All Forum Posts by: David Lewis

It is an asset because you are the policy owner.

Here, put on your thinking cap and answer this question: how is this different from any real estate investment? Is real estate an asset even though you have to either sell the property (cash in your policy), take income (take dividend payments), or borrow against it (take policy loans)?

This reminds me of a line from my favorite movie (Other People's Money), when Danny DeVito says: "You don't care if they manufacture wire and cable, fried chicken, or grow tangerines! You want to make money!"

Here's some money. Take the money :)

Hey no one is forcing you to read the thread and get a self-induced migraine.

And, I'm not saying everyone misunderstands. Some people here genuinely want to know. Others seem more like they're trying not to understand. Most people do understand this concept. That is why whole life insurance sales are growing industry-wide, specifically, limited pay policies which are used for their cash value, and specifically among Millennials. 

I understand (possibly) your frustration and confusion. Here's the problem: Your general questions have multiple answers. I think you need to acknowledge this before going any further. If you are looking for *specific* answers to a *specific* policy design with a *specific* company, you need to talk to an agent and get a policy quote. 

Most of your questions cannot be answered unless an agent knows: 1) your age 2) the type of policy you want 3) the particular insurance policy being illustrated. 

I CAN answer #4 for example - when you die, any outstanding loans are deducted from the death benefit. 

I CANNOT answer #5, for example, because whether you pay premiums or not until your death depends on the policy. Some are limited pay policies. Some are not. Meaning, some policies require you to make premium payments to age 100 or 120. Some only allow payments to age 65, others for just 20 years and others just 10 years. Still others are fully customizable so you can make payments for any number of years as long as you make payments for at least "x" number of years (usually 3 or 5). Some are guaranteed paid in full after a set number of years. Some are not. 

It would be like asking: If I put up $50,000, what kind of house can I buy and what would its expenses be and how much can I sell it for? 

How would you possibly answer this question, as asked, with no other information?

Now, suppose I get frustrated and say "see, these real estate PROFESSIONALS can't even answer a simple question." 

This is pretty much how this conversation is going. 

This is sort of like saying "very few people are in a position to benefit from buying real estate". 

When you sell your home, you don't get the equity plus its market value. You get the selling price, which includes the equity. You pay people to borrow against the value of the home (which is "borrowing against your own savings/equity"). 

You pay a commission to a broker or agent when you buy and sell the home. You pay closing costs. You pay title fees. You pay points and interest on any mortgage loans and HELOCs. 

If you take out a loan against a home, then sell it, the loan comes off the selling price and you get what's left.

As you pay down the mortgage, you increase the risk to yourself and decrease the risk to the bank.

These are the same disadvantages you (and other) are saying makes whole life a bad place to park some cash. Yet, I'm guessing no one here is going to say buying real estate is a bad idea. 

Originally posted by @Mark Ferguson:

No they're not. I gave you the two answers that applied. I specifically said that it depends on the contract you have. You don't understand the product, which is why you're asking. Then, you're getting antsy about not getting a single answer. 

Let's say I ask you: "on a typical vehicle, how many doors are there?" Do you see the problem with this question? 

****

I give insurance company $50,000

insurance premium is $2,500

Insurance company takes $5,000 right off the bat.

I can now borrow $42,500 of the $47,500 I paid.

Let's assume it is 7 percent, which from what I have read is never going to happen. That would be $2,975 I am earning on my $42,500, while I am borrowing that money from myself. Awesome....;..

Except I paid $5,000 to earn $2,975, In real life I am guessing that number would actually be much lower, like $1,000 if anything.

Then when I die all that cash I paid the insurance company goes away and the insurance company gets it to pay the "cost of insurance". But, then why was I paying $2,500 a year out of my insurance policy for the cost of insurance to begin with? 

****

This pile of crazy is not how insurance works. 

Here's how it works: I pay $12,000 a year. The insurer gives me $350K of death benefit that grows every year. By year 6ish I break even (which is not unlike the process you go through when buying a home or buying term insurance which earns 0% interest and investing in something else). 

My long-term IRR is like 4%. Maybe 5%.

When I borrow money against the policy, I get charged 5% interest and I keep getting interest on my cash value as though I hadn't borrowed money. I repay the interest on the loan to the insurer. They then turn around and credit that back to me over time (because money is fungible and interest keeps getting paid on my policy). 

You with me so far?

At the end of the day, I either pay interest to a bank, credit card company, whatever, or I pay it to the insurer.

Don't get hung up on this idea of borrowing from savings. You're taking out a secured loan against the policy. That's it. Not hard to comprehend. 

The difference between using the insurer and an outside bank is the insurer effectively refunds me that interest through the normal interest crediting of the policy + dividends. I pay simple interest to the insurer on loans and earn compound interest through the policy. I could just keep my money in an investment account and take out a loan against that, but it's logistically harder to pull off at will. 

Side note: Had I taken the fixed loan option on my policy, I would pay probably a 1% spread for my loans. I didn't want to do that. 

Let's say when I die I have $10 million in death benefit. I have $10 million in cash value. The cash value *is* the death benefit. So, my heirs/charity get $10 million. Think about the death benefit as the "savings goal" in a process of self-insurance. Your cash value is constantly working toward reaching that death benefit amount. When it reaches it, you're self-insured. There's no more pure insurance. Just the contract stating the guaranteed amount you will receive. 100% of the death benefit is cash value. 

Does that make it more clear?

OK. I'm not sure how else to put this to you other than how I've already explained it.

Do you have an insurance policy? If so, what kind? And, what does it say in your contract (they are typically written in plain English so you should see loan provisions in there somewhere). 

You are asking a question with multiple answers. I gave you both answers. I also answere this in another post up the line. Sorry, can't help you further. Which answer do you want? 

That depends on the insurer. If your contract says "non-direct recognition," or something similar like "net 0% cost loan," or "wash loan," then you are earning the rate you were earning prior to the loan on your cash value. In some cases, you can get a positive spread on the loan, meaning the net cost of the loan is negative. 

These are usually set up as variable rate loans (they have to be for this to work).

If you take a fixed-rate loan option, or your contract says "direct recognition," then you usually get paid a lower interest rate on your borrowed cash value. Some whole life insurers actually raise the dividend on direct recognition policies or pay an alternate dividend scale that doesn't result in a net cost. 

I can't speak for Thomas's policy design, but if you are talking about a participating whole life product, then the cash value is not gone. I few posts back I explained that the cash value is a reserve against the death benefit. People often think that, when you die, the insurer takes your CV and you "only get the death benefit." This is an unnecessarily confusing way to explain it and carries a certain connotation with it that's absolutely not true. 

The cash value is the actual reserve used to pay for part of the death benefit (you are going through the process of self-insuring in a whole life policy). So, with every premium dollar you pay during your life, the insurer sets a significant portion of that aside (cash value), adds interest to it, and then when you die, your family gets whatever the stated death benefit is (which consists partially of cash value and partially of pure insurance). 

In universal life insurance, this can be true if you set it up as a level death benefit option. ULs also have an increasing death benefit option where cash value is stacked "on top of" the death benefit. In this case, you get the death benefit in addition to the cash value (which *sounds* like a better deal but isn't necessarily -- all other things being equal, you'd end up with the same death benefit as whole life.).