Investment grade insurance

[Troy Layne Pierce]

Hey all. My father in law is about to retire this year. He invests in real

Estate with me and has a 401k from a W2 job he worked for his entire career. Recently he has come across a law firm called fortune firm in Nevada. They offer investment grade insurance policies using whole term life insurance. For several thousand dollars they offer to move his 401k into this policy that involves setting up 2 LLCs and will allow him to borrow against his policy at 4% interest while earning a guaranteed 5% on the principle amount in the policy. The money is mostly non taxable, offers tax free distribution to heirs upon death, and has a $4 million payout for the life insurance portion of this. My opinion is it all seems too good to be true, but I hate to be a naysayer just because I don’t fully understand it. There has to be a catch right? I understand that for someone younger like me it is probably better to just have term life insurance and invest the rest on my own for a much better return, but what about for someone like him at retirement age that doesn’t need a large rerun anymore and just wants security and tax sheltering? Seems like a great option but again what is the catch here?? Any honest feedback on this would be greatly appreciated. I don’t want them making a decision they may regret later on. Thank you all

[Thomas Rutkowski]

@Troy Layne Pierce

First, There is no such thing as "investment grade life insurance". That is simply them trying to come up with a clever way to spin a maximum over-funded life insurance policy. These are the same life insurance policies that the infinite banking folks use, be your own bank and any other "system". Most of the time they are merely "over-funded", not maximum over-funded. 

Second, 4% guarantees are a thing of the past. Insurance companies used to use 4% as the actuarial growth rate for pricing their policies. They called this the "guaranteed" rate. Basically, if you assume that you can make at worst, 4% on your reserves, you can determine how much you need to collect each year in premium for the policy owner to save up the death benefit on the insured over the insured expected lifetime. 

Since it is almost impossible to make 4% in today's debt market's debt markets, the insurance companies lobbied congress for some relief. This was granted in the Omnibus tax bill passed just before the end of the year. Insurance companies can now offer guarantees of only 2% and that can be revisited each year. 

Everything else is accurate. A properly-designed, maximum over-funded life insurance policy should have about 85% cash value to premium. That cash value can earn about 3% in today's debt markets in a whole life and about 5% in an Indexed Universal Life. The cash value can be leveraged so that you can put your money to work in two places at one time. This results in a higher combined growth rate that, over time, will make up for the insurance loss (that 15% of your premium).