POF Options - Cash Value/Borrowing of Life Insurance?

Question

Hi,

So far I have been using my IRA to purchase properties so the POF has not been as issue as I have been just using cash from within my IRA. So the whole POF thing is a bit new to me.

With that being said, I am planning on starting to buy some properties OUTSIDE of my IRA with 'traditional methods'.

One thing I am not clear on if the 'Cash Value' of Life Insurance can be used for a POF letter/source? I would prefer to borrow these funds from the account (I have talked in depth with my agent about this - the cost is about 4% interest) instead of withdrawing since part of the benefits of the account (such as interest rate paid) are based on the cash value, and dont change even if that cash value has an outstanding loan against it.

Do any of you have experience with this in regards to the whole POF requirements?

Thanks, Dan Dietz

Albert Bui · Answer

HI Daniel,

I've researched this topic extensively and work in real estate lending and you can use cash value life loans/withdrawals for down payment funds and you can also use cash value life as "reserves," since when you go from financed mortgages #5 -10 with Fannie Mae you'll need 6 months reserves PITIA(prin/int/tax/ins/ass) for each financed residential mortgage/property and these reserves will pivotal to your success at obtaining financing.

I ran into an an issue with my investors I work with who were leaving cash on the sidelines, checking and savings accounts earning .05 - .2% annually when they were planning for the next deal.

To keep the wealth creation machine going, it got me thinking of ways to plan for a  a competitive return in the mean time, in a tax advantaged manner,  provide access at a moments notice for the "next deal,", and additional benefits (death benefit, asset protection,etc). Permanent life insurance was the only option I found that could cater to all the needs/returns/access/protection/benefits that we could find.

All you'll need to do is to show the quarterly/annual or 2 months of statements in your file.

With regards to seasoning you can use financial assets for reserves as long as you have two full months or more of the asset by the time you draw docs so in technicality if you started a lump sum contribution to a PLI and had only 1 month statement showing your funds you would probably be fine because by the time the file is submitted, the appraisal is ordered, file is processed, remaining items are submitted, file is submitted to underwriting, and reviewed another month will probably have passed so you will have two months statements by then.

Also keep in mind that borrowing from the PLI will not affect your debt to income ratios with conventional financing, but it may with portfolio lenders or 2nd TD lenders out there who have to do a bit of CYA as their guidelines are a bit different.

Let me know if you have any questions.

Kyle J. · Answer

While a lender may require the funds to be "seasoned", there is generally no such requirement when making cash offers.  You just have to show the money is in there now.  In fact, when I send proof of funds with an offer it is in the form of an account summary, so the seller wouldn't have any way of determining if the money has been in there for 10 years or 10 minutes.  The last several properies I bought were paid for using all cash, and I never at any point had to show anything other than an account summary.

Jon Holdman · Answer

@Daniel Dietz Its possible that a seller would accept the info about the life insurance policy as proof of funds.  The key is they want to see liquid funds that you can grab at a moments notice with no strings.  If someone has to approve it then its a financed offer.

The seasoning issue with cash usually comes about for down payments.  Lenders typically want to see your two most recent bank statements and want to see the down payment money there from the start of that period. If you have the cash in the bank I'm not so sure it matters when you're making a cash offer.

Daniel Dietz · Answer

@Jon Holdman ,

As I said, I am new to this, so still a bit confused. I know I need to go talk to some lenders, but thought I would get some advice here too.

I realize there are ALL kinds of different Life Insurance policies out there - some great and some not so much.

One of the reason we keep a large cash value in my LI  is that this 'lump of money' was a gift from a family member, and our goal is to preserve it for the next 10 or so years to make sure different people in the family can be 'taken care of' if needed. It also happens to make over a 5% return AFTER providing me with about 500K of life insurance to boot!

Jon, what I am wondering specifically is this; I DO have access to this where I can get up to about 125K on 48 hours notice. That does not seem much different than a bank account to me. Maybe I am missing something?

I know there are rules about 'seasoning funds' that are deposited into an account. Would that still hold true if I took out a loan ahead and deposited the LI funds into my normal bank account say a week before I needed to show POF?

Thanks, Dan Dietz

Wayne Brooks · Answer

Agree with Jon, those BS POF letters from some "group" other than the buyer, no matter the balance in those accounts, are obvious from a mile away and go straight to the trash.

Jon Holdman · Answer

Unlikely the cash value from a life insurance policy will work.  Even more unlikely those bogus letters will work.  "Proof of funds" means a bank statement with the same name on the account as the name on the offer that shows enough money for the purchase.

Proof of funds from someone else isn't a cash offer.  Its a financed offer.  Make it as such.

Bryan Davis · Answer

Oh and as an aside, look into term life insurance. I was in the insurance industry for a few years and cash value is a HUGE waste of money as is evidenced in the commissions you get for selling it. You can get the same coverage for WAY less. I have Primerica myself (even after working for 'em) and preach their gospel to this day.

Bryan Davis · Answer

I'm not trying to spam anything here so nobody shoot me BUT... I use the proof of funds generator that is a part of Ron LeGrand's Gold Club. I have a link in my signature block below, it IS my personal affiliate link so if you want to Google it so I'm not making anything off of anyone here, feel free to. He'll allow you to generate POF letters on demand for up to $300,000 and will even send bank statements to the seller if requested. Just something to check out.

POF Options - Cash Value/Borrowing of Life Insurance?

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