If you’re thinking about setting up an “infinite banking” policy for investing in real estate, you have come to the right place to make sure its done right! Bookmark this page right now because you’ll want to explore all of the links and great information that I have for you. You should find everything you need to know short of seeing an actual illustration… that needs to be prepared by a licensed agent.
I’m going to presume that if you are searching on this subject, you’ve probably come across it somewhere, the idea intrigued you, and then your search for more information began.
This page is going to cover the policy design modifications needed to get the most cash value for real estate investors. I’ll cover the basic math and financial for this approach here, but you’ll want to check out all of the links, recorded webinars, and YouTube videos as well.
More Info: How Does Life Insurance Work?
Private Banking for Real Estate Investing Requires Maximum Over-funded Policies
So let’s start by referring to “Infinite Banking Concept“, “Be Your Own Bank“, “Bank on Yourself” “7702 Plans” and other Life Insurance marketing systems as simply wealth building and Private Banking strategies utilizing Over-funded Cash Value 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.
None of these strategies were originally intended for leveraging the cash value for real estate investing. There is nothing to stop you from leveraging the cash value to invest in real estate. But, in order to maximize profits, Real Estate Investors in need a policy that is designed for maximum cash value. An improperly-designed policy can easily cost you tens or even hundreds of thousands of dollars over time.
When it comes to Private Banking and Real Estate Investing, I like to refer to it as The Double Play: putting your money to work in two places at one time by leveraging the cash value of a maximum over-funded life insurance policy. The word Maximum is what separates what I do from other Private Banking practitioners.
If you don’t know the difference between a maximum overfunded life insurance policy and one that is minimally funded, be sure to check out this article.
Recommended Reading: Minimum and Maximum Over-funded Life Insurance Explained
Regardless of the Private Banking approach you are using, if you are planning to leverage the cash value to invest in real estate, the policy NEEDS to be designed right up to this legal limit: a Maximum over-funded policy design. In this type of policy, the cash value is maximized while the death benefit is minimized.
Recommended Reading: If you’re asking yourself: “What is cash value life insurance?” Start with this Life Insurance 101 Tutorial.
The Double Play Explained
Leveraging the cash value of a maximum over-funded life insurance policy allows a real estate investor to put their money to work in two places at one time. You will earn a higher rate of return because when you leverage your cash value, the cash value never leaves the policy and continues to earn dividends or interest credits. And to the extent that your real estate return exceeds the cost of interest on the loan, you create value on top of the return on the cash value.
A Simple Question: What if you could put your money into an asset that earns 6 to 8% and you could get a line of credit against that asset? To the extent your investment returns exceed your loan interest rate, you are creating value.
The Double Play 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?
The Reason Why Your Policy MUST Be Maximum Over-funded
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, they want the most bang for there buck. A properly designed, maximum over-funded life insurance policy should result in about 85% of the premium going to the cash value. Take a look at your illustration. Divide the cash value at the end of Year 1 by the amount of premium you paid. The result should be greater than 85% (presuming you are healthy and don’t use tobacco products).
The Death Benefit is the primary cost driver in a policy. If the end of year cash value is not around 85%, then the death benefit is likely higher than it needs to be (presuming your goal is to maximize the cash value at the expense of death benefit protection). 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.
Here’s the problem…
Not all over-funded life insurance are Maximum Over-funded designs. The agent’s commissions are tied to the death benefit, so there is an incentive for them to increase the death benefit. This comes at the expense of your cash value.
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.
Paid-up Additions Should Be Maxed Up Front
Real Estate Investors need to break from the Traditional Private Banking philosophy in the interest of maximizing their wealth building. According to Private Banking philosophy, when you borrow from your own bank and pay yourself “interest”, you are building your bank. What you’re actually doing is buying more Paid-up additions in the policy.
This is one reason why you’ll see many Private Banking practitioners design policies with more death benefit than would be optimal for a Maximum Over-funded Life Insurance Policy design. They are leaving room for the Paid-up Additions to be added without creating a MEC (Modified Endowment Contract).
Real Estate Investors NEED their policy’s cash value to be maxed out from the beginning. You want as much of your money to be working in two places at one time as possible. If you have the money, it should be in the policy from the beginning, not added later. The higher fees are going to consume the premium dollars in a non-optimized policy design.
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?
This chart shows how long it will take for the cash value to break even with the amount of premium 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.
Using Life Insurance to Invest in Real Estate vs Investing Directly
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.
The data for this chart come from an actual illustration that was sent to me for review by a prospective client (Blue). The client was a 46 year old who wanted to fund his policy for 7 years at $40,000 a year. I ran a properly-designed policy illustration (Green) and plugged the numbers into The Double Play model. The model assumes that the cash value is leveraged to invest in real estate earning 8%. The marginal tax rate is assumed to be 35%. The chart also shows the results for $40,000 a year for 7 years invested directly in real estate (Orange).
The chart clearly shows the advantage of using a properly designed policy.
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.
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“Infinite Banking” and Real Estate Investing works. It is a way to put your money to work in two places at one time by leveraging the cash value of a life insurance policy. However, to do it right, the policy needs to be designed as a maximum over-funded life insurance policy. Otherwise it will take too long for the cash value to break even. When you look at the break even, you need to be looking at what you could have done with the money had you invested directly in real estate. You will know the policy is designed properly when the cash value to premium ratio is approximately 85%.
Real Estate Investing with Life Insurance requires a Maximum Over-funded Life Insurance Policy. “Over-funded” doesn’t mean that it is Maximum Over-funded. 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.
Interested in meeting other people investing in Real Estate with Life Insurance? Join The Double Play community on Facebook and network with like-minded real estate investors.
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.
The primary reason for purchasing life insurance is the death benefit protection. Any other benefit is purely ancillary.