By Mark Willis, CFP® / CERTIFIED FINANCIAL PLANNER™

 

First, let’s outline the easiest way to use this policy: a cash purchase. It’s best to think in terms of four straightforward steps:

1. Use the equity in your policy to purchase real estate.
2. The policy continues to grow even on the capital you borrow!
3. You control the repayment schedule to the policy you own.
4. Sell the property and recycle the money into the policy before making the next cash purchase

 

This very simple strategy allows you to have, in essence, a guaranteed line of credit to yourself. So even when banks aren’t lending (which is what they love to do during recessions when real estate prices are at their lowest), you can confidently walk to the courthouse steps and pay cash for properties at pennies on the dollar.

Years ago, Matt, a 45-year-old, began paying $32,200 a year in premiums. By year 10, he had a cash value of $396,428. In year 11, Matt stopped paying the premiums altogether (most people falsely believe you must pay premiums forever). Without any loans or taking any other action on Matt’s part, from year 10 to year 15, the policy cash value would have grown from $396,428 to $515,913. Pretty good for “boring” whole life insurance!

 

At the start of year 11, Matt found an investment property and took out a loan for $350,000 to make a cash purchase of that property. Over the next five years, he can completely pay off the policy loan through a combination of rent payments to him and a cash-out refinance on the property. In year 15, his cash value is still $515,913. That’s right: When the loan is paid off, the cash value is the same amount he would have had he not taken the loan.

 

If he had merely pulled funds from a bank account, IRA, or most anywhere else to purchase this property, this benefit would have been impossible for him. Recall that these policies grow the same whether you borrow against the policy or not. There is no breaking the compound growth when you access policy loans on your policy

 

If the property returned a 3% annualized appreciation, Matt’s property would have shown a paper profit of about $55,000 of growth. But by using the policy for the purchase, he still gets the real estate appreciation ($55,000), plus he also gets the arbitrage on his policy. What’s arbitrage? It’s the amount of money you make beyond what the policy loan interest cost you. To be specific, the loan that he borrowed will cost $38,212 over a five-year period, which works out to an annual percentage rate (APR) of 2.1% — pretty good interest rates for the times we’re living in today, especially when you factor in the reality that he was in complete control of that loan repayment.

 

Even though Matt paid $38,000 of loan interest, recall that the policy grew from $396,428 to $515,913, an increase of $119,485. The growth of the policy minus the interest he paid on the loan means he earned an arbitrage of $81,273; he earned more than he spent. Add that $81,273 to the $55,000 real estate appreciation and Matt’s total benefit for the deal is $136,273. He took a 3% rate of return on his real estate and improved it dramatically! The return more than doubles to almost 7% with no additional market risk.

 

This strategy didn’t take a high IQ or a fancy, complicated structure; all Matt did was pull funds from a different account and invest in real estate.

 

What would happen if real estate improved at more than 3% a year? The numbers would look even better. What would the numbers look like with renters in that property? What if you added the value of real estate tax advantages to this strategy? Again, the numbers would look even better. And don’t forget that all the while, your cash value is building toward a tax-free income in your retirement.

It gives me goosebumps. What if you used the policy loan feature with every major purchase you made in your life

 

DISCLOSURES

Bank On Yourself® is a registered trademark owned by Hayward-Yellen 100 Ltd Partnership and is used with permission of the trademark owner here. This information represents the opinions of Mark Willis, of Lake Growth Financial Services and not of Bank On Yourself or Pamela Yellen. Pamela Yellen and Bank On Yourself and its affiliates, directors, officers, and employees are not responsible for any errors and omissions or for the results obtained from the use of this information and will not be held liable for any direct, special, indirect, incidental, consequential, punitive, or other damages related to the use of this information.

Neither Mark Willis, Lake Growth Financial Services, Bank On Yourself, or Pamela Yellen are engaged in rendering legal, investing, accounting, or other professional services. If accounting, financial, legal, or tax advice is required, the services of a competent professional should be sought.

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