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“Infinite Banking” and Real Estate Investing

Let’s start by referring to “Infinite Banking”, “Bank on Yourself” and other Life Insurance marketing systems as simply Over-funded Life Insurance. An over-funded life insurance policy is simply one in which there is more cash value than the absolute minimum required to meet the obligations of the policy.

There is a maximum limit on the amount of premium that can go toward the cash value. Some legally-defined minimum amount of the premium dollars must go toward the cost of the death benefit protection. Otherwise the life insurance contract does not meet the definition of Life Insurance.

There is a spectrum that extends from the least possible price that you can pay for a set amount of death benefit to the most that you can possibly pay for that amount of death benefit.

A policy where the owner is intending to leverage the cash value to invest in real estate NEEDS to be designed right up to this legal limit. In this type of policy, the cash value is maximized while the death benefit is minimized.

Recommended Reading: If you don’t understand what the cash value is, or why some policies would have a lot of it, here is a Life Insurance 101 Tutorial. This would be a great place to start.

Because the amount of Death Benefit drives the internal costs of the policy, minimizing it means that more of the premium dollars go toward the Cash Value of the policy. The insurance company has to take money from either the cash value or from premium and pool it to cover the expected claims from other policies.

Leveraging the cash value of an over-funded life insurance policy allows a real estate investor to put their money to work in two places at one time. The cash value itself never leaves the policy and continues to earn Dividends (or Interest Credits in the case of a Universal Life policy). The loan proceeds are invested and, as long as you earn more than the interest on the loan, you will create additional value on top of the cash value gains of the Life Insurance policy. 

The concept of leveraging the cash value of an over-funded policy is covered in detail here: Click Link.

This allows the investor to achieve a higher combined growth rate than they would have earned if they simply used their money to invest directly in real estate…

…over time AND as long as there is sufficient cash value after all of the fees of the policy have been subtracted

One of the likely reasons you have found this page is because you are researching this concept and aren’t sure how it can work because you know that Life Insurance has fees and costs and not every dollar of premium goes toward the cash value of the policy.

So the big question is…

How much cash value is left after the costs are subtracted from the Premium?

If you are here for any other reason, please send  a message and let me know what you were hoping to learn!

The purpose of this page is to outline some of the problems with this approach when the policy isn’t designed properly.

Let’s start from the perspective of the Real Estate Investor. If you are going to purchase a life insurance policy and then leverage the cash value, then it needs to make financial sense. That is why you have read this far. You are probably trying to answer this question.

When an investor is leveraging the cash value of a life insurance policy to invest in real estate, it is paramount that the policy have as much cash value as possible. If the policy is not designed right and the Death Benefit is too high, the premium dollars go toward the higher internal policy costs associated with the higher death benefit. You can see this in the ratio of Premium to Cash Value on your illustration.

Here’s the problem…

Not all over-funded life insurance are designed for the maximum amount of cash value. They sit in the middle of the spectrum between minimally-funded and maximum over-funded. Many of the Infinite Banking policies, for example, leave room for the policy owner to add more cash value later in the form of Paid-up Additions (read: more premium). 

If your illustration is not showing the 1st Year Cash Value at least 85% of the 1st Year Premium, the agent is not designing it for maximum cash value. Period. The death benefit, and the agent’s commissions, are too high.

If you put $1.00 of premium into a policy, would you want a policy with 65-cents of cash value or one with 85-cents of cash value?

85-cents, right?

When you are planning to leverage cash value to invest in real estate, it is imperative that the cash value to premium ratio be maximized. The red line shows a policy with 85% cash value to premium and the blue line shows one with 65%. At a 7% return on the cash value, it takes over 6 years for the cash value just to get back to the amount paid in premium! The properly-designed policy takes only 2 years.

This chart shows how long it will take for the cash value to break even with the amount of premium that you paid. You can see that if a policy starts at 85% cash value to premium, then the cash value breaks even in just over 2 years.

However, when the policy starts with only 65% cash value to premium, it takes over 6 years to break even.

Looking at the Break-even doesn’t tell the whole story.

We need to look at the alternative. What could you have done with the money had you not purchased life insurance? If the investor simply took their money and invested in real estate, then the $100 could have grown to nearly $200 after 7 years if they earned 10% on their investment. [Rule of 72].

So not only do you need to catch up to the amount of Premium you paid, you also need to catch up to where you would have been had you simply invested in the alternative. The chart below makes the proper comparison.

This chart compares the combined return from the cash value of a properly-designed and over-funded life insurance policy being leveraged for REI versus REI alone. Assumptions: 6.38% CV growth, 5% Loan Interest, 9% REI Return, and 35% Tax Bracket. Policy is a 5-pay design with five annual $80,000 premiums with no further premium afterward.

The chart shows that during the 13th year of the policy, the policy owner will have been better off by leveraging the cash value to invest in real estate rather than simply investing in real estate directly. And look at the exponential growth after that!

Now, if it takes 13 years to truly break even with a properly-designed policy, how long do you think it will take when the policy is NOT properly designed?

Don’t overlook the value of the Death Benefit protection and the asset protection that may result from wealth stored in the form of cash value. But unless you really have a need for the higher death benefit, it is important that the policy be designed properly.

Bottom line: There is a spectrum that extends from the least possible price that you can pay for a set amount of death benefit to the most that you can possibly pay for a set amount of death benefit.

A basic Whole Life or Guaranteed Universal Life policy is a good example of a Minimally-funded policy. They represent the least cost way to get the most coverage. They’ll also have the least amount of cash value.

A Maximum over-funded policy is the polar opposite. It is the Most that you can possibly pay for a given death benefit. THAT is the policy design that will have the greatest cash value.

Be careful that you get a properly-designed policy. Just because a policy is billed as “Over-funded” doesn’t mean that it is designed to the maximum limit. The Cash Value to Premium Ratio should be roughly 85% if you are a healthy and don’t use tobacco.

If this seems a little overwhelming, be sure to check out Life Insurance 101 for a basic understanding of how permanent insurance works and what the cash value in a policy represents. It is much easier to see the piece parts of the policy when you are reviewing an actual life insurance illustration.

See what a properly-designed policy looks like. Click the Chat Icon to see if someone is available to chat right now or use the “Click to Schedule” icon to find a good time for us to give you a call.

Recommended Reading: Debunking the Infinite Banking Myths

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No Rendering of Advice: The financial content in this document is provided for your personal information only. It is not intended for trading purposes, and cannot substitute for professional financial advice. Always seek the advice of a competent financial advisor with any questions you may have regarding a financial matter. Information in this document is not appropriate for the purposes of making a decision to carry out a transaction or trade nor does it provide any form of advice (investment, tax, or legal) amounting to investment advice, or make any recommendations regarding particular financial instruments, investments, or products.

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tom@innovativeretirementstrategies.com