All Forum Posts by: Thomas Rutkowski

You are borrowing against the cash value, which will be something less than the premium you paid into the policy... depending on how well the policy was designed.

 All of my policies are designed for maximum cash value and minimum death benefit. If a client has money, say $250,000, they are using for their real estate business, then I would design a policy around 5 annual premiums of $50,000. Roughly 85% of the premium goes straight to Cash value.

So, to answer your question, you would have to make a premium payment of about $120,000 in order to have about $100,000 of cash value on day 1. And you would need to continue funding the policy at that level for 4 more years.

Or, if all you have is $100,000, you could begin to cycle it into premium over 5 years. The challenge is in maintaining liquidity to make your premium payments of $20,000 each year. Does this make sense? In year 1 you would make a $20K premium and invest the combination of cash value and your remaining $80,000. In year 2 you would invest your cash value plus the remaining $60K. and so on. This is complicated, but it is the way that most of my clients build their policies. Everyone keeps their money working and this is my single biggest challenge in promoting this strategy to real estate investors.

You cannot borrow against retirement plans. If you know of a lender that will do this, I'd love to know who it is and how they protect their investment. An IRA can borrow money to leverage a purchase within the IRA, but its not quite as effective because of the low LTV on these loans.

 I'd be happy to go over the numbers with you. You can start with the numbers I used in my blog post. 

https://www.biggerpockets.com/blogs/7595/47651-are...

I've got dozens of clients using this strategy for their real estate investing that would dispute your comment that the people selling them are the only people saying good things about it. 

If you can put your money into an account that earns 6-8% interest and you can borrow against it to make other investments, what else do you need to know? That one sentence says it all: You can put your money to work in two places at one time. 

Plus the loan interest reduces your taxable income while the cash value grows tax-free! Its more powerful than a self-directed IRA.

Josh - I would be happy to explain how this works to you. Usually when life insurance pops up in these forums, the life insurance trolls come out of the woodwork, as the previous posts suggest. They scream "buy term and invest the difference!" and then disappear back into their holes until the next time it pops up.

The concept is very simple and it works. If you can put your money into an account that earns 7% (give or take), and you can borrow against it, as if you had a credit line, then anything you do with the loan proceeds in excess of your loan cost will be gravy. You are quite literally putting your money to work in two places at one time. Its a no-brainer.

The biggest problem is that most people dont fully understand how permanent life insurance works. 1. They think you borrow "from" the cash value. If that was the case, they would be right. This wouldn't make sense. But its not the case. Policy loans are loans against the cash value. That is a HUGE difference that is lost on many people.

2. They think it takes forever to build cash value. In a normal life insurance policy, yes, cash value accumulates slowly and steadily. But in an over-funded life insurance policy, I can get as much as 85% of the premium going straight to the cash value. You might see that as a loss, but you would be looking at it all wrong. Since that balance is now your "credit line", you have the ability to get a loan from the insurance company (not your own money). That gives you $1.70 of working assets for every $1.00 of premium you put into the policy.

Here's a recent blog post I wrote on this subject. 

https://www.biggerpockets.com/blogs/7595/47651-are...

This absolutely works and there are plenty of people here on BiggerPockets using this strategy. Where else can you get this kind of leverage, asset protection?

Good luck!

Alexandra - Your accountant is probably not the best person to provide education on self-directed IRAs or rollovers. Accountants understand taxes and tax deductions, but they may or may not even know that self-directed IRA's exist.

I see some confusion between your question and Brian Eastman's response. There is a big difference between the words "Borrow Against" and "Borrow From". Borrowing "against" implies getting a new loan with something, in this case your retirement account, as collateral. Your retirement funds are still in the account and are still working and earning. If you could do that, it would be a wonderful use of leverage, but you cannot pledge a qualified retirement account as collateral for a loan. You cannot personally benefit from a qualified account.

Borrowing "from" implies taking a loan from the qualified account. That means the money is no longer in the account and earning interest. There is not much advantage to doing this. It is much more advantageous for your SD-IRA to get a non-recourse loan to increase your purchasing/investment power.

 There is nothing that can be done for last year's taxes, but I have several strategies that can create tax deductions and potentially reduce your tax liability. Don't wait too long.

My whole business is geared toward teaching this strategy to real estate investors. I've sold dozens of policies specifically for real estate investing and I do it myself. It doesn't have to take years to build up cash value. Only if you are starting with nothing. I try to get a client's savings/working capital all into life insurance premium in 5 years. If I put $50K into premium, I have about $42,500 of cash value immediately. In a few more years I'll have my $250,000 of working capital held in cash value.  

For the "funding" years, your investing has to be balanced between policy loans and outside funds, but after 5 years, ALL of your working capital will be leveraged cash. I call it the "magic checking account" 

While every financial advisor should listen to your needs, figure out your risk tolerance, and find out what your goals are, I believe most financial advisors have their own agenda and the products they like to use as their core. A stock market guy, for example, is not going to like your real estate investing and not only because they may not understand it. Keep looking until you find somebody you like, trust, and shares your views. And if you really want to truly grow your wealth, call me ;)

It doesn't' make sense to maximize your 401k contributions to get the tax deduction and then turn around and borrow money FROM yourself. Sure, you got a tax deduction, but you just gave the government a blank check. You don't know what tax rates will be in the future and you don't know what tax rate you will be in when you decide to take income from your 401k. 

It makes much more sense to put your money into high cash value permanent life insurance. A properly designed and funded policy has cash value from day one. And unlike a 401k loan, you don't borrow "FROM" it, you borrow "AGAINST" it. All the life insurance haters on this site can never seem to grasp the significance of the difference in those two words. It means that your cash is working and earning interest in two places at the same time. 

Just as with a "Roth", you are contributing to your retirement plan with after-tax dollars, your money will grow tax free, and because you take income via a loan, you access your money tax-free. But unlike a Roth IRA/401k, there is no limit on contributions and a life insurance death benefit rides along.