Using a whole life insurance policy to invest in real estate allows you to earn a return on your real estate investment while also earning a return on the money you put into your policy. It is a great strategy to build wealth if used correctly because you become your own bank.
Policy Debate
You will find no shortage of content online saying how bad whole life insurance is and that you should use term life insurance instead. This may be true if you are going to invest in the stock market, but whole life insurance is a great vehicle for real estate investing. There are higher premiums that you must overcome in the beginning, but once you start building the cash value of the policy, the compound interest takes over.
The debate really comes down to cost in my opinion. You can get term life insurance for cheap if you are young and healthy. So why pay extra for whole life? Term expires at some point whereas whole life insurance is lifetime. Another argument is that whole life insurance does not offer a good return on investment. This is true if you only make the premium payments and get a cash dividend on your cash value. If you use whole life as a wealth building tool like infinite banking, then it is much more robust than term life insurance.
Infinite Banking
The infinite banking strategy uses whole life insurance as an investment vehicle. It does this by using the cash value of the policy. When you make payments on your whole life policy, the cash value builds up overtime and you can take a loan out against that money. You also receive a dividend on the cash value of your policy. The key to infinite banking is that if you take a loan out against your policy to invest it, you still build the value of your policy from the dividends.
Example: the cash value of your whole life policy is $50,000. You call up the life insurance company and request a loan for $50,000 and within a week the company sends you a check for $50,000. You now have $50,000 cash to do whatever you want with while the cash value of your policy is still $50,000. The policy receives a dividend of 6-7% (a lot better than a bank) on that cash value of $50,000.
The great thing about taking out that loan is you now have $50,000 to invest in real estate deals while you earn dividends on that same $50,000. An added benefit is that the loan is simple interest at a low rate. If you can make a 15% return each year on the $50,000 and owe simple interest of 4% then you are winning using arbitrage. At the same time your policy is compounding at 6-7%. Once the deal sells you can pay off your loan and the cash value of your policy will have gone up. Rinse and repeat—infinite banking.
A few other things I like about whole life is that it is protected in bankruptcy, you can overfund the policy to speed up the process, and it adds to your net worth and liquidity for commercial real estate financing where IRA’s do not.
Case Study
I started my whole life insurance policy after meeting my now business partner, David White, at a multifamily real estate meetup. We met a few times to go over the policy and he showed me the illustrations of how it would work. I was skeptical at first because it is a lot more expensive than term life. I decided to go with it and started to pay the premiums. I did what is called a paid-up addition or PUA. It allows you to buy additional whole life coverage using the policy’s dividends instead of premiums. The PUA’s then earn dividends and compound indefinitely. I put in about an extra $25,000 the first year and second year of owning the policy.
My policy cash value was around $50,000 when I decided it was time to invest it in a real estate syndication deal with the money. I was able to call the insurance company and request to take out the policy loan. Within a week I had the money to now invest in the deal. I went with a sponsor that I knew, liked, and trusted. She saved me a spot as a limited partner on a 272-unit apartment complex in Arlington, TX. The deal was under market value and is expected to do well. Now I am a part owner in a deal that is projected to return around 15% a year and my loan is a simple interest loan at around 4%. I am also earning dividends on that $50,000 at rate of 6-7%.
Conclusion
Insurance is a personal choice, and it depends on an individual’s situation. I personally like using whole life insurance for real estate because I can build wealth faster with it and use it for net worth and liquidity purposes later when I want to go after bigger deals— I am my own bank. It is tax advantageous in that I can deduct the interest I pay on the loan and don’t get taxed for using the money.
If you want to set up a whole life insurance policy is important to reach out to someone reputable and knows how to use it properly. David White understands how to write a great policy without all the extra commissions a normal sales agent will try to push on you, and he is also a General Partner in real estate syndications. You can reach out to him on his website: Infinity Investments Strategy.
