Investor basic question

[Brandy Smith]

If you had $70k in your bank account, how would you invest it right now? Non-real estate

[Thomas Rutkowski]

Originally posted by @Jody Sperling:

This is an odd ask on a primarily real estate forum, and I'll bite. I'd set up high-cash-value life insurance policy for 40k with a gross 5-year outlay of 200k.

I'd borrow the cash value from the first year immediately, place it in an index fund along with the remaining 30k. On 70/20 split, that would have 65k in the market. Assuming average returns, I'd have enough to repay the loan and pay second-year premiums with the cash value increase.

Third year, I would use a loan against the policy and the dividend to pay the premium on a one-year repayment plan. 

Fourth and fifth year, I'd use the funds from my HELOC.

At the end of five years I'd have tax free access to $197,000 collateralized loans at a >1% interest rate to invest any way I chose with an $80,000 loan owed on the policy. 

I'd pull the remaining $197k loan, invest in VTSAX (assume 7% interest) and repay my loan as a 30-year mortgage. By retirement age, if I never invested another dollar (that would be stupid, but I can't buy real estate in this game) in the life insurance account I'd have $700k with a death benefit of 2 million and an annual dividend of $50,000 (based on over 100years of historical performance). In the index fund investments I'd have 1.7 million.

Not Warren Buffet, but pretty good for a guy who spent just under 350k of his own money

 That is a very high risk approach! What happens if the stock market collapses? I'm not sure if you noticed, but the market doesnt go up every year. My entire business revolves around designing maximum over-funded life insurance policies for people who intend to leverage the cash value. I would NEVER recommend someone use borrowed money to invest in a volatile asset.

If you want to stick to the life insurance approach, it would be much, much safer to fund the $40,000 initial premium as you suggest. But put the other $30K someplace safe and liquid so that it will be there in 12 months. Understand that a properly-designed, maximum over-funded policy should have about 85% cash value to premium. This means that a $40,000 premium should yield a policy with about $34,000 of cash value immediately. Then, at the end of the year, you could borrow against the policy's cash value (~$34K) and kick in an additional $6,000 from the outside assets to make the 2nd year premium. (The first year dividend will not be paid in time to help with the premium.)

At the end of year 2, you would repeat the process by taking another loan against the unsecured portion of the cash value and kicking in cash from outside the policy to make the Year 3 $40,000 premium. The amount needed from outside will be reduced by the dividend paid at the end of year 1, so instead of $6,000, it will be something less. 

This can be repeated for at least 5 years but for long as it takes to put all of the money to work. 

Here's the beauty of this approach: 

Understand that the insurance company will have funded the vast majority of the premium payments. Because most of the premium has been paid with borrowed money, the client shouldn't finance any more than they can afford in recurring interest payments. When you think about it, this is much like real estate in the sense that you are using leverage to maximize your ROR, but unlike real estate, you cannot use the policy's dividends to pay the loan interest.

Consider that while the Client will be paying simple interest on an approximately $150,000 loan, the resulting cash value will be growing at a compounding rate. Hopefully you comprehend that the delta between the cash value and the loan balance will be getting wider with every passing year... just like a loan on an investment property. The loan balance stays the same, but the house continues to appreciate in value. The owner captures all of the equity.

While this may seem complicated, you can also try to visualize a flat annual expense against an asset growing at an exponential rate.