Introduction
If you’ve been searching the internet looking for information on using life insurance to invest in real estate, and you want to know if you can really and truly build more wealth by doing it, then you have come to the right place.
The Double Play is putting your money to work in two places at one time by leveraging the cash value of a maximum over-funded life insurance policy to invest in real estate. That may sound like a mouthful, but words matter. Many people searching the internet are simply looking for information on using life insurance to invest in real estate. But it’s important to understand that there is much more to it than simply getting a policy and using that loan to invest in real estate.
It’s very easy for someone to get a policy loan and use that money to invest in real estate, thereby putting their money to work in two places at one time. The cash value of the life insurance policy is unaffected by the loan against it and continues to grow and earn dividends or interest credits. And since the life insurance cash value remains unaffected by the loan, the loan proceeds can be separately invested in real estate to generate wealth on top of the growth of the life insurance policy’s cash value.
But the real question that I think people are trying to answer is: “I’m know I can do it, but will I be better off doing it or by simply taking my money and investing directly in real estate.” And that’s because it would be extremely frustrating to look back later in life and realize that you had been leaving money on the table.
The purpose of this article is not to show you “How” to do it, the purpose is to show you “How to do it right“. And as you take this information, and effectively implement it in your own life, you should find that your own results greatly exceed your expectations.
So what are The 3 Key Success Factors for The Double Play? The first is policy design. You NEED to use a Maximum Over-funded Life Insurance Policy Design. The second is accessing the cash value line in a tax-advantaged way with a Cash Value Line of Credit. And the third, is choosing a policy type that will offer the best cash value growth. I’m going to cover each of these in greater detail below.
Key Success Factor #1: Use a Maximum Over-funded Policy Design
When you are using a life insurance policy to invest in real estate, you need to use a maximum over-funded life insurance policy. I want to first show you how to know if your policy is designed properly and show you why it is so important. So let’s start by asking a question: “how do you know your policy is designed properly?”
Is my Policy designed right?
I think it’s fair to state that everyone understands that a life insurance policy has fees and expenses. Not every dollar of your premium is going to the cash value, right? The insurance company is taking the premium, taking out the cost of insurance and other fees and the rest goes to the “Cash Value”. In a Properly-designed policy the ratio of cash value to premium should be about 85%.



If you are looking at an illustration from a life insurance agent, you can easily check this by simply comparing the cash value at the end of the first year to the amount of Premium. Just divide the ending cash value by the premium to arrive at the ratio of cash value to Premium. Keep in mind that the ending cash value also includes the dividends for the first year. So obviously, if you were leveraging the cash value from the beginning of that year, you would not have earned that dividend yet. So that dividend should also be backed out.
How does a poorly-designed policy impact The Double Play?
A numerical example will help illustrate why a poorly-designed policy is going to hurt your cash accumulation.



What we’re looking at here is a very simple business model showing only the very first premium payment into a maximum over-funded life insurance policy. This is the basic Double Play model right here. The only thing we’re missing is subsequent premium in the years to follow.
Let’s cover some of the basics for this scenario. We are assuming that the policy owner has a choice of putting $100,000 per year into their favorite real estate investment or putting $100,000 a year into a life insurance policy where they would turn around and leverage the cash value to invest in real estate. We need to know which is better.
Let’s assume that the cash value is earning a dividend of 6% and that the policy owner can get a cash value line of credit at 5%. The investor is going to pay 40% on taxes and they are making a hypothetical investment that returns 10%. So how is our hypothetical investor going to fare with a Poorly-designed policy?
As we begin to analyze this, let’s first carefully look at an example where the policy was sold as over-funded but wasn’t maximum over-funded. I’ve labeled this as the sub-optimal policy design. It has a cash value to premium ratio of 65%.
In this example, the investors $100,000 turns into about $65,000 of cash value after all of the fees and expenses of the policy have been taken out. If we assume that the $65,000 earns a 6% dividend, we will finish the year with dividend credit of $3,900. So that’s the life insurance on its own.
If the investor utilizes a cash value line of credit to get $65,000 to make the hypothetical investment earning 10%, they will finish the year with gross income of $6,500. If we assume that this policy owner has read my article on the best way to access the cash value and is utilizing a cash value line of credit instead of a policy loan to do their investing, then the interest is tax-deductible as a business expense, so we subtract $3,250 interest expense from the income of $6,500 and the result is taxable net income of $3,250. In the 40% tax bracket they’ll be writing a check to the IRS for $1,300.
After all of that, there is $1,300 of profit left over. And since our cash value earned $3,900 during the same time period, our total gain was $5,850.
Are we better off than if we had taken our money and invested directly in real estate?
NO! THAT is less than we would have made if we just took our money and invested it directly in the alternative. In that case, the $100,000 would have made $10,000 and after paying taxes, we would have been left with $6,000.
Now, what about if we do it the right way and we utilize a properly-designed maximum over-funded life insurance policy?
As we begin to analyze this scenario, we can see that the investors $100,000 turns into about $85,000 of cash value after all of the fees and expenses of the policy have been taken out. If we assume that the $85,000 earns a 6% dividend, we will finish the year with dividend credit of $5,100. So that’s the life insurance on its own.
And as we continue, we can see that if the investor cleverly utilizes a cash value line of credit to get $85,000 to make the hypothetical investment earning 10%, they will finish the year with gross income of $8,500 instead of only $6,500. We subtract the $4,250 of interest expense and get taxable net income of $4,250. In the 40% tax bracket they’ll be writing a check to the IRS for $1,700.
This time we have $2,550 remaining after paying the interest and taxes on our “side” investment. When we add that to the gain on the cash value we get a total of $7,650.
Are we better off than if we had taken our money and invested directly in real estate?
YES! But here’s the problem, while we are earning a higher combined total rate of return, we still are not back to where we started. We started with $100,000 and now we only have $92,650. Wondering how this makes sense? Keep reading!



This graph is looking at just the first year premium over time. We can see that the properly-designed policy starts off at about $85,000 and it takes a little over 2 years to catch up to the amount of premium that we paid into the policy.
The poorly-designed policy started off at $65,000 and took over 6 years to catch up to the amount of premium that we paid into the policy.[2]
As you think about the previous graph, you will quickly realize that simply catching up to your premium is not sufficient. If we had invested directly in real estate, we would have finished the year at $100,600. Not only do we need to catch up to our premium, we need to catch up to where our money would have been had we done the alternative!
The Double Play is an exercise in patience and the power of compounding interest. You have to be able to answer a simple question: would you rather have $85,000 growing at 7.6% or $100,000 growing at 6%?



This graph shows each of the three scenarios over time. You can see in the first 10 years that the real estate-only option slightly outperforms both the properly and poorly-designed policies. As we can see, because of the tremendously powerful impact of compounding interest in the later years, it is difficult to ascertain where the exact crossover point occurs, but you can see that the properly-designed policy significantly outperforms both the poorly-designed policy and the real estate-only alternative.
In this example, I had assumed that the interest was tax-deductible. This brings us to our key success factor number two: accessing the cash value in a tax advantaged manner.
Key Success Factor #2: Use a Cash Value Line of Credit
I don’t think I can stress enough how important it is to access your cash value properly. In the previous example, I simply assumed that the interest was tax-deductible. However, that is not always the case.
If you watch videos on real estate and life insurance on YouTube, you will very often here so-called experts telling you that you can access the catch value via a policy loan. Well here’s the problem: policy loan interest is not tax-deductible.



Rather than reinvent the wheel, let’s just look back at our previous example and look at the results when the interest is not tax-deductible. Our Properly-designed, maximum over-funded policy is on the left. This is the example we just reviewed. The results on the right show what happens when the interest is not tax-deductible.
The policy owner puts the same $100,000 premium into their policy and gets $85,000 of cash value and earns the same dividend credit at the end of the year. They leverage the cash value and make the same exact investment earning 10%. At the end of the year we have the same $8,500 gain.
But here is where things diverge. Because the interest is not tax-deductible, the entire gain is subject to taxation. In this case the 40% tax results in a check to the IRS for $3,400. However, the loan interest is still the same and now that comes off of the resulting income, so the net gain after paying the taxes and paying the interest is only $850.
So let’s compare the numbers: in the first example we had a net return of $2,550 and in this case we have a resulting return of only $850. $2,550 is three times $850! And as we add this to the gain from our side fund, you can see that we are again worse off.
Hopefully you can see with your own eyes why it is so important to use a cash value line of credit where the interest can be tax-deductible. There is doing it. And there is doing it right.
Alright, so I have shown you why you need to have a properly-designed policy and why you want to be able to deduct the interest expense. The last key success factor is the choice of policy type.
Key Success Factor #3: Use an Indexed Universal Life.
For the most part, I try to be as unbiased as I possibly can. If you want to invest in real estate with life insurance, you can use either whole life or Indexed Universal Life. You can do it with a well-designed policy or a Poorly-designed policy and you can do it with a policy loan or a cash value line of credit. But if you want to know how to do it properly and maximize your wealth accumulation, the best type of policy to use for The Double Play is an Indexed Universal Life.
The cash value of the Indexed Universal Life is going to outperform the cash value of a identically designed whole life. If you look at two identically-designed policies with the same amount of premium, with the same death benefit and policy expenses, the policy whose cash value grows faster is going to outperform the other policy.
IUL Mechanics
Contrary to what a lot of people think, the insurance companies do not invest the cash value of Indexed Universal Life directly into the market or any type of security. Rather, the cash value is invested in the same exact asset classes as whole life companies use. In previous blog posts, I showed the balance sheets from the insurance company annual reports. These showed that they are all investing in the same types of debt investments: primarily bonds, treasuries, and mortgages.
The difference in an Indexed Universal Life is that the insurance company takes the money that they would have otherwise credited to the cash value as a dividend, and they go to the index options market with the goal of hedging to capture as much movement in the market index as they can get with the money that they have.
This is why you see Indexed Universal Life policies having a cap and a floor. The cap represents the maximum movement in the market that the insurance company could capture with the money that they had to spend. If the market goes down, then the options expire worthless. When this happens, the only loss is the income that you would have otherwise received as a dividend. While this may result in variable returns from year to year, the cash value still retains its principal protection.
IUL Crediting Rates vs Whole Life
The goal of an Indexed Universal Life is not to capture the equity market rate of return, per se. Rather, the goal of an Indexed Universal Life is simply to credit a higher amount than they would have had they credited a dividend.



This table is a tool that I use to apply the current cap rates to the changes in the S&P 500 index over the last 30 years. Over the last few years, as interest rates have fallen, the insurance companies have had less money to spend on hedging. As a result, the amount of movement in the market index that they have been able to capture is quite reduced.
This table allows me to take the current Cap rates and look back over the last 30 years of index changes to see what the annualized rate of return would have been at the current cap.[3] It is important to understand that the current Moody’s Aaa corporate bond index average, which is a good proxy for the debt market rate return, is currently at 2.43% . So even with a cap of 9%, we can see that the annualized rate of return for the 5, 10, 15, 20, 25, and 30 years would still yield IUL crediting in the range of 5 to 6%. This represents a premium of about 2.5% over the current debt market rate of return as expressed by the Moody’s corporate bond index yield.



This graph shows a maximum over-funded policy design based on 10 annual premiums of $100,000 with a drop in the death benefit at the end of the premium paying years to drive the cost out of the policy. I use this graph very often in my blogs and videos. The one thing you don’t see on this graph is the policy type. Because it doesn’t matter. A properly-designed Indexed Universal Life will look just like a properly-designed Whole Life. The illustrations will only be different if the input assumptions are different.
The policy with the lowest internal costs and the higher return on the cash value is going to slope up and increase in value at a faster rate. The policy with a lower return on the cash value is going to increase in value at a slower rate. There is doing it, and there is doing it right.
Conclusion
If you are reading this and you purchased a poorly-designed policy from one of the big promoters, I hope I haven’t totally taken the wind out of your sails. I like to back up everything I say with facts and data. This post is full of facts and data that you can use in your decision-making process. Avoid following the advice of anyone who is using “hype”, “fluffy terms”, and outright BS. As you analyze these facts and data, and the tools I’ve shown you here, you’ll quickly realizy that you have everything you need to go get the most efficiently-designed policy possible so that you can greatly accelerate your wealth building.
[1] Note: this graph is based on a different set of assumptions where the poorly-designed policy is capable of still generating some positive growth.
[2] Note: this graph is based on a different set of assumptions where the poorly-designed policy is capable of still generating some positive growth.
[3] It is very unlikely that the cap would be constant for an entire 30 year span. Cap rates were 13% only just a few years ago when interest rates were a little higher..
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No Rendering of Advice: The financial content in this document is provided for your personal education. 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.
The sole purpose of life insurance is for the death benefit protection. Any other benefit is ancillary.