Investment grade insurance

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Investment grade insurance

Troy Layne Pierce
Rental Property Investor · Columbia, SC · Member since 2020 · 10 posts · 4 votes

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

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Thomas RutkowskiPro Member
Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
5y

@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).

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  • Troy Layne Pierce
    OP
    Rental Property Investor · Columbia, SC · Member since 2020 · 10 posts · 4 votes
    5y

    I should also clarify that the firm says this is not the same as infinite banking, but often gets confused for it.

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    5y

    There are several companies that do setups like this.  I've never heard of Fortune.

    I've looked into it a few times, and my takeaway has been the same every time.  It MIGHT be a good thing, but it is very complicated, and it is hard to understand its inner workings.  Every time I have invested in something that seemed complicated and hard to understand, I've gotten burned.

    Here is a particularly well written short article about it.  https://bankingtruths.com/awr-...   In every article I've read about this, you see the same sorts of things that send up red flags for me.   Instead of just describing how it works, they have to insinuate that it must be a good thing because the IRS wants to regulate it.  (Sorry, that is not evidence of anything for me.)  I also don't understand how you can borrow against your own cash but get interest on your cash at a higher rate.  If this were the case, the insurance company is losing money unless they are somehow making a much higher return than they are giving you.  If that is true, what are they investing in?  What happens if they are investing in risky assets to get high returns and make a bad decision?  In other words, what happens if they go bust?  

    Long story short, I share your skepticism.

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  • Troy Layne Pierce
    OP
    Rental Property Investor · Columbia, SC · Member since 2020 · 10 posts · 4 votes
    5y

    @Greg Scott thanks for your input. Sounds like we have similar concerns here. I’ll take a look at that article. I just don’t want to see them make a bad choice at the end of a life of hard work to get where they are now. The only reason they are even considering it is because of an older family member insurance agent that we all trust who thinks it is a good idea for them. He uses it himself. He would never willfully lead them wrong. I just want to do some outside due diligence for them on my own.

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  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    5y

    Guaranteed 5%? Chicken feed! Ol' Bernie guaranteed 15% as I recall, and his prospectus was not complicated at all.

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  • Thomas RutkowskiPro Member
    Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
    5y

    @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).

    3Reply
  • Troy Layne Pierce
    OP
    Rental Property Investor · Columbia, SC · Member since 2020 · 10 posts · 4 votes
    5y

    @Thomas Rutkowski thank you for explaining. I do believe they guaranteed 5% but I’ll revisit those details with him again. I don’t quite understand what happens once you start taking payouts to live off (I.e. living off your retirement savings as they are intended to be used). Would you borrow against your policy and just not pay it back at that point? Does the interest just accrue until you die at which point they cash in on your policy payout to cover?

    0Reply
  • Thomas RutkowskiPro Member
    Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
    5y

    @Troy Layne Pierce

    Taking income from a life insurance policy is not the same as the policy's return. Because you are borrowing against the policy's cash value and 100% of the cash continues to grow, a life insurance policy, especially an IUL where the cash value growth rate can exceed the loan interest rate by 1 - 2%, this allows for a safe income rate of about 8% relative to the cash value at the time of retirement.

    That is much higher than the typical "4%-Rule" would dictate. 

    You are correct about not paying the interest. Each year, the insurance company loans you the money to pay the interest and tacks it on to your loan balance. You just have to remember that the collateral securing the loan is increasing in value at the same time. When you die, the loans are paid off from the death benefit and the beneficiary will get whatever is left over. 

    You'll hear many agents incorrectly state that taking loans reduces the death benefit. That is not technically true. The death benefit stays the same, its just that after the loans are paid off, the "net" death benefit received by the beneficiary will be less.

    2Reply
  • Troy Layne Pierce
    OP
    Rental Property Investor · Columbia, SC · Member since 2020 · 10 posts · 4 votes
    5y

    @Thomas Rutkowski I think I’m tracking everything you said except the 8% you mention. Are you saying you can take about 8% a year of the principle balance in loans while still being able to preserve the actual principle? Just trying to determine what makes up the 8% math. Thanks for all the help by the way.

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  • Thomas RutkowskiPro Member
    Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
    5y

    @Troy Layne Pierce

    The 8% assumes that you are dipping into your collateral. The goal is to spend your kid's death benefit while you are still alive ;) Otherwise the cash value is part of the death benefit and will pass to the beneficiary. 

    Its kind of interesting to see. The collateral dips down to a safe minimum before compounding interest takes over and it starts moving the other way and building back up again. My projections include income for life even if life was up to age 120.

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  • Troy Layne Pierce
    OP
    Rental Property Investor · Columbia, SC · Member since 2020 · 10 posts · 4 votes
    5y

    @Thomas Rutkowski I see what you are saying now. Many thanks on helping me understand this! Maybe I'll look into this as an option for funding real estate deals with my Roth IRA savings.

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