What if you had access to financing that was private and required no approval by a loan officer, all you needed to do was request it? What if this financial product had a pool of ready to use cash that accumulated tax deferred? And, finally, what if the assets in this product were protected from your creditors? Could you use it to manage and grow your real estate portfolio? Of course you could. What is this financial product? Believe it or not, I am talking about a type of cash value life insurance, known as Whole Life. This e-report will explain, in general terms, how a savvy real estate investor can use this conservative financial product to improve and grow their real estate investment portfolio.
The key to making this strategy work is a properly designed Whole Life policy using, “The Permission-Slip Concept.” Having a properly designed Whole Life policy, (using special policy riders), gives you the “permission” to use and expand your real estate portfolio in new and creative ways. A summary of the benefits of a Whole Life policy to the real estate investor are listed below:
1. Cash Values can be borrowed at below market rates regardless of credit standing.
2. Death Benefit can be used to secure outside financing.
3. Cash Value accumulates tax-deferred.
4. Death Benefits are tax free to named beneficiary.
5. Cash Values are protected from creditor claims, (check state law).
6. Can be used to fund buy/sell agreements with investment partners.
7. Can be used to increase tax-free income from properties.
8. FIFO taxation treatment on withdrawals from policy.
Using any of the strategies I discuss below depends on your personal situation and the laws of your state. The report does not provide any tax or legal advice. Always seek tax, legal, and life insurance advice from licensed professionals to assess how appropriate any of the strategies are for your personal use. In addition, please note that not all life insurance agents are trained or educated on how to design and use a Whole Life policy as I will describe. Contact me at my email address for an analysis of your personal or client’s situation: firstname.lastname@example.org.
Understanding the “Velocity of Money Multiplier Effect”
I give thanks to my economics professor Robert Ebert PhD at Baldwin Wallace College for introducing me to the Multiplier Effect. The economic health of our country depends to a great degree on the availability of money in the banking system and its movement through the economy. The Money Multiplier Effect is a well known economic principle. Let’s look at an illustration of this important economic principle as defined in Investopedia.com:
“The multiplier effect depends on the set reserve requirement. So, to calculate the impact of the multiplier effect on the money supply, we start with the amount banks initially take in through deposits and divide this by the reserve ratio. If, for example, the reserve requirement is 20%, for every $100 a customer deposits into a bank, $20 must be kept in reserve. However, the remaining $80 can be loaned out to other bank customers. This $80 is then deposited by these customers into another bank, which in turn must also keep 20%, or $16, in reserve but can lend out the remaining $64. This cycle continues - as more people deposit money and more banks continue lending it - until finally the $100 initially deposited creates a total of $500 ($100 / 0.2) in deposits. This creation of deposits is the multiplier effect.”
In other words, in the illustration above, the banking system is able to use your $100 as if was actually $500. Quick question, who keeps the profits on the $500, you or the bank shareholders? Give yourself a cookie if you said the bank. The banking system cannot lend out 100% of the money it has in deposits, there must be a reserve kept to meet potential current obligations. In the example above the reserve requirement is 20%. The current reserve requirement for banks in January 2014 ranges from 3% to 10% depending on the size of the bank.
Use Whole Life Insurance to create your “Personal Money Multiplier Effect”.
You can create your own “Personal Money Multiplier Effect” borrowing from a specially designed Whole Life policy. The key to building wealth in this way depends on the loan provisions of your policy. The loan provisions of a Whole Life policy are unique among life insurance policy types. When you borrow cash from your Whole Life policy, the loan proceeds you receive does not actually come from your policy. The money comes from the general fund of the insurance company. Your cash value is pledged as collateral for the loan. With all other types of cash value policies, including universal life, and variable life, your loan proceeds are deducted from the cash value and no interest is paid on the loaned amount.
While you are using the money to put a down payment on a property, the “pledged” cash value from your policy is still earning a dividend. Taking out a loan on your Whole Life policy can actually contribute to its overall dividend performance. The interest you pay on the loan is income to the insurance company. The dividends you receive are calculated using a formula that includes the interest income paid from policy loan recipients combined with insurance company investment income. Depending on the company, the dividend rate credited on your policy stays the same or is slightly less to the extent of the “pledged” cash value. This is known as Non-direct Recognition or Direct Recognition Dividend crediting.
Whole Life is an asset with cash value. While this cash value is growing tax-deferred you may be able borrow up to 90% of the cash value, (depending on the loan provisions of your policy), at any time and for any reason. The borrowed funds can be used for:
- Down payments on property.
- Improvements on your real estate.
- Financing a construction project.
- Any other use you can dream up.
This borrowing transaction can be done over and over again as you need the money for investment purposes thus creating your Personal Money Multiplier Effect. The dollar you spend on a premium does the job of two and three dollars, or even more. Your Whole Life premium:
- Buys a Death Benefit.
- Builds tax deferred cash value.
- Can be pledged for a loan from the insurance company over and over again.
- Still earns dividends in the policy, even when loaned.
- Reduces dependency on outside financing.
- Reduces interest cost. The interest on the loan is offset to an extent by the continued dividend paid.
Let’s take a look at the “Personal Money Multiplier Effect” in action with this hypothetical example:
Robby Realtor is a successful real estate investor. He currently has his eye on a property that has excellent potential for flipping. However, due to his other current projects, his cash position is low and he needs an additional $30,000 to close the deal and make the improvements needed to flip the property. He has recently sold a couple of properties, but will not receive the sale proceeds in time to make the deal happen. He contacts his insurance company, fills out a one page form simply stating that he wants a $30,000 loan on the cash value of his Whole Life policy, and signs the form.
Robby purchases the property. With the improvements he makes, financed by his policy loan, he sells the property in 3 months making $50,000 in profit. He repays the loan from the proceeds of the previously sold properties and now has an additional $50,000 in profit. He repeats this process 7 times in the next 5 years following the procedure of borrowing and repaying the same $30,000 from his policy. He generates an average of $50,000 in profit from each transaction. So, in essence, the same $30,000 has been used over and over again to generate $350,000 in wealth.
All this wealth has been created privately without once having to qualify for a bank loan, talking with a loan officer, enduring mountains of paperwork, credit checks, compiling financial statements, and providing tax returns.
In our hypothetical example above, Robby benefited by having the foresight to save money in a Whole Life policy and then use it to build his real estate portfolio.
Prudent Loan Management.
A policy loan does not have to be repaid and this could lead to loan abuse. Any outstanding loan will be deducted from the death benefit and unpaid loan interest is added to the loan. The key point to remember about loan repayment is this: The repayment terms are on your schedule and you need to be a prudent money manager:
- I recommend paying back the loan as soon as possible and borrowing the same cash value over and over again when you need it to maximize your “Personal Money Multiplier Effect.”
- At the very least pay the annual interest on the loan so the amount borrowed doesn’t grow.
- Do not let the policy lapse, cancel it, or exchange it with outstanding loans. The result could be unwanted taxes due on your loans.
- Work with a Life Insurance Professional well educated about Whole Life products and loan provisions.
This strategy is a long-term one. The key to success is building up your cash value as quickly as possible and using prudent loan management. The brevity of this article does not permit me to discuss all the important information you need. Click on the following link to request a free copy of my special e-report via email: Grow and Protect Your Real Estate using Whole Life Insurance.