How To Finance REAL ESTATE w/ Whole Life Insurance

We are going to touch on a popular concept which involves using a dividend paying whole life insurance policy, a high cash value life insurance policy to finance real estate. A lot of real estate investors are attracted to this idea. Some hear about it, don't move forward. Some see it, move forward right away. So conceptually, we're going to touch on exactly how this works. We'll begin with the whole life insurance piece. So with a whole life policy, I should say, this 100% has to do with the cash value. You will see some tie to the death benefit, but when it comes to actually purchasing real estate, if that's my goal, the cash value has everything to do with it. This is the key here. So when it comes to the cash value, a couple bullet points here. It is a safe, liquid, tax-free area to position money. Tax-free provided I don't mess the policy up and we've got more content on that elsewhere. But let's touch on these two pieces, safe and guarantees. So the money itself within the cash value component of a life insurance policy is not tied to or invested in the stock market. I have a guaranteed floor, a guaranteed minimum interest rate of 4%. And then typically the company will pay a dividend on top of that. And with different companies, I'll see dividends range from about 5% to 6%. That's for 2020. Liquidity money is very liquid. Once it's inside of a cash value life insurance policy and the tax benefits, well, we've got a lot more content on that. Here's the piece that really makes it all work. This is what attracts people who are involved in real estate because it resonates with a real estate investor. No lost opportunity cost in the sense that once a dollar passes through the cash value of a life insurance policy, regardless, if I just let that dollar sit and grow or if I borrow against it, if I pull it out, I continue to yield dividends and interest, the guaranteed rate and dividends as if all of the money were still in the policy in the first place. A lot like a piece of property, if I'm appreciating at 5%, whatever that real estate's appreciating at, if I borrow against the equity, I still receive the appreciation on the entire appraisal value, not just the remaining equity. You'll find that it is very, very similar with the whole life insurance policy. So when it comes to real estate, cash flow, there's different ways to invest in real estate. Maybe it's buy and hold, sell it down the road, but typically cash flow is what works quite nicely with a whole life insurance policy, meaning I'm purchasing properties that are producing cash flow, flowing back to me. Cash flow is king at the end of the day too. So the property, let's say I'm earning somewhere between 6% and 12%, broad range, but it really depends where I'm investing and how much capital I have to work with depending on what type of deal I can get. Now to purchase it with a life insurance policy, let's take a look here. So in action, how this would use, how this would work. If I have a life insurance policy and let's pretend, how much capital should we look at here? A bigger piece of property, let's say we've got $500,000 in cash value. Now the thing is, you do have to capitalize a policy first, meaning to have $500,000, I would have had to have paid that in or paid in less than that and then the appreciation obviously grew to $500,000. But I can't just put a dollar in and instantly have $500,000. So if I've got $500,000 in cash value, I want to buy a piece of property, let's say this costs $350,000. So I want to purchase this $350,000 property, I can buy it in cash, finance through the bank or finance through my policy. So financing through a life insurance policy, here's how this would work. So I'm going to loan out $350,000 from my policy. So first things first, remaining cash value would be $150,000. And the reason for that is because I take a policy loan of $350,000 to purchase the property. Okay, so at $510,000 cash value, I've borrowed out $350,000. So I've got $150,000 remaining in equity. Okay, now what's going to happen here is I've got that $350,000 loan outstanding. So there is a cost to borrow just like there'd be a cost to borrow to take a line of credit out or a mortgage from a lender that's going to depend on the insurance company typically you'll see them range from about 5% to 6%. Now that 5% on the loan will go to the insurance company. So if I pause there this concept would make zero sense because I'm literally borrowing and paying interest on my own money. However, just like a piece of property that I'm earning the appreciation on the entire appraisal value here's what happens. If the company is paying me I'm just going to use some simple numbers here 5% on $500,000 say it's 4% or 5% whatever I'm going to continue to receive that even though I pulled $350,000 out. There's no lost opportunity cost. Now how the insurance company does this tying back to the death benefit where we said it has some importance with this concept is if I borrow out $350,000 let's say day one my death benefit was $1,000,000 I pull out $350,000 the insurance company is going to collateralize my death benefit. So if I die with a loan outstanding they're on the hook for $350,000 less. They're okay with that. Remember their first and foremost obligation is to do what? Pay out life insurance claims and if I pay it back it's all fully restored. But what we've got going on here is I am still compounding on that full $500,000 while I'm paying interest only on the $350,000. Quick side note loan interest accrues at annual simple interest. So if I pay it each year it will not compound on itself which is valuable. So literally what guys will do here is borrow call it $350,000 purchase the property if that is producing 8% or whatever it is now they can take that 8% and use it to repay the policy loan. The thing is this is constantly at work for them. Again no lost opportunity cost. What's interesting is if you've ever seen any of our videos where we looked at a policy side by side where I pay money in let it sit and grow compared to borrowing and then repaying what you'll find is once a loan is paid back my cash value is fully restored to what it would have been as if I had never touched it in the first place. That compounding continues there's no lost opportunity cost. So really using a policy for real estate that allows me to call it double dip on my money where I keep my primary bucket of cash at work for me and then at the same time invest in real estate where I get a return over there keep the compounding going forward good stuff and as always hope this helps. Hey guys Steve Parisi here. If you enjoyed the content you just saw please subscribe, like and hit the notification bell for future videos. If you'd like more information or to see some custom policies for yourself feel free to call or email our offices at the contact information below.