How To Fund Real Estate Using Cash-Rich Life Insurance Policies

[Jake Song]

I want to start by going over the benefits of investing in real estate. Then I’m going to go over the common pitfalls real estate investors face. And finally, I’m going to demonstrate how leveraging cash value life insurance is the solution to all of these problems, and why it is a valuable tool for many other applications than real estate.

There are two ways people can invest in real estate using cash value life insurance. The first is to use the cash value in the policy to borrow from the policy and invest in cash flowing real estate assets. The second is actually to qualify for a new financing by using the cash value in the policy as collateral. You can use a line of credit, which can’t be used for collateral, to fund the policy, which then becomes collateral.

It’s a well known fact, at least with savvy real estate investors, that more people have become wealthier in the US through real estate than any other investment strategy.

Another way that real estate adds to compounding wealth growth is through tax advantages.

For investment real estate, the tax benefits get way better, because depreciation is allowed year over year over a period of time based om whether the real property is commercial or residential.

Furthermore, cost segregation provides additional tax advantages through faster depreciation of tangible private property.

Also, other costs such as upgraded labor and resources and other business costs can be deducted from taxes.

Finally, investment real estate can be rented to a third party causing, you guessed it, cash flow. And cash flow is king.

One way that real estate builds wealth is appreciation. This aspect of real estate is exhibited by the real estate market itself and rising real estate values across the continuum over time.

Now let’s talk about the disadvantages of using conventional bank financing:

-Burdening your investment property up to the maximum LTV ratio

-Difficult approval process with any bank loan coupled with appraisals and costs

-Credit reporting consequences for future loans thereby lowering leverage

-Inflexible repayment terms for minimum payments and penalties for nonpayment

-The bank can “call the loan” due and payable at any time, for any reason

Let’s talk about Burdensome real estate property as leverage with additional bank debt in order to obtain a new opportunity and how this is not idyllic for several reasons.

-The approval means of conventional and even home equity loans is exhaustive and burdensome.

-Appraisals are mandatory which might not be available if the property isn’t completed.

-Timing for getting approval has other issues entirely and the opulence of additional time isn’t always possible when pursuing real estate deals.

-Finally, traditional banks charge administrative costs and other charges.

-Your credit will also have an effect on financing costs and credit reporting results in stipulations when it comes to bank financing.

-If you're just starting out in real estate investing, more likely than naught you will be applying for loans individually as opposed to through an investment entity such as an LLC or corporation. This means that the amount of debt you have associated to your income and assets may affect your ability to get loans in the future.

-Your ratio of debt obligations as a percentage of total accessible credit will also affect your credit report, thus making bank financing more costly as debt grows. One, way to account for this is to stay disciplined and pay down your debt.

-Inflexible loan repayment arrangements as well as the possibility for the bank to “call the loan” should be an extra concern for every savvy real estate investor. You may find it hard to believe that your friendly banker could get up one day and decide to call your loans.

Banks are in this game, not to help you, but to make money, no doubt about it. They can cut you off on a whim without even a crisis. Their reasoning could be something as simple as trimming the fat.

Let’s talk about the shortfalls of other alternative funding sources to invest in real estate.

-Self funding should be discussed because of our collective emphasis on saving money. However, whenever you save to spend on investments, the net effect is the same as borrowing, because the entire time you were saving, you gave up the opportunity cost of that money that could have been applied to investing in other assets.

-Private lenders can be a useful resource, especially where the preferred loan is for a fairly short turnaround time, which could be 12 to 24 months. Drawbacks may be the shorter loan term and higher interest rates of around 10 – 12%, so it is much more difficult to get a long term arbitrage on the money.

-Self-directed IRA withdrawals and borrowing from a 401 (k) plan are popular ways to finance real estate without a having to involve a bank. These solutions offer some disadvantages as follows:

-The most significant disadvantage to using a self-directed IRA is that the withdrawal is highly regulated by the IRS due to the qualified tax nature of the IRA.

Investments funded by IRAs will lack some plasticity because IRA funds cannot be blended with other funds without risks and legal problems. IRA proceeds also are only suitable for certain assets such as real property, and are not permitted for investments such as private lending.

Disadvantages to funding through a qualified 401(k) plan include a loss of opportunity to benefit from the growth of the account when you withdraw (which is why you want your money to grow while you spend it, which we will get into in a little bit). The 401(k) holder is not allocated the gains for the portion of the account that is loaned out, unlike in a cash value life insurance policy.

Now let’s take a look at a solution to these pitfalls with the traditional route of real estate investing.

Given the many disadvantages of the alternate sources of real estate financing, using cash value life insurance tells a different story entirely. This is the power of being your own “bank” instead of relying on a big financial institution with rigid repayment rules. With life insurance, you can take tax free policy loans whenever you want, without a structured loan repayment schedule. You don’t have to qualify. No one can call your loan. You don’t need to apply for the loan. It is your money and you can take it whenever you need to. You pay yourself interest instead of paying a bank interest. You can use this source of capital to invest in real estate, and it is easy, flexible, liquid, and under your control at all times, not at the mercy of a bank.

Ray Kroc borrowed from his cash value life insurance policy to finance his growing McDonald’s franchise. Contrary to popular belief, McDonald’s has always been a real estate company and not just a burger joint.

Walt Disney borrowed from his whole life insurance policies to purchase swaths of land in Orlando Florida to become modern day Disney World.

One of the most difficult challenges most real estate investors run into is having enough money to do the volume of deals they want to do, and therefore we look for private money, or withdraw from IRA's to get our next big deal. There is one area that is often unnoticed for investment capital that I think deserves some discussion: Cash value life insurance. That often-overlooked program could be your ticket to an unexploited resource of funds for your next deal.

As you have enough cash value in your whole life insurance policy, why not consider borrowing from yourself, to purchase that next cash-flowing asset? You can pay your policy back with the income produced from the tenant, and in turn your cost basis for your real estate property essentially is zero.

Leveraging the cash value of a max over-funded cash value life insurance policy to invest in real property will accomplish greater long term wealth growth than simply investing directly in real estate alone. You have the growth of your cash value and any wealth created by leveraging the cash value. You get to double dip.

The double play is putting your cash to work in two places at once by leveraging the cash value of a maximum over-funded cash value life insurance policy, and we will get into that part in a second.

There is a big misconception about this which is why no one is talking about it. Most people incorrectly think that you borrow from the cash value of your life insurance policy. That is not actually the case. You borrow against your cash value. The difference is what makes this such a powerful tool. Your cash value is still growing even while you are borrowing against it to invest in real property. You literally have two assets working for you at the same time, and this is a huge benefit to investors to be able to do both at once.

A life insurance policy must designed properly, with the right company, and must be devised as a personal “bank on yourself” system. This simple idea accounts for much of the bewilderment, even among life insurance professionals, concerning how soon a policy can be used for self-banking purposes. In fact, life insurance agents don’t want you to know about this because they get a lower commission.

Most professionals have this indoctrinated approach of a policy that is primarily concentrated on purchasing a death benefit, as if that was the only benefit of life insurance. However, a policy designed in this way will grow cash value very slowly and therefore will take a long time to gain the footing needed to become beneficial for self-banking transactions.

Proper policy design for this strategy would involve the use of some options to allow faster growth of cash value. This is typically arranged through a paid up additions rider (PUA) or another method that maxes out cash value growth and lowers the required base premium for the death benefit.

It is essential to remember that this special type of policy design knowledge is required because the IRS has established rules to limit the amount of premiums that can be paid into a policy at the same time. The IRS has decided that if too much cash is paid into a policy at once, a Modified Endowment Contract (MEC) is created which eliminates tax advantages of the cash value life insurance policy.

In addition to proper policy design, choosing the right life insurance company for this “bank on yourself” system is an essential decision. There are many top companies that offer cash value insurance policies; but all companies are not created equal. You want to work with a company with a rich dividend history that has been around for a long time. You want a company with A-ratings across the board, that is a mutual company with non-direct recognition.

Once your policy is created and funded and time has passed to allow for the growth of sufficient cash values (and this will change from policy to policy), you can begin borrowing from it as a source of private capital.

Unlike the other financing sources mentioned above, using your policy offers an immediate source of funds without any obstacles.

The benefits of cash flowing life insurance are as follows:

-quick and simple loan approval

-Does not impact your credit score

-Does not add risk by hindering real property

-Low fees and low interest rates

-Growth continue in policy regardless of loans – known as non-direct recognition

-Peace of mind in controlling your own loans instead of relying on a bank

In addition, the Cash Value Life Insurance Policy provides:

-Guaranteed cash value accumulation

-Guaranteed leveraged death benefits

-Secured fixed premiums payments

-Dividends

-Tax preferred treatment

-Creditor protection, as well as possible litigation and bankruptcy protection

-Privacy, use, and control

When you borrow from a policy, you’re borrowing from your own cash value life insurance policy, so your approval and financing can be issued in literally hours. There is no qualification, appraisals, or other difficulties.

Your credit score is NOT impacted by your policy loans like it might be with a bank, as they are collateralized by the cash value in your policy.

Your debt to equity ratio on the property stays intact because the equity from your real property is not being used to fund the loan, thus maintaining elasticity if a downturn in the market occurs (which happens all the time… it is not a matter of if, but when ) and the real property would need to be sold.

The best insurance companies charge low rates (in today’s market around 4-6%) (some companies offer fixed options) for loans.

So, it is possible to get an financial arbitrage when profits are borrowed and repurposed to third parties. Costs for taking loans are minimal as opposed to the substantial closing costs that can accumulate from obtaining mortgages and home equity lines of credit or other bank financed loans.

The proper mutual life insurance company will allow full payment of dividends on the cash value sum regardless of loans taken, and this is a massive advantage over loans guaranteed by other financial products such as 401(k) accounts and IRAs.

Furthermore, because this is your policy and you manage it, there is no worry about having loans called or otherwise altered, like they can with bank financing.

The simplicity of borrowing and paying back your policy will at a minimum improve the real estate investor’s capability to swiftly capitalize on opportunities, adding the quickness of money to the equation, and opening up new level of freedom and achievement.

A common objection is that using cash value life insurance in this way isn’t an effective approach for real property investors because the policy costs money upfront (premium payment) and is therefore too costly.

However, this belief is especially absurd in the context of talking about real estate. A cash value life insurance policy is weighted up front, with a down payment so to speak, in the same way as real estate.

In this way, real property and cash value life insurance are mutually beneficial. Although both real estate and cash value life insurance assets may lack equity in the beginning, once fully financed, they offer lifelong immense freedom and advantages to the owner.

Conclusion

Using cash flowing life insurance as part of a real estate wealth building strategy is an exceptional way to safeguard your hard earned money. It also offers an outstanding tax advantaged vehicle with true compound growth with guarantees that rudimentary savings accounts lack.

In addition, investors who want a new line of credit can consider cash value life insurance as a roundabout way of getting it, by using the cash value itself as collateral for the financing. It’s a great option if you’ve expended all your other opportunities but still have a higher income with which you can carry on investing.

This is barely scratching the surface of all the things you can do with a cash value life insurance policy and real property, but I wanted to at least open the thinking process to this potent yet under-utilized asset creation strategy.