The goal of this post is to show you how you can achieve an Infinite Rate of Return when you invest in Real Estate using a Maximum Over-funded Life Insurance Policy. In case you don’t know what an infinite rate of return is, I’m going to start off by defining an infinite rate of return. Then I’m going to explain why you can achieve an infinite rate of return when you leverage the cash value of a maximum over-funded life insurance policy. Lastly I’m going to show an example of the calculations.
What is an Infinite Rate of Return?
You should understand that an infinite rate of return occurs any time you create value with borrowed funds, or in Real Estate parlance, with Other People’s Money (OPM). An investment’s rate of return is calculated by dividing the return by the amount invested. The resulting percentage is the Return on Investment (ROI). Since any return will increase as you reduce the amount of investment, this means that the ultimate limit is infinity.
Any number divided by zero is infinity. Don’t believe me? Try dividing 1 by 0 on your calculator right now. You get an error because the calculator can’t display an infinite number.
An infinite ROI occurs when the denominator in the ROI calculation is zero.
You can also try dividing $1000 by $1. You’ll get a 1,000% return. Now divide $1,000 by $0.01. You’ll get a 100,000% return. You can see that as you continue lowering the denominator (the investment), the return will get ever larger and ultimately approach infinity.
In a real estate deal, you may do a deal with leveraged home equity. It is important to recognize that any wealth created with this borrowed money is an infinite rate of return as long as you have no other money in the deal.
How do you get an Infinite ROI with Life Insurance?
You should be aware that when you leverage the cash value of a life insurance policy, you are getting a loan that is secured by the cash value. This means that the cash value is never leaving the policy. Its important to understand that the life insurance policy is a separate asset and is in no way impacted by the loans against it.
Read that again 2X
If, for example, you borrow $100,000 against your policy and you use it as a down payment on a $500,000 investment property where a 3d party bank is funding the other $400,000, there is no investment in this deal. Any positive return would be and infinite ROI.
Realize that this deal is being done completely with OPM. You should not be counting any premiums that you have paid into the policy as part of this deal because the life insurance policy stands alone on its own merits.
I realize that this may take some time to wrap your head around. Its important to understand that the primary purpose of a life insurance policy is for the death benefit protection. Any other benefit is purely ancillary.
Examples
What I want to do in this section is just look at three simple examples that will illustrate the concept of an infinite rate of return. In this first example I want to show you an example without any leverage as a baseline. Let’s just say that you invest $100,000 of your own money in a deal that generates $10,000 per year.
| Annual Return | $10,000 |
| Investment | $100,000 |
| Annual ROI | 10% |
The annual ROI is calculated by dividing the Annual Return by the Investment. The result here is 10%.
In this next example, the same person is buying an income property for $500,000 and using his $100,000 to make the down payment and borrowing the rest. This property will generate $50,000 a year in net income.
| Annual Return | $50,000 |
| Investment | $100,000 |
| Annual ROI | 50% |
In this example you can easily see that the leverage allows the annual ROI to increase to 50%. The same “investment” returned much more by utilizing OPM.
In the final example, our budding real estate mogul is leveraging $100,000 of the cash value in his life insurance policy to make the down payment for the property in the previous example.
| Annual Return | $50,000 |
| Investment | $0 |
| Annual ROI | ∞ |
In this example you can clearly see that the $50,000 was created with 100% OPM. Since there is no investment, the ROI is infinite.
Conclusion
In this post I have showed you how you can create an infinite return by leveraging the cash value of a maximum over-funded life insurance policy, or the cash value of any policy for that matter. The important thing to understand is that you cannot count the premium paid into the policy as part of the investment. The life insurance policy is a separate asset.
