Let’s face it, none of us really love paying for insurance unless it’s that rare moment when we actually need it and all of a sudden we’re eternally grateful.
As a former life and annuity insurance agent and a partner in a title insurance company I’m well aware of the fact that as real estate investors – we all need the obvious types of insurance. Of course you most likely need title insurance when you buy a property, and it usually makes good business sense to have Homeowners’ Insurance on a property as well. As for mortgage insurance many times you can get more bang for your buck with life insurance, but mortgage insurance can also make sense in some cases too – like if you were ineligible for life insurance. But what about some of the not so obvious ways of using insurance?
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Why Use Insurance?
One thing I learned a long time ago when I was doing financial planning was how the truly wealthy individuals insured all their investments and today I strive to do the same. For example, I learned when it comes to stocks and bonds they utilized things like “stop-losses” and “puts” and “calls” in tandem. As a hedge against inflation they would invest in real estate AND in precious metals. If their real estate holdings were large they might utilize an appreciation tactic where you place a “put-option” on a real estate stock like “Pulte” or “Toll Brothers” to ensure your real estate holdings.
That was almost 20 years ago, so now I even play a game with how I use insurance for my investing. For example, I recently had some of my private money lenders in town and we were going to dinner. So, I wanted to insure we’d have a good meal. I proceeded to take the waiter aside to give him his tip in advance. I asked him, “Could you take good care of my out-of-town friends for me, I’d really appreciate it?” And as you can guess he was more than happy to oblige. The point here is you’re leaving a tip anyway, why not do it in advanced and insure a good meal? And who knows, maybe that would insure me some more private capital! It’s just one of those gestures that seems to go a long way. All business relationship tips aside, there are at least three hugely IMPORTANT strategies I feel as though every investor should know when it comes to utilizing insurance.
1.) Insurance as a Bucket
Like many investors, I’ve always used entity selection and titling to keep investments in different buckets. I do this so as to keep things separate in case of something like a lawsuit, so say something happened at one property in one entity, they couldn’t take my apartment building that’s in another entity. I even take that one step further with having multiple retirement accounts even, but that’s neither here nor there.
Now I know what some of you are thinking, “Yeah, well I already do that.” But I have to ask; do you know that you can do something similar with insurance? For example, cash value inside a life insurance policy safe from lawsuits but it’s safe from being included in a bankruptcy as well. You can also use an umbrella insurance policy for additional liability protection, covering almost anything above and beyond your normal liability component of your existing insurance.
2.) Insurance as a Private Bank
Another great tactic I’ve learned and utilize today is using a life insurance policy as a private bank for personal use and/or investments. I do this because it’s a tax favored environment for investing since cash value in life insurance policies builds tax free usually at a rate of about 5% and you can take it out ANY time to invest (as a loan with a low rate of interest).
Many times insurance salesmen try to get you the most death benefits as possible and a low cash value, but for you the savy investor, that isn’t always the best way. In fact it’s often better to overfund the policy, take a high cash value (as opposed to death benefit) that grows at 5%, and after borrowing it out investing it in something that makes even more on top of that. You could even theoretically borrow money out and never pay it back, having it only reduce your death benefit. Other advantages to it aside from being protected from lawsuits or bankruptcy (as stated above), life insurance policies also pass favorably to heirs.
3.) Home Warranty Insurance
Several years ago when I was a RE/MAX agent selling properties exclusively to real estate investors, a common strategy that I would see employed by the less handy investors was utilizing a home warranty policy. My one buddy, who couldn’t change a light bulb, would buy a row home or townhome, and right at closing he would put a home warranty on the property for about $400-$500 a year. This would cover everything but the roof which he had inspected already and was either new or just coated. Then he would build in the $75-$100 deductible into the lease for the tenant to pay the first hundred dollars in repairs, and he would tell them to just call the 800-number if they needed any repairs at all. Not a bad model when you really think about it.
So, what are some things you do to ensure success with your real estate investments?
Photo: David Hilowitz