@Thomas Rutkowski
What you write is in bold and my replies are below:
The truth about WL?? You mean people like you who don't understand how insurance works repeating the same myths over and over? Just because you think its "the truth" doesn't make it the truth.
No Thomas, when we talk numbers there is no wiggle room here so don't be insulting to others assuming we don't understand how insurance works. Insurance was never meant to be an investment vehicle no matter how hard or gimmicky you and insurance companies want to present them. The truth is in the facts and figures.
The Double Play math is simple. Imagine if your first premium was $100,000. $15,000 of that is lost to the policy charges. You are starting with $85,000 of cash value. Premium minus expenses equals cash value. You can get a line of credit against that cash value at prime, but let's just say 5% to keep the math simple and be conservative.
You talk from both sides of your mouth: Now you are saying the premium is $100,000. What kind of premium is that? Ah it is based on "over funding" the insurance yet when someone gave an example earlier in the thread of using the money for downpayment you replied with "no one needs to fund the whole premium amount upfront"!!
Anyway, even when you switch the numbers back and forth with small premiums or huge premiums it is still not going to make sense so let me prove it to you with the simple math that you refer to since several people have attempted to do so and your replies are insulting and demeaning.
Paying $100,000 to have $85,000 of cash value will give you access to a maximum of 90% of that amount for loan which would be $76,500 minus the fees to get that loan (which is you borrowing back your own money)
You somehow cleverly omitted that part and just wrote above that someone can get a credit line but did not want to explain that it would only be 90% of cash value which 85% of the exorbitant premium paid.
You don't believe me? google it, here is what will come up: "How much you can borrow from a life insurance policy varies by insurer, but the maximum policy loan amount is typically 90% of the cash value"
So now you have over funded your premium with $100,000 and $15,000 of it went toward your insurance death coverage with a lot of fees included to cover fees and commissions. (This is 5X to 10X what you would pay for same coverage if you bought a 20 or 25 years level premium insurance after using all your money with no additional insurance expenses as a down payment to buy a property. You could even buy a turnkey rental property in the midwest in full for $100,000 and get a 10% net return and you will start getting cash flow from day one and will not have on-going obligations to keep funding your insurance and accessing only 90% of 85% of the cash value which may also fluctuate based on insurance terms etc With the real estate rental cash flow you can take a small amount and buy the right life insurance without over funding it!
Then you have another $8,500 sitting in the cash value that you cannot borrow.
And now that the money is loaned out you pay interest higher than the income you would receive on that amount from the insurance co.
If you can take the proceeds of that credit line and invest it at 10%, you'll make $8,500 the first year. Your interest is a business expense, so you end up with $4,250 of taxable income.
Again your calculations are based on $85,000 which is 100% of the cash value which is wrong but I will give you the benefit of the doubt and will assume you have some crazy insurance company that will actually loan all the 100% cash value to its clients. Why would anyone who could make 10% as per your example on $85,000 would be satisfied with a net of $4,250? Wouldn't you be better off taking the $100,000 and buying the real estate, make the 10% return like you mentioned but actually net the full 10% due to depreciation, and other write offs and finally buy the life insurance from the cash flow?
You realize that the difference between making $10,000 in net cash flow and $4,250 is $5,750 which would buy you the insurance coverage you need? or even more coverage for a level term insurance for 20 or 25 years.
I should stop here but I will continue since you seem relentlessly frustrated with your replies to everyone on this thread.
If you're in a 40% tax bracket, you'll write a check to the IRS for $1700, leaving you with a net of $2,550.
Very simple but very bad math compared to using the money for real estate and using the cash flow to pay for insurance as was explained by others and again myself here. Read my reply in the paragraphs above
The cash value of the policy also earns a dividend during that same period, so assuming that is 6%, your cash value grows by $5100. The total growth is $7,650.
Wrong math again, it is always a negative spread because you will earn less than the interest you pay the insurance companies. I think everyone is clear on how insurance companies work.
Even if I give you the benefit of the doubt and calculate that the interest paid and the dividend earned are at par, if they are at par you are out the fees and you have a big risk because anyone borrowing against their life insurance cash value must carefully monitor the size of the loan as compared to the policy’s cash value. If you fail to make interest payments, the interest amount is added to the outstanding loan balance. If the total size of your loan ever exceeds your policy’s cash value, the life insurance policy will lapse, canceling your coverage. In addition, you will likely have to pay income taxes on the loan.
Compare this with investing $100,000 of your own cash directly in the same investment earning 10%. This time all $10,000 is subject to income taxes, so your net after tax is $6,000.
Wrong math again. We are a real estate group here so we have plenty of tax deductions and write offs. The $10,000 will come to anyone with no tax because of depreciation and other deductions. If you get a loan to buy the real estate you would even get interest deductions, while the renters are paying down your debt making your IRR in mid teens.
As I stated in my first post: would you rather have 85% of your money making 9% or 100% of your money making 6%? The graph clearly shows the benefit of this planning approach over time.
What are you talking about here? Read what you wrote above and you will see that you are using the writing numbers. You just gave in your example above a return of 10% and I am telling you you would bet the entire 10% versus the insurance return which would be barely 4.25% based on your own calculations.
But to answer your question, even though several people told you in this thread, we prefer to have 100% of the money working for us in real estate and buy the life insurance from the rental cash flow! I know you are a one track minded insurance agent/broker (financial advisor) because that is how you make your living but please look at the facts and figures
This is just a simple example. Depreciation in real estate requires a little more sophisticated modeling, but it still works.
Maybe that math is a bit over your head but it is simple and actually you take usually 80% of the improvement and divided by x years (based on residential or commercial) to get the proper amount for the tax right offs and you still have so many more deductions, so let's not brush off that subject.
And you can see that a poorly designed policy with less than 85% cash value would negatively impact the results.
Even a great policy would still not work! go back and read my statements above even with your biased pro-forma.
This is what 85% of your money growing at 9% vs 100% of your money growing at 6% looks like...
Even with your wring math and messed up numbers, your chart is a disaster. It will take someone with an over funded insurance even if your numbers were true over 15 years to reflect a noticeable difference. The sad part if your numbers are not true because you make the insurance returns much better than they are and omit one of the biggest benefits in being in real estate which is the tremendous leverage and tax benefits.
I know you will keep replying and arguing, @Thomas Rutkowski. I usually do not even engage on Bigger Pockets but I could not resist because your bad attitude and misleading numbers were very upsetting
