As a real estate investor, you understand that cash flow is king in the journey of building wealth. So you may have heard of this concept to fund your next real estate deal called: Whole Life Insurance.
In this article, we will go over all of the common questions about whole life insurance for real estate investors.
We will show you a new and creative way to fund your real estate deals.
What is Whole Life?
Whole Life Insurance, also referred to as Permanent Life Insurance, is a life insurance policy that offers lifetime protection. Your premium payment will never increase and your death benefit is guaranteed to lasts forever.
Permanent Life Insurance is one of a few tax advantages product that can be used to buy real estate. In addition to the tax-advantaged features of the policy, whole life insurance provides a living benefit “Cash Value” that can be accessed to fund things like real estate investments.
Whole Life Insurance is different from term life insurance. Term life insurance will only provide you a death benefit for a period of time. For example 10 years, 20 years or 30 years. Once this window of time expires your life insurance coverage would end.
Whole Life Insurance policy can range as small death benefits like $5,000 to as large as $200 million. The best part about Whole Life Insurance is that it is flexible and can be purchased to fit your needs.
But hold on for a second….can you even imagine how much that $200 million dollar policy must have cost! whoof
For the purpose of this article, we will be looking at Whole Life Insurance for Real Estate Investors.
Why You Should Buy Whole Life
Cash value is the primary reason to consider Whole life insurance for real estate investors. Essentially the quick and simple access to capital is what makes Whole Life insurance a powerful tool. The cash value is similar to a savings account but it is inside of your life insurance policy.
The reason we say it’s like a savings account is because this cash value always grows, it never goes down. That is right if you purchase a dividend-paying whole life insurance policy that policy will earn a dividend each year and grow your cash-value account.
The cash value in these accounts is safe. Your cash values are vested immediately and the performance is non-correlated to the stock market so your account will not go backward.
For example back in 2008 when the economy plummeted and the stock market tanked those who had cash value in their whole life policies were safe from this drastic market change. In fact, many investors with these whole life policies were able to then dip into their cash values and invest at the best time in history.
Whole Life Vs. Savings Account
Ok, so why would a savings account be interesting?
What kind of interest rates does your bank pay you on the cash you have saved? 1% maybe 2% if we are being generous? To make things worse that interest the bank pays you is taxable. So really are you making anything?
What is the bank doing with your money once it is in their possession? The bank multiples’ your money and loans it out, earning far more than 1-2%. So why give up the control of your own money into a savings account for a messily 2%?
Frankly, no one has ever shown you anything different. This is just what the government wants. They want you to think putting money in a savings account is the norm. They want you to rely on government-provided options like 401Ks for retirement. Who really benefits throughout your lifetime as you blindly save for the future? I would argue banks and the government.
Imagine if you could change this?
If you have done any research on this topic you will have most likely seen information on infinite banking concept. This concept dives deep into the above concept. Check out the article here.
Without diving into the infinite banking concept to deep the reason why Whole Life Insurance is a strong option for savings is that:
- It will be credited with a much stronger interest rate for example, of the strongest mutual companies they are crediting between 4-6% on policies cash values.
- These returns are Tax-deferred.
- The cash value can be accessed tax-free
- The death benefits offer asset protection and is a tool for estate planning.
We can guarantee that you do not get this type of value from your savings account at your bank!
Recommended Reading: Check out the top 7 companies for cash value
An Analogy Real Estate Investors Get
We have found that many real estate investors resonate with the following analogy.
Let’s assume that your insurance policy is a $1,000,000 home.
Term insurance: is like renting the $1,000,000 home for a period of your life. You can acquire the $1,000,000 insurance policy at a lower premium price and have some of the benefits but you do not own the home. You are simply living in it until your term or “lease” is over.
Whole Life Insurance: Whole Life Insurance is more like buying the $1,000,000 home. This is more of a long term commitment. You will need to commit to a steady mortgage premium each month that would be payment will be more than renting. But in this case, it will be helping to pay down the mortgage and build equity “cash value”. As your equity grows is can be used throughout your lifetime to purchase other investments.
Using your life insurance cash value is very much like a Home Equity Life of Credit “HELOC”. The main difference between a HELOC and Whole Life cash value is you do not need to apply for the line of credit and be approved. Additionally, you pay no origination fees on the loan and the interest is paid back to your policy, not to a bank.
Caution! Not all Whole Life insurance companies are created equal.
We mentioned that many companies give you dividends that increase your cash value. One of the interesting features is that certain companies pay the same dividend even if you take money out of your policy.
This means that as you take out money your performance is not impacted, so you can use it as an incredible source of funding real estate deals.
Who Shouldn’t Buy A Whole Life Insurance
Whole Life Insurance has many great advantages. As we discussed the product can also bought at various different levels. Even with all this in mind whole life insurance is not for everyone. So who shouldn’t buy whole life insurance
People who have unstable or drastically unpredictable cash flow. It will be very difficult to sustain a whole life policy if you cannot make the premium payment.
If you speak to a quality financial advisor or insurance agent they should be able to guide you to the proper design.
We Are Real Estate Investors too!
At Top Whole Life we have a unique perspective when we help our clients find their whole life policy. We are not just insurance experts we are also real estate investors.
Our team owns a large portfolio of single-family, multi-family and mobile home parks around the US. We are not just talking about whole life insurance, in theory, we also own this stuff.
We have used our own whole life policies to acquire real estate investments over the years.
So as you are doing your research make sure to connect with us.
DOABLE vs MEANINGFUL
As we explained above there are cases where it does not make sense to buy a whole life policy (at least right now)
From our experience, we have found that there is a range for a whole life policy.
- There is a very DOABLE premium amount: EX. $100/Month
- This amount may not be enough to be very meaningful for you.
- There is also a very MEANINGFUL premium amount: EX. $5,000/Month
- This amount could be meaningful BUT is this a doable amount to sustain?
The experts here at Top Whole Life can help you find the right mix between DOABLE and MEANINGFUL and ensure you have the best whole life policy to invest in real estate with.
Premium Financing for Real Estate investors
Now we will go over some advanced concepts on how to use whole life insurance.
Every real estate investor understands debt. And that real estate (for income) is an arbitrage between debt and how much rents are generated.
As an investor liquidity can be a limiting factor as you try and start your whole life policy. Real estate investors have run into this problem and premium financing is sometimes the solution. This strategy is where you can leverage real estate to purchase large whole life insurance.
So you do not have to pay this whole life insurance, the bank pays for it.
Premium Financing is an advanced strategy that only works for the right people. The only issue with premium financing is it only works if you have substantial assets to pledge as collateral to the bank. If you are a real estate investor with a large portfolio this strategy could be a viable option.
Related: Premium Financing Whole Life
Are There Any Other Alternatives?
Yes, there are. Whole Life Insurance comes in various forms. One of these forms is Indexed Universal Whole Life Insurance. If you are a bit more of a risk-taker this type of a policy might be right what you were looking for.
Recommended Reading: Whole Life vs. IUL
- How much is a Whole Life Policy for a Real Estate Investor
- This can depend…Get a Quote Here
- How much of your whole life insurance cash value can you access?
- You should be able to access up to 90% of your cash value.
- How long does it take to access capital?
- This will depend on the design you choose.
- If you are in need of your Cash Value right away check out: MassMutual’s High Early Cash Value Policy
- What is the death benefit?
- Are their restrictions to what the funds can be used for?