cash value, you'll be trading death benefit for cash value. You'll have to ask yourself if you still need the death benefit that you did when you bought the policies.

Read this thread before you consider trading into an infinite banking policy...

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

 In a monetized installment sale you get cash up front, hence "monetized" installment sale. The intermediary installment sale is what gives you the tax deferral. Your taxes are deferred until you receive the balloon payment at the end of the contract term.

As Jay stated, you can earn a very good risk-adjusted rate of return by shifting into debt. The equity of the asset that you are lending against is what protects you. The lower the LTV, the safer your principal. If the borrower defaults, you seize the collateral securing the loan. You can accomplish this through debt funds as well, so you don't have to do your own underwriting.

The other risk factor that most people overlook is liquidity. When you tie up your money in a longer term investment, you capture the liquidity premium. Average investors put all of their retirement savings into publicly-traded securities. Why? You can't touch this money until you retire. Longer term, private-placement securities, notes, and other alternatives offer higher returns to offset the lack of liquidity.