I read every post in this thread, and it's clear a number of people did not. The most common misconception was that Whole Life is an investment in and of itself. Every person who seemed to hate it, failed to acknowledge the policy as a holding tank for money with a roughly 4% compounding return.
Here's the cool thing though: I recently got a first-position HELOC on my investment property, which used to be my primary residence. I could sell the property for $155k easily, in days. (But if I do that, I no longer have an asset and I pay taxes on the gain.) I bought that house five years ago for 95k.
When the appraiser came along this year, he valued my property at $120k. The bank, using that value, gave me a line of credit for 90k. I owed 63k on the original loan. To work all of this magic, the bank charged me just under $2k in fees.
To recap, in five years, my investment earned me 23k, which I can't access, because it's stuck collateralizing my line of credit with the bank. And don't forget the rehab I had to do to get my property to appraise at $120k: that cost me $4k, so we're at $19k, but also don't forget I paid closing costs when I bought the house of about $5k. So over 5 years I earned $14k. Now, remember, all I did was build the Line of Credit and fund it. That's what a primary household is. A line of credit you fund.
I've now worked myself down to 40k outstanding on the HELOC by moving tenants in and dumping every dollar I earn into the HELOC: 3 months (congratulations me, and yes that's Velocity Banking, another hated and misunderstood financial concept). In the event of an emergency, I can borrow from the HELOC, a loan on MY investment property, up to $50k. So, I have a very conservative emergency fund. Remember, I can sell the house, repay the bank and walk away. It is my money. But, for the convenience of setting up a stupid Whole Life policy, I'm going to borrow $30k from the bank, on my investment property, a collateralized line of credit against a collateralized line of credit.
Why would I buy a stupid life insurance policy, pay 4% interest on the credit from the bank and earn 4% on the interest in the policy? Because if it were available in the HELOC, it would be earning 0% too. The advantage, before we get to the other advantages, should be coming clear to anyone who's following along. Money has a cost, no matter where it comes from.
The policy will allow me to take a loan immediately for roughly $26k. (If you want to quickly scale that, the stupid insurance policy gives me access to more of my money per dollar than the HELOC does.) Every year, for 10 years, I'll put $30k into the policy. By year four, interest will have made it so I can borrow equal to the number of dollars I've put into the policy: meaning I'll have access to $120k and have saved $120k. My HELOC will never do that!
I'm using a line of credit to fund my future line of credit, but the line of credit I'm creating won't be subject to the fixed cost of the line of credit I have with the bank. That's right. No matter what I do, I can never make my HELOC worth more, unless I pay fees to have the house reappraised, and even then, the value of the property will never match the value I can gain within my policy. Worst of all, everyone who weathered 2008 knows there can and will be financial crises that force banks to nonrenew lines of credit. Scary!
My line of credit with the insurance carrier can't be cancelled, though, even in tough times when real estate will sell for pennies on the dollar. What do you think I'll be buying with my policy loans then? And there's no renewal fees year after year.
In thirty years, I'll have a stupid life insurance policy worth more than $1.8 million. The house, if I had it appraised in 30 years, might, possibly, perhaps, be worth $300k.
Ah, and a quick word about the policy, I'll have only ever put in a total of $300k of my own money. The rest of the value that I can borrow against, will be from compounding interest. (I'm using the guaranteed side of my policy. Should be better with dividends.)
Most of the naysayers have probably long ago stopped reading, but in case there's one left. All throughout the process I've been borrowing against the loan. My money earns 4%, and the insurance carrier charges me 5% to take a loan. That means my line of credit costs me 1%. I invest it in real estate and my returns are whatever they are minus 1%. If you can find any bank out there that's charging 1% on lines of credit, point me toward them, please!
I pay my credit back to the policy just like I pay it back to the bank. I pay them back at 5% knowing my cash inside the policy is earning 4%. I'm pretty good with that.
