All Forum Posts by: Zachary Paschke

You can do that but no one talks about how you loaded that policy and had to pay 15-30% in fees in the first year. There is loss opportunity costs.

Check out "Heads I Win, Tails You Lose" by Patrick Donohue, or the infinite banking series by R Nelson Nash.

We use a LOC collaterized against the actual cash value of the policies for my wife and myself. Since a WL policy is generally very safe, the LOC LTV will be high. We use a separate LOC since the interest rate is lower than if we borrowed directly out of the policy.

Keep in mind you can only put in so much each year, based on your income and other variables, so can take time to build up. You can have multiple policies on the same person. I even have a $250k policy on my 2yr old son! There are costs to set it up and less of the initial money goes to the ACV, but still worth it.

WL policies mean I can have death benefit coverage while still using most of that money for other things, like RE investing, and it's not tied to my W2 job.

@Lane Kawaoka

Would you not consider it as a potential starting platform?

For example - If I had ~$100k -$150k to put as a down payment on my first multi-family. Instead, put it in a whole

life policy, take a loan out against it, use that for the down payment, and have the policy gain interest while simultaneously acquiring a tangible asset and using rent to pay back the loan.

I recently had a conversation about this strategy with a financial planner.  I had not heard of it previously.  I too had always had a bias towards whole life being a bad investment.  A couple take aways I recall:

-Life insurance is a bad investment if you look at fees and returns and compare it to stocks or real estate, for example.  On average the payout is 4% or so over the life of the policy.  4% sounds pretty good when compared to bonds, and it is basically a guaranteed dividend, so long as the company backing it remains solvent. 

-In addition, you get a death benefit for your surviving family. There are a lot of scenarios and coverages to choose from that affect the cost.  

-You can borrow against the policy for "free", but if the money is not in the policy, your death benefit would be less if you were to pass while it was out. Borrow up to 90% was what I was told.

What I didn't quite grasp is the starting value of the policy.  I believe the death benefit is front loaded as a cost, so you may put in $50K and have a $35K balance to start and there may be a lock-up period where you can't access the money.  

Not an expert, but saw your post and thought I would chime in while the info was fresh in my mind.  I'm considering it, but have access to lines of credit and am concerned about tying up from an opportunity cost stand-point.  Still have my biases about life insurance until I get more eduction. 

Good discussion and lot of opinions like so many topics. 

I thought I would throw my MUCH simpler experience with Permanent Insurance and why I think it is a legit product. I should add that it is through a Fraternal Organization  (Thrivent).

I have a policy that is "pre 1984" so a little different MEC rules to my understanding. One of the earlier benefits of it was when my inlaws were doing estate planning they gave us a large sum of money, around 200K. We were able to put that into my policy where it is NOT counted on the FAFSA for when my kids went to college. This helping them be eligible or about 90K of grants and scholarships. About the only from of assets that are not on FAFSA are retirement accounts and Cash Value Life Insurance. It also provided 800K of life insurance paid for out of the returns (no premium needed) and a 6-7% return at the time, or double what CDs were. We wanted to preserved these funds if they were ever needed for the inlaws care.

Since getting divorced and my wife getting those funds back I left 15K of cash value in their. I consider it par t of my emergency fund also, that would normally just be in a money market account of something similar. It still provides 100K of insurance by using part of the returns for paying the premium, and also has about 4% return on TOP of that. I am 54 now, and it will pay that premium until I am about 69 without taking the cash value down. I also have the benefits of guaranteed purchase options and converting my Term Insurance, that I also have at Thrivent, over TO that policy if I choose to at what the rates would have been at the time I took out the Term Policy.

I dont really see a downside to it myself, in moderation. 

My only advice for people that are considering a WL insurance policy, ask the agent to show where in the policy it's written of all the benefits.  I had a NYLife WL policy and one of benefit the agent kept telling me year after year to convince me to keep my policy was that you can withdraw from the cash value tax free.  I finally read the policy line by line and that was not the case.  You can only borrow against the cash value and interest must be paid on that loan if you do not pay it back.   

Zachary, I'm a glutton for pain for getting into forum arguments with insurance salesmen, but I wanted to respond to you points, quoted below in italics:

- part of those fees is obviously cost of insurance. You might not think so, but that is worth something. 

Yes, but insurance is much more affordable if you're just buying the insurance -- ie, term life insurance.

- the Guaranteed interest I’m seeing off WL companies right now is ranging from 2.5-4%. If you have a bank that’s paying 4%, let me know!

This is absolutely misleading. That percentage is not taking into account the cost of the insurance. I ran the numbers on an "infinite banking" policy that was generated for me and removed the dividend, so we were just looking at the guaranteed return. The actual IRR peaked at 2.32% in year 36. This was when Ally was offering 2.25% on its online savings account. Entirely comparable.

- Dividends aren’t guaranteed, but Mass Mutual has consistently paid one since the Civil War. Companies find a way to pay them. 

And I'm sure you're aware that dividends have been declining every year for well over a decade. Here's a screengrab from a 2018 report put out by The Insurance Pro Blog:

- Annuities don’t pay close to what dividend earning WL does over time. You’re looking at two separate products for two separate intended purposes. 

They certainly do when you compare the actual costs. If you compare when an annuity costs and what it pays vs. what a whole life policy actually costs and what it guarantees, annuities are a preferable option.

- Borrowing money from your house is much more difficult and expensive than borrowing from a WL policy. An equity loan will obviously have fees and you have to be approved. WL loans must be approved if there’s cash available and it’s a straight interest loan. As you pointed out, the policy grows even while you have a loan out.

This is a bunch of bunk, man. I got a $160K HELOC on my primary residence for a cost of $0. Yes, I had to be approved, but you argue that whole life policies are for people with money -- ie, the kind of people who don't have difficulty getting approved for a HELOC. And my home continues to appreciate even while I have the loan out, as I'm sure you're aware. Plus, when I decided I wanted that HELOC, I got to shop around for the rate and terms that benefited me most. On my specific HELOC, I have to pay interest and principle, but my rate is LIBOR -1%. I'm paying 2.24%! That's insane!

 - Guaranteed interest is a big deal. On years where the market, housing, and incomes go down - that money still gets deposited. You probably don’t have the experience of going the 2008 and seeing 40% of your retirement accounts disappearing overnight.

I did. I was 26 years old and my retirement account was only $40K or so, but I watched my portfolio drop 40%. It was especially painful because I'd saved all of that money in the previous two years. But, as I'm sure you know, market volatility is fine early in a person's career. Are you suggesting somebody very near retirement would benefit from buying whole life insurance instead of an annuity?

 - You never considered the benefit of all of this happening tax free.

The tax-free element is about all the whole life policy has going for it. I just don't think the juice is worth the squeeze.

 - I understand. When you don’t have money you’re not worried about insurance or reducing taxes, or the security of guaranteed interest. This kind of product isn’t for everyone- it may not be for you. It doesn’t mean no one should have it. Either your father-in-law is the financial moron you think he is, or he’s seen the real changes that come about from his policy. Did you ever review his policy to see if it actually did well? 

Firstly, to insure my family, my wife and I have term life policies totaling $5.5M ($2.5M for her and $3M for me as I earn a little more). Obviously, we'd never buy a whole life policy for this amount as the premium would be crushing.

Secondly, to reduce taxes, my wife and I both invest heavily in our SEP and Roth IRAs, mine through my C corp and hers through her LLC. I know these options aren't available to everybody, but to sell whole life insurance as the only tax mitigation strategy is baloney.

Thirdly, my father-in-law certainly isn't a financial moron, but I don't think he's right about whole life insurance. He did share the details of his policy when we discussed this in 2018 (as well as a screenshot of his policy page, which I won't share.) He opened a $50K convertible whole life policy in 1983. The annual premium is about $2500. The death benefit in 2018 was $340K, and the cash value was $115K. In 2018, the dividend was a little more than $7100. As my father-in-law put it, "The dividend is now more than $7100 which is a nice return on the $115,000 cash value." Those are his exact words from the email.

But I'm looking at the numbers and seeing that my father-in-law put $2500 into his policy for 25 years. If you put $2500 into an index fund earning, say, 7% annually, your portfolio would be worth $169,000 in year 25. "But the death benefit is $340K!," you'd say. Yes, you're right. Comparing apples and oranges for sure....

Anyway. Thanks!

Shaun, I'd be very skeptical of whole life insurance.

I did a deep, deep dive into whole life insurance (including index universal life) about two years ago when my father-in-law insisted I get a whole life policy. My father-in-law is very protective of his daughter, so I figured I had to -- and if not, I had to have danged good reasons why. So, I spent the better part of eight months talking to a wide variety of insurance salesmen, from the small-town old-timers to the "infinite banking" gurus, and here are a few of the things I learned:

- A lot of money goes to the salesperson's commission and the cost of the underlying product, the life insurance. So you might put $50K into your policy over the first few years, but your account will only be credited $40K or so. Sure, that $40K might earn a 4% return, but you invested $50K. The real return, in this hypothetical, is actually 3.2%. My father-in-law bragged about his $200K policy that was earning 7% a year, every year, but he's actually put a lot more money into that account than $200K.

- Insurance companies also pay a dividend, but how they derive it is totally opaque. A 6% dividend doesn't mean you earn a 6% return on your money; it means the insurance company earned/is paying out 6% of its investment account -- but no company discloses how big its investment account is. The insurance companies are basically saying, "This year, we had some amount of money that made 6%. We're not going to tell you how much money or how we made that return. But we'll disperse it, and it's up to you, if you're astute enough, to actually track how much money you've sent us, how much money is in your account, and what that return looks like." The insurance companies are correct that most people don't do the math.

- Whole-life policies are complicated instruments, and that complication allows for a lot of fees. There are fees all over the place. In short, you mail a check for $XXX every year, and some amount less than $XXX ends up in your account. Then the insurance company decides what return that less-than-$XXX will earn. There's no transparency.

- Whole life salesmen advertise these amazing advantages of whole life insurance as though they don't exist in any other vehicle. For example, salesmen tout the guaranteed return. As pointed out earlier, the guaranteed return is lower than advertised. More importantly, you can get a guaranteed return by buying an annuity. The annuity will be cheaper because it doesn't also include overpriced life insurance. If you want a modest guaranteed return, buy an annuity!

- Similarly, a big deal is made of the fact that you can access your policy via a loan. Firstly, if you want equity that you can access via a loan, you're better off putting a down payment into a home. You can borrow against the value of a home just as you can borrow against the value of a whole life policy; there's effectively no difference. It's no miracle of finance (it's certainly not "infinite banking") that you can borrow against equity with a whole life policy. Furthermore, the insurance company is going to charge you an interest rate of their choosing. You can't shop around for this loan because your only lender is the insurance company. So your money is still "at work," as they say, earning that 4%, but now you're paying 3.5% for the privilege of using it. In this hypothetical, your money's only earning 0.5%, and a lot of it has disappeared to commissions and fees.

- Another funny thing: my father-in-law would praise the insurance companies as being bedrocks of our economic system because they own huge buildings. "You know who owns the such-and-such building in Chicago? MetLife does. That's why I trust them with my money." Oh, boy... If you want the stability that comes with owning A+ real estate, buy shares of a REIT. You can own the Empire State Building by buying shares of the Empire State Realty Trust -- and you won't also be paying for life insurance!

Two points to close:

Whole life salesmen will show you a thirty-year projection of how much money you'll earn if you reinvest all of your dividends. It looks AMAZING -- but only a small fraction of that yield is guaranteed (about equivalent to keeping your money in an online savings account), and an index fund will perform better over thirty years. It will. And you can even borrow against an investment portfolio, too.

And, most importantly, don't fall for the baloney that this is what rich people do, that this is rich people's secret, that this makes you the bank. It doesn't. If you want guaranteed income, but an annuity. If you want to build equity, buy a house. If you want a safe and strong return, but an index fund. If you want life insurance to protect your spouse and kids, buy 25-year term insurance. If you want to overpay for a mediocre return from a vehicle that ties up your resources for years -- for the rest of your life, really -- buy a whole life policy.

Good luck!