We are going to touch on a popular concept which involves using a dividend paying whole
life insurance policy a high cash value life insurance policy to finance real estate a lot of
real estate investors are attracted to this idea some hear about it, don't move forward, some see it
move forward right away so conceptually we're going to touch on exactly how this works. We'll
begin with the whole life insurance piece so with a whole life policy I should say
this 100% has to do with the cash value you will see
some tied to the death benefit but when it comes to actually purchasing real estate if
that's my goal the cash value has everything to do with it this is the key here so when it comes
to the cash value a couple bullet points here it is a safe liquid tax-free area to position
money tax-free provided I don't mess the policy up and there's we've got more content on that
elsewhere but let's touch on these two pieces safe and guarantees so the money in itself within the
cash value component of a life insurance policy is not tied to or invested in the stock market
I have a guaranteed floor, a guaranteed minimum interest rate of 4%
and then typically the company will pay dividend on top of that and with different companies I'll
see dividends range from about five to six percent that's for 2020. Liquidity money is very liquid
once it's inside of a cash value life insurance policy and the tax benefits well we've got a
lot more content on that here's the piece that really makes it all work this is what attracts
people who are involved in real estate because it resonates with a real estate investor
no lost opportunity cost in the sense that once a dollar passes through the cash value
of a life insurance policy regardless if I just let that dollar sit and grow
or if I borrow against it if I pull it out I continue to yield dividends and interest
the guaranteed rate and dividends as if all of the money were still in the policy in the first place
a lot like a piece of property if I'm appreciating at five percent
whatever that real estate's appreciating at if I borrow against the equity I still receive the
appreciation on the entire appraisal value not just remaining equity you'll find that it is very
very similar with the whole life insurance policy so when it comes to real estate cash flow there's
different ways to invest in real estate maybe it's buy and hold, sell it down the road but
typically cash flow is what works quite nicely with a whole life insurance policy meaning I'm
purchasing properties that are producing cash flow flowing back to me cash flow's king at the end of
the day too. So the property let's say I'm earning somewhere between six and 12 percent broad range
but it really depends where I'm investing and how much capital I have to work with depending on what
type of deal I can get now to purchase it with a life insurance policy let's take a look here
so in action how this would be used how this would work if i have a life insurance policy and let's
pretend how much capital should we look at here a bigger piece of property okay let's say we've got
five hundred thousand dollars in cash value now the thing is you do have to capitalize a policy
first meaning to have 500 grand I would have had to have paid that in or paid in less than that and
then the appreciation obviously grew to 500k but I can't just put a dollar in and instantly have 500k
so if I've got 500k in cash value I want to buy a piece of property let's say this costs
350,000. So I want to purchase this 350k property I can buy it in cash finance to the bank
or finance to my policy so financing through a life insurance policy here's how this would work
so I'm going to loan out 350k from my policy so first things first remaining cash value
would be 150.
and the reason for that is because I take a policy loan
of 350 thousand dollars to purchase the property
okay so at 500k cash value I've borrowed out 350 so I've got 150 remaining in equity okay
now what's going to happen here is I've got that 350 loan outstanding so there is a cost to borrow
just like there'd be a cost to borrow to take a line of credit out or mortgage from a lender
that's going to depend on the insurance company typically you'll see them range from about
five to six percent now that five percent
on the loan we'll go to the insurance company
so if I pause there this concept would make zero sense because I'm literally borrowing and paying
interest on my own money however just like a piece of property that I'm earning the appreciation on
the entire appraisal value here's what happens if the company is paying me I'm just going to use
some simple numbers here five percent on 500k say it's four or five percent whatever I'm going to
continue to receive that even though I pulled 350 out there's no lost opportunity cost now
how the insurance company does this time back to the death benefit
where we said it has some importance with this concept is if I borrow at 350 let's say day one
my death benefit was a million bucks I pull out 350 the insurance company is going to
collateralize my death benefit so if I die with a loan outstanding they're on the hook for
350k less they're okay with that remember their first and foremost obligation
is to do what payout life insurance claims and if I pay it back it's all fully restored but what
we've got going on here is I am still compounding that full 500 while I'm paying interest only
on the 350 quick side note loan interest to cruise at annual simple
interest so if I pay it each year it will not compound on itself which is valuable
so literally what guys will do here is borrow call it 350 purchase the property if that is producing
eight percent or whatever it is now they can take that eight percent and use it to repay
the policy loan the thing is this is constantly at work for them again no lost opportunity cost
what's interesting is if you've ever seen any of our videos
where we looked at a policy side by side where I pay money in let it sit and grow
compared to borrowing and then repaying what you'll find is once a loan is paid back my cash
value is fully restored to what it would have been as if I had never touched it in the first place
that compounding continues there's no lost opportunity cost so really
using a policy for real estate it allows me to call it double dip on my money where i keep my
primary bucket of cash at work for me and then at the same time invest in real estate where I
get a return over there keep the compounding going forward good stuff and as always hope this helps
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