Todays episode, "Become the Bank" with Whole Life Insurance?

[Sean Ruggiero]

Chris kind of glossed over this since it was his intermediary between flips and flops, but does anyone have any thoughts here?

I love Bigger Pockets so much but I hate how I always want ten plus hour episodes and they cut short this fire content just when the speakers are really getting on a role!

In any case, I did several hours of research on this topic afterword and would love to open a discussion on it! There are many different Whole Life Insurance companies, and within the companies there are many different policies. Let's get a discussion going! What do you think about this strategy?

[Mike S.]

Originally posted by @Chris Szepessy:

Maybe I'm being arrogant, but isn't borrowing against a whole life policy, just borrowing money that you could've just put in a savings/money market account and used from there? I don't see the point in paying a ton of money for a whole life policy just to be able to borrow from it. I understand there is a "death benefit" with the policy, but whole life is crazy expensive compared to term insurance. Just looking for some clarification on why this is a good way to go, since it wasn't explained in detail in the podcast.

You could use the same concept with a savings account if:

- the savings account was giving you a return in the 4~8%,

- a bank would accept to give you a loan at 3~5%, based on the collateral of your savings, while your whole savings account is not touched.

And that is what is difficult to understand in this concept, when you are taking a loan out of your policy, you are not borrowing from yourself. You are taking a loan from a third party (the insurance company or a bank), that is secured by the cash value in your life insurance. So the full cash value is continuing to grow unimpeded.

So let's take the following example:

You have $100,000 in cash value in an Index Universal Life Insurance.

During that year your return on the index has been 7%, but after the cost of the insurance your net gain was 6%*. So your cash value at the end of the year would be $106,000.

You take a loan, secured by your cash value, of $90,000 at 3.5% from a bank that you reinvest in a syndication that is giving you a 10% cash on cash return.

You would pay the bank $3,150 in interest that year

Your syndication investment will give you a return of $9,000

If you are in the 35% tax bracket, you will have to pay tax on ($9,000-$3,150). The gain on the life insurance is tax free.

So your net gain, after tax, on your syndication will be $3,802 and your gain on your life insurance will be $6,000. A total of $9,802.

Would you have invested directly the $100,000 in the same syndication, without the life insurance, your net after tax gain would only have been $6,500.

So with the life insurance, you get more money, and on top of it you also have a life insurance that will give your heirs tax free money when you die.

*The cost of life insurance is heavily front loaded, and the first few years the yearly total cost of the insurance may be as high as 15%, in later years, it may be as low as 0.25% a year. Averaged over the life of the policy, the cost is usually between 0.5 to 0.75%.