All Forum Posts by: Thomas Rutkowski

Not a big fan of using Life Insurance as a vehicle for investing. Everything sounds good on the surface, but always look at the fees associated with the product. Life insurance is life insurance, agents get paid a good amount of money to write policies, insurance companies are a for profit business, be mindful of the hidden fees. 

Okay, so let's ignore the death benefit and let's assume we get paid a dividend on the full cash value even after taking out the loan (which doesn't seem right, 

Adam - We've covered this a dozen times. The cash value is still in the policy. It never left. The loan is secured by the cash value. This is the insurance company's money.

but we'll go with it) and that dividend is tax-free. Let's also assume, like in your example, the interest payments on the loan are made once at the end of the year without the interest compounding (again, doesn't seem right, but let's go with it). 

The interest/dividends do compound each year.

And let's assume you can borrow up to 100% of the cash value. 

Its a little extreme, but possible. You're not taking it out, you are collateralizing it.

Let's also use a 28% tax rate even though this is a real estate forum and a long-term capital gains tax rate might make more sense. 

I believe I specifically stated that this could be a note or private money loan. But it doesn't matter. LTCG rate would be appropriate for pure real estate transaction.

Let's ignore any mortgage deduction or depreciation benefits, as well. All of these assumptions are in your favor.

What about these numbers:

10% ROI
4% Dividend - this number has been floating around quite a bit as typical rate.
5% Loan Rate - so has this
28% tax rate

The worst case scenario for a policy loan is what is called a "wash loan". That is, the interest rate on you policy loan is the same as the interest rate(div) on the cash value. You can use 4% which is usually the guaranteed rate on most whole life policies. The appropriate loan rate would also be 4% at this rate.

But seriously, there are companies I can write today that are currently paying 7% and loaning at 5%. Make hay while the sun is shining. 

Again, my $100,000 returns $7200 like in your example 1.
In example 2, though, the numbers are different:

Okay, so, you're actually doing about 10% worse here than just investing the money. The difference between the two just grows if you use a lower tax rate.

How about these numbers:

8% ROI
4% Dividend
5% Loan Rate
15% tax rate


My $100,000 investment returns $6800 ($8000 in returns taxed at 15%)

Your strategy returns:

Nearly 20% worse. Even if I lower the loan rate to 4% to match the dividend rate, your total return is still just $6290, about 7.5% worse.

So, essentially, unless the dividend payment outpaces the loan payment, you're going to do worse, unless your tax rate is very high or your ROI is low. You're also locked into making premium payments that will increase as you get older

What?? As I stated in my example, it was a "5-Pay" of $100,000 per year for 5 years. That's it. Funded for life. You may be confusing the "Cost of Insurance" with "Premium" COI is only applicable to a Universal Life policy, not a Whole Life. It is only a fraction of the cash value, seriously, less than 0.25% of the CV. Whole Life will never need another dime after 5 premiums paid.

Seriously, lets get back to my original premise: If you can put your money into an account paying 7% and that account can secure a loan at 5%, then anything you do with that 5% money that earns more than 5% will be adding value on top of the 7%. You wouldn't make an investment unless you know you can make money. 

I make 20%+ on my tax liens. Your example isn't even in my world. Loan rates and dividends may change, in the future, but I'm investing right now. 

PLUS

This was only the first year. That 15% penalty you see is only assessed on new premium. I don't want to explain policy and premium charges here, but they go away. The next year, your "bank" will have grown and you'll be using higher % dollars. You're not going into this blindfolded. If you started tomorrow. You'll have a policy with 7% and 5%. It works right now and will continue to work.

I use an Indexed UL for this. My interest crediting fluctuates between 0 and 13% based on the S&P 500. I've had two good years of 13's. This year will probably be zero, but I don't care because I know the markets will eventually bounce back. The long term average is over 8%

Maybe that's too risky for you, but it works for me.

and eventually you'll either have to repay the "loan" or have it deducted from your death benefit.

What am I missing?

Reality. Here's my returns. Is this every year? Hell no. But I'll take it.

1. Whole life insurance is a rip-off! Most people would be far better off getting the cheapest term insurance to protect their families and invest the difference into assets they can control and understand the best such as real estate or private lending. 

2. What you posted here David looks more like a blog post not a forum post. 

BP is a wrong place for you trying to promote your scheme. People are getting ripped off daily with the insurance products that you are selling, but majority of folks here are intelligent enough to realize that they are much better off taking control of their investments into their own hands, rather than giving their hard earned money to the insurance companies which pay their sales agents commissions up to 90% of the premium received. 

I have no opinion on whole life, or whole life v term or anything, and unlike you, I have no vested interest. It very well could be a terrific investment (though most everything on these forums and the internet disagrees). But the responses in this thread have done nothing to convince me of that. Your responses have convinced me that you're at best, unprofessional, and at worst, a scammer.

 I have never disputed those claims, I have simply added some points that you guys fail to include. 

1. Is it not true that only 15 to 20 percent of people ever get paid out on whole life? 

I have no idea. Lots of people cash in their policies when they need the cash because the agent never properly explained how policy loans work. Life Settlement companies will pay cash in excess of the surrender values for policies that are no longer needed. 

2. Is it not true that the in the example you give the $100,000 investment is not passed to the the heirs? It is used to pay for the life insurance. If you have $500k in cash value when you die and a 1 mil death benefit the heirs get 1 mil, not 1 mil plus $500k cash value. You have said you can increase the death benefit, but that increases all the costs significantly right? 

No. The cash value is the "seed" that will eventually grow and become the death benefit. It technically belongs to the policy owner. It is the money you get back if you surrender the policy. I can spend this money in my lifetime or I can simply let it pass to my heirs. 

3. Whole life is extremely expensive when you are older right? In the example I posted a 60 year old could get term life for a few thousand a year and the same coverage with whole life would be about 5 to 10 times more expensive per year. 

Yes, it is more expensive each year. But if you look at the policy fees and expenses tab on your illustration, you can see exactly what that cost is for every year of the policy. If you take a calculator and divide the cost of insurance by the cash value, you will find that the number is usually less than 0.25% of the cash value. That is far, far less than a typical mutual fund. Once you are out of the first 10 years, cash value has very little eating into it internally.

4. You said investing in whole life is the same as investing in a house when it is clearly not. As I wrote before if you invest $200k in a house and a term life policy of 1.5 million and you die you have the house plus the 1.5 million death benefit. If you invest $200k into whole life and have 1.5 million death benefit and you die you have just the death benefit. 

My whole point is to show there are other things to consider with whole life. It is not magic. The insurance company makes their money because the cash value transfers to them at death. No it doesn't. You are absolutely wrong on this. How else could the policy holder afford to pay the $25,000 a year for the insurance when they get older? Because the cash value is earning wayyyyyy more than that in dividends or interest each year, that's how. Just look at an illustration. You'll see it.

That brings up another question. Does the cash value start decreasing when someone gets older as the cost of insurance increases? It can if the policy is not properly designed and funded. In an overfunded policy, that is highly unlikely. This question doesn't even apply to whole life, only UL. If so what happens if someone lives to be an extremely old age and the cash value becomes completely depleted from their account and they still have to pay $30,000 a year in premiums to keep their policy active? Use the Rule of 72, Mark. In my example, the policy will have over $500,000 of cash value by year 5. At 7%, the money will double roughly every 10 years. 

$1M at year 15 (7% = $70,000)

$2M at year 25 (7% = $140,000)

$4M at year 35 (7% = $280,000)

$8M at year 45 (7% = $560,000)

These numbers get huge very fast. And will outpace the increased cost of insurance in a good policy design.

This is a real question. I do not know this and would love to know. I wonder if this is why only 15 to 20 percent of whole life policies pay out

 Actually this response is much better than the others i have seen. You keep telling people they are borrowing from themselves and it is their money, but that money is paying for the insurance Policy. Once they die it is gone. It is not the same as buying a house with the money. 

So how much does it cost to have a term life policy at an old age? This is what i found from kiplinger. 

"The disadvantage is the out-of-pocket outlays. A healthy 50-year-old man would pay $13,940 per year for a $500,000 whole life policy from Northwestern Mutual. A 60-year-old buyer would pay $23,305 per year. (If he bought a 20-year term policy at age 60, he'd pay $2,839 per year until the coverage expired at age 80.)"

Yes the policy expires before you might die with term, but you save $400,000 over 20 years! Thats almost as much as the death benefit. 

I know how insurance works and the whole life cash value is used to pay for the death benefit. That $500,000 saved up or whatever it is is used for insurance costs because whole life is so expensive. 

People need to consider if it is worth spending 20k a year on life insurance when they are 60. Will they even need insurance then? Kids Will be grown up. If you have invested in real estate wisely you may not need any insurance for your spouse. If you do need insurance at that age. Get a term policy and save $400k

 The money is not mine if it decreases the death benefit, it is the cost of insurance as you said. I can use that money, but it is like a loan until I die.  Once I die, the insurance company takes it. 

In your first example you said it was the same as spending $500,000 in the bank, but it is not. Because I could buy a one million term policy and spend that $500,000 in the bank and my term policy is still one million. My heirs still get one million. But I take that $500,000 that I had in the bank and put it in the life policy and then I spend that $500,000 it is not just gone, my death benefit goes to $500,000 from one million. I spend the money I put in the life policy and not only is the money gone, but my life insurance policy decreases by that amount.