Quote from @Josh St Laurent:
As a financial advisor and professor of finance, I want to provide a more detailed analysis of the use of whole life insurance as a funding source for real estate investments:
- High Fees: Whole life insurance policies often have upfront commissions that can be as high as the first year's premium, and ongoing management fees. These costs reduce the cash value and overall return on investment. For example, a $1 million policy could have an initial commission of $50,000 to $100,000, significantly impacting the policy's cash value in the early years.
- Limited Access to Capital: Accessing the cash value requires taking out a policy loan, which accrues interest, typically at a rate of 5-8%. This interest can compound over time, reducing the net cash value available for investment.
- Restricted Investments: The growth rate of the cash value in a whole life policy is often lower than the average return on real estate investments. For instance, the average annual return on the S&P 500 over the past 90 years is about 9.8%, while the dividend yield on whole life policies is typically 5-6%.
- Opportunity Cost: The premiums for whole life insurance can be significantly higher than those for term life insurance. For example, a 40-year-old healthy male might pay around $500 per year for a 20-year term life policy with a $500,000 death benefit, compared to $4,000-$5,000 per year for a whole life policy with the same death benefit. This difference could be invested directly in real estate, potentially yielding higher returns.
- Long-Term Commitment: Whole life insurance is designed to be a permanent policy, with the expectation that premiums will be paid for the policyholder's entire life. Surrendering the policy early can result in substantial surrender charges and a loss of the death benefit.
- Tax Implications: While the policy's cash value grows tax-deferred, policyholders must be cautious of the potential tax consequences of a policy lapse or surrender. For instance, if the cash value exceeds the total premiums paid, the excess amount is taxable as ordinary income.
- Risk of Policy Lapse: If the policyholder cannot maintain premium payments, the policy can lapse, resulting in the loss of the death benefit and potential tax liabilities on the cash value. This risk is particularly concerning during economic downturns or personal financial hardships.
In summary, while whole life insurance can provide certain benefits, it is crucial to consider the costs, limitations, and long-term implications before using it as a funding source for real estate investments.
To be clear, I don't fault @Brandon Beaudoin for promoting products like this. Insurance companies often prey upon agents (Especially new ones) telling them only half the story to encourage them to sell as many of these "infinite banking" policies as possible and make large commissions. I was one of these agents 13 years ago and have since educated myself on both sides of the coin.
*Not advice* Just my opinion.
@Josh St Laurent, appreciate the "other side" of the coin!
I couldn't help but notice you didn't disagree with anything I wrote. That's probably why you can't "fault" me for "promoting" a product like this. Really, though, I'm not promoting the product here as much as I'm promoting a strategy. A strategy that works, mind you, and works very, very well for lots of people. It does need the right product behind it to facilitate implementation, that much is true.
Instead of refuting anything positive that I stated, you did however offer risks and other items to consider. And I respect that....I do the same. I posted what I did because most people are unaware of the TRUE benefits of the whole life and IBC and only focus on, well, what you did.
To that end, here's my 0.02 based on what you wrote:
1. High fees - Any business has startup and ongoing costs. Using whole life products to create a banking system (i.e. our bank or "the business") to then fund real estate deals (benefits in my original post) are well worth any associated costs. Also, the higher costs are also attributable to a lifelong benefit over that of a temporary (20-30 year term). How much are renewal costs of a term policy again? In most cases much, much higher....but that is never talked about it. Hmm..
2. Limited Access to Capital -This is only true if you don't pay back policy loans with returns from real estate investments. You also make no mention of dividend payments in non-direct recognition policies that increase cash value over time regardless of the policy loans outstanding. And it just gets better and better over time....
3. Restricted Investments - Why are you making this an "either or" thing? And how did you go from growth rate of cash value compared to real estate returns compared to S&P 500?? You have access to your cash value no questions asked and can invest in anything you want. Seems out of line with the bulleted title "Restricted Investments".....odd.
4. Opportunity Cost - How much are renewed term premiums? Talk about costs...
5. Long-Term Commitment - Policies designed for IBC do have long term commitments in their effective use and management but the reality is that policyholders can stop paying premiums much, much earlier in their life spans (5, 7, 10, 20 pay etc)
6. Tax Implications - Certainly need to be aware of this. Much like the tax implications of any investment vehicle or retirement plan.
7. Risk of Policy Lapse - This is a risk and policyholders need to be cognizant of it. But, any retirement plan or investment strategy should have firm understandings of associated risks and the discipline to mitigate and steer clear of them.
Brandon W. Beaudoin
Founder - Abundant Life Products & Strategies, Inc
Licensed Life Insurance Agent
Infinite Banking Practitioner & Coach
Book a Call: https://calendar.app.google/praigJnXx4u4eC3Q8
Cell: 619.306.8823
Email: [email protected]Proverbs 22:7: Just as the rich rule the poor, so the borrower is servant to the lender
