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Real Estate Investors using Whole Life Insurance: Where Can it Go Wrong? | IBC Global - YouTube
Channel: Insurance Business Concepts (IBC) Global
[0]
Have you ever heard of whole life insurance
[2]
being used to finance real estate
[4]
or used to enhance
[5]
your real estate portfolio?
[7]
Well whole life insurance
[9]
has been used for real estate investors
[10]
and is today it's very popular.
[13]
The thing is
[14]
where so many people
[15]
get into trouble with this
[16]
or have buyer's remorse
[17]
is investors purchase
[19]
whole life insurance policies
[21]
based on the concept or idea
[23]
of using a whole life insurance policy
[25]
to acquire more real estate
[27]
or enhance their portfolio.
[29]
Specifically what they are attracted to
[32]
is that with a whole life insurance policy
[34]
when one looks at the cash value
[36]
once a dollar
[37]
passes through that cash value
[39]
if you just let it sit and grow
[40]
which is a great alternative
[42]
to money sitting in cash
[43]
because it'll produce between 3% to 5%
[46]
it's safe
[47]
liquid
[48]
tax-free as well
[49]
but if it grows at 3% to 5%
[52]
or if you borrow against it
[53]
if you pull money out
[54]
it keeps compounding
[56]
at that 3% to 5% rate
[58]
as if you never touched it
[59]
in the first place
[61]
there's no lost opportunity cost
[63]
that's where the attraction is.
[65]
So often people will say okay
[67]
I want that
[68]
I had no clue you could do that
[70]
with a whole life insurance policy
[72]
but then they get into it
[74]
and after the excitement phase
[76]
has passed
[77]
once they've paid money into the product
[80]
they kind of step back
[80]
and look at the numbers and say
[82]
wait a minute
[84]
why am I doing this again?
[86]
It just doesn't make sense
[87]
I've got a negative hit
[89]
takes forever for me to see a return
[90]
like there are other things
[92]
I can do with my money.
[93]
Can I get out of it?
[94]
Nope too late
[96]
so if I have the awareness upfront
[99]
I can prevent
[100]
a bad situation from happening.
[102]
So I want to share a story in this video
[104]
earlier this year
[105]
I met a young man
[106]
he was 31 years old at the time
[109]
he's 32 now
[111]
we're a year apart
[112]
I'm a year older than him
[113]
so I call him a young man
[114]
but really we're the same age.
[116]
He is into real estate investing
[118]
he does very well for himself
[120]
a single guy
[121]
earns north of $500,000 per year
[124]
and by the way
[125]
you would never know it
[126]
from talking to him
[127]
he is extremely humble
[128]
that's one of the reasons
[129]
I like talking to him so much
[131]
he doesn't boast
[132]
he doesn't brag about the money at all
[133]
he does it
[134]
because he thoroughly enjoys it
[136]
and the money comes.
[137]
Now with that said
[139]
he was doing research
[140]
on real estate investors
[141]
he found a coach that he really likes
[143]
that provides a lot of information
[145]
he has online courses
[147]
specifically on real estate
[148]
and this coach talks about
[149]
whole life insurance
[151]
how he personally
[152]
the real estate coach
[153]
purchases whole life insurance policies
[156]
flows his money through the policies
[158]
and then uses the cash value
[160]
to then purchase real estate.
[162]
So of course the client then
[164]
this individual says
[165]
well I want to do exactly
[166]
what the coach does
[167]
it's working for him
[169]
how do I copy that model?
[170]
So he's introduced to a group
[173]
that works with this real estate coach
[175]
that presents and sells him on
[177]
whole life insurance policies
[179]
and they're really selling the concept
[182]
to say hey
[183]
this money in the cash value
[184]
you can use it anytime you want
[187]
you've got all the benefits and features
[189]
that the real estate coach has
[190]
you're going to do great with this policy.
[192]
He's excited
[193]
he gets into it
[195]
however here's the problem
[197]
he opened that policy
[198]
with a small company
[199]
which as far as he knows
[201]
all companies are the same
[202]
and then 2nd
[203]
had a very very high base premium
[206]
which we talked about
[207]
in a lot of our videos
[209]
the base premium
[210]
does not show up in cash value
[212]
in the 1st year
[213]
with most traditional products
[215]
takes a long time to see any value
[217]
in terms of your cash value.
[218]
A single guy
[220]
he doesn't care about the death benefit
[222]
he's interested in the cash value
[224]
and building his real estate portfolio
[226]
that's what he's interested in.
[229]
Now the focus
[230]
when he purchased this policy
[231]
was again not on the net cash value
[234]
the focus was on
[235]
hey look at this dividend column
[237]
and look at what you can do
[238]
to enhance your real estate portfolio
[240]
you're going to make so much money
[242]
just like the coach.
[243]
Again selling the concept
[245]
selling the dream
[246]
neglecting the numbers.
[248]
Some people see through this
[249]
a lot of people don't
[250]
and we've seen smart
[252]
sophisticated investors
[255]
even fall down this pit
[256]
or go down this road
[258]
and it happens frankly.
[260]
So kind of the closing statement
[263]
that this individual shared with me
[265]
is he was told by the sales agent
[268]
the financial services professional
[270]
that hey you've got the same policy
[272]
that this real estate coach has
[273]
this investor
[274]
you are set up for success.
[277]
Now as he reflects back on that today
[279]
kind of says yeah right
[280]
there's no way this guy puts
[282]
that kind of money
[283]
into one of these products
[285]
that takes 10 plus years
[286]
just to break even.
[288]
What was not touched on at all
[290]
was the commission
[291]
which we will touch on
[292]
as we go through this.
[294]
Let's get into the numbers here
[295]
so here's a policy
[297]
I'm not going to disclose the company name
[301]
but here we've got age 31
[303]
standard non-tobacco rating
[305]
what do you see
[306]
in the monthly premium over here?
[307]
$6,250 times 12 comes out to what?
[312]
$75,000 per year
[313]
so that's what he is committing to
[316]
that is his underlying base premium
[318]
on the contract
[320]
it's technically a little bit less
[321]
as a part of that
[322]
is the term insurance Rider.
[324]
That's high
[325]
when we talk about a 10/90 split
[327]
that minimum base premium
[329]
if I'm paying in $75,000 per year
[331]
I'm going to have a $7,500 base premium
[334]
if I have a $75,000 base premium
[336]
that means I want the ability
[338]
to pay up to $750,000 per year.
[342]
So that's a high base premium
[343]
here's his payments
[345]
the 1st year
[348]
$125,000 goes into the policy
[350]
based on the guarantees
[352]
cash value is about $76,000
[355]
however
[356]
based on the non-guarantees
[358]
we see a dividend in the 1st year
[360]
and a net cash value
[362]
of $82,000 and change
[364]
that's his actual value in the 1st year.
[368]
It's about a $42,000 hit
[370]
if you've got a calculator now
[371]
and you're doing the math
[373]
so that's a big hit
[375]
$40,000 on his money
[376]
he's 31 years old
[378]
could you use $40,000 to
[380]
invest in additional real estate
[382]
that'll produce a higher return
[384]
than the policy?
[385]
The answer is absolutely yes
[388]
so that is what business owners
[390]
and investors look at
[392]
every single business owner that I talk to
[395]
same thing with real estate investors
[396]
that has seen this in the past
[398]
high cash value life insurance
[400]
and not moved forward with it
[403]
has been due to this
[404]
the opportunity cost
[408]
I can do more with my money today
[411]
than what this negative hit looks like
[412]
right off the bat
[413]
it just does not make sense
[415]
and they're told hey
[416]
just focus on the long term
[417]
and they're like no
[418]
I grew my business
[420]
by using capital upfront
[422]
if it's too much of a hit
[423]
I'm not going to do it
[425]
so can you make it better?
[426]
The answer is absolutely yes
[429]
and at 100%
[431]
has to do with the policy design.
[433]
So let's take a look at what he did
[437]
so the good news about this
[438]
is we were able to catch this
[440]
only a couple months into the policy
[443]
so he did take a hit
[446]
of a few months premium payments
[447]
which adds up quite quickly
[449]
but as we examined everything
[450]
to make sure
[451]
hey if we exit this policy
[453]
and get into a new one
[455]
how much time
[456]
does it take to make up for lost time?
[458]
Because he's got to walk away
[459]
from the payments he's made already
[461]
does it make sense
[461]
to just keep the policy perhaps.
[463]
So let's take a look here
[466]
let's see what we got
[466]
a small company on the left
[469]
let's zoom in first
[471]
here we go.
[473]
So this was the illustration
[474]
we just looked at
[475]
what do we see here?
[478]
$125,000 in the 1st year
[480]
$82,000 in cash value
[482]
the growth a negative $42,000.
[485]
Now that cash value growth
[486]
what that represents
[487]
is the net growth
[489]
we see on the cash value each year
[491]
so for example year 2
[494]
you see negative $17,323
[498]
what this represents
[499]
is the fact that he pays in $75,000
[503]
and the cash value grows
[505]
from $82,000 to $140,000.
[507]
What that means
[509]
is he paid in $75,000
[512]
and of that $75,000 payment
[515]
he lost $17,000.
[517]
Year 3
[519]
he loses $13,000 on that payment alone
[523]
finally by year 7
[528]
he pays in $75,000
[530]
he gets the $75,000 back
[532]
and another $1,000 on top of it.
[535]
So finally by year 7
[537]
he's seeing more growth
[538]
on his single payment each year
[540]
and that $75,000 is all premium
[543]
a little bit less
[544]
so we see this drop
[545]
from $75,000 to $73,272 in year 8
[549]
you'll see the death benefit drop as well
[551]
so what happened here
[552]
is the term Rider fell off
[553]
it was a 7-year term Rider
[555]
this is exactly what's going on
[557]
but when the turn Rider fell off
[558]
the term premium dropped as well
[561]
so that's the actual base premium here.
[563]
And in yellow
[565]
represents his breakeven point
[568]
12 years
[570]
he's got $941,000 in payments
[572]
and in total cash value $945,000
[575]
12 years just to get his money back
[577]
and he funded it
[579]
for a total of 20 years
[581]
up until age 50
[582]
that was his planned funding.
[584]
So does that make sense
[587]
being that he can enhance his position
[589]
with real estate?
[590]
I say no way
[592]
don't make sense
[594]
I wouldn't do that with my money.
[596]
So here's what we looked at
[598]
first we asked the question
[599]
well as we look at different policies
[601]
if we were to just kind of reverse time
[603]
how much would you want the ability
[605]
to pay into a policy
[607]
if you saw your cash value upfront
[609]
and you could use it
[610]
for real estate right away
[611]
how much would you want
[612]
the ability to pay in
[614]
so you wouldn't have to go through
[615]
those early expenses again?
[617]
Because this policy
[619]
the most you could pay in was $125,000
[621]
if you wanted to pay in more
[623]
what would have to happen?
[624]
Well this is where we'll consider
[625]
another policy
[627]
repeating this process
[628]
which he didn't want.
[629]
So he wanted the ability
[632]
to go up to $300,000 per year
[635]
but he didn't want to get a bill
[636]
for $300,000 per year
[638]
so how we designed this guy
[640]
is with a $30,000 base premium
[644]
is how we design this
[646]
that's what he is committed to each year
[649]
a little bit more
[649]
with his term insurance Rider as well
[651]
but committed to the minimum
[653]
and he has the ability
[654]
to go up to $300,000 per year
[657]
so now he's not billed
[658]
for $75,000 per year.
[660]
So think of it this way
[661]
over here
[662]
he can pay up to $300,000 per year
[665]
but he's only committed to $30,000
[667]
and with this guy
[669]
he's committed to $75,000
[672]
and he paid $125,000 right off the bat
[674]
definitely lopsided
[675]
and that's why you see
[677]
a big difference in the break-even as well.
[679]
So the actual break-even point
[681]
on this guy is highlighted in orange
[685]
but I want to focus on this yellow here
[688]
whenever we look at a 1035 exchange
[691]
what that results in
[693]
is one walking away
[695]
from the payments they made
[696]
into the other policy.
[697]
Meaning
[699]
say at the end of the 1st year
[701]
he exercised a 1035 exchange
[704]
he would have paid in how much?
[706]
$125,000
[708]
and he could rollover
[711]
$82,000 and change
[713]
so if you're the consumer
[715]
and I made that recommendation
[717]
or I mentioned that to you
[719]
what would your reaction be?
[721]
While I roll over the $82,000 Steve
[725]
I paid in $125,000
[728]
what happens
[729]
to the other $42,000 that I paid in?
[733]
Is it just gone?
[734]
The answer is yes
[736]
it's gone
[737]
that's what we like to look at
[739]
when it comes to a 1035 exchange
[741]
there have
[742]
if I were to measure the numbers
[743]
it's going to be close
[744]
but I would bet that there is
[746]
or very close to more cases
[748]
that we have recommended
[750]
not to go forward with a 1035 exchange
[752]
than there have been 1035 exchanges
[755]
because what I want to look at
[757]
is if we walk away from $40,000
[759]
how long is it going to take
[761]
to make up for that lost time?
[763]
In this case
[764]
it made sense because
[766]
the designs were so lopsided
[768]
compared to what he wanted to do
[770]
and what he actually got.
[771]
For example
[773]
what we did here
[774]
cumulative payments
[776]
year 1 we actually made $425,000
[780]
so he paid in
[782]
and this is an assumption here
[784]
$300,000 in this option
[786]
but why we made it $425,000
[788]
is I wanted to account
[789]
for this $125,000 payment as well
[792]
I know we're going deep here
[794]
but I want to factor that in
[795]
to make sure it is in the client's best interest
[798]
if it's not we're going to say hey
[800]
keep this
[801]
we can attempt to make some tweaks with it
[803]
maybe we don't even look at a new policy
[805]
because it just doesn't make sense
[806]
let's see what revisions we can make here
[809]
but in this case
[810]
we did try that actually
[811]
to make revisions with that
[812]
he got a ton of resistance
[814]
because the premium was so high
[816]
so this move ended up making
[817]
the most sense.
[818]
So with that said
[820]
accounting for the additional $125,000
[822]
here's the break-even point
[826]
year 5
[827]
let's look at something else here
[829]
the guaranteed values
[831]
what do we have?
[834]
And this accounts for the $125,000 as well
[836]
the new policy year 6
[839]
with the old one
[840]
what does that look like
[841]
on the guarantees
[842]
which we pulled from that illustration
[843]
we had up?
[844]
When you see yellow
[846]
that's when we break even
[850]
year 24
[852]
policy design.
[853]
Now we always talk about the big 4
[856]
the 4 major mutual companies
[857]
I'm going to add with this small company
[860]
it can be designed
[861]
with a more aggressive split
[863]
than a 10/90
[864]
if actually modeled with this
[866]
the lowest I ever got
[867]
was right around a 3.5% base premium
[871]
and everything else in the
[872]
PUAs [Paid-up additions]
[872]
we had to have a huge term Rider
[874]
and it didn't make sense that case
[876]
but that's as aggressive
[877]
as we were able to design it
[878]
the company will allow it too
[880]
so it's not as if it's just
[882]
performing so badly
[883]
because it's a small company
[885]
no
[885]
it's the design really on this one as well.
[889]
So guaranteed
[890]
non-guaranteed
[891]
when we look at that hit
[893]
and the guarantees
[894]
would be a $49,000 hit upfront
[896]
the question is
[897]
can we make up for it
[899]
make up for lost time?
[900]
And in this case the answer was yes
[902]
absolutely
[903]
based off how he wants
[904]
to fund the new policy
[906]
it would be very similar
[907]
if we were funding it at $125,000 per year
[910]
we would just kick the base premium down
[912]
to $12,500.
[915]
Let's touch on the last thing here
[917]
so the premiums
[919]
on these examples were what?
[922]
$75,000 / $30,000
[926]
Now what I'm going to add here
[929]
is smaller companies
[931]
like this company
[933]
actually pay a commission rate
[936]
of 130% on base premium.
[941]
This company
[942]
as a larger mutual company
[945]
tops out at an 85% rate
[949]
on base premium
[950]
which shows you a lot of times
[951]
the motivation between using a
[953]
large company
[954]
that does offer business
[956]
in the state of New York
[957]
versus one that does not
[958]
a world of difference on the compensation
[961]
just as far as the total rates concerned
[963]
but as I look at this
[965]
what was the base over here?
[966]
$75,000
[968]
so take $75,000
[971]
100% is what?
[973]
$75,000.
[974]
So take 30%
[976]
$22,500 plus the $75,000
[981]
gives you $97,500
[982]
there was a PUA payment as well
[984]
commissions are small in PUAs
[986]
but there are commissions there
[988]
close to a $100,000 commission on this
[991]
that's a whale of a sale
[993]
if you want to use that expression.
[995]
What's it on this guy?
[997]
The base premium was what?
[1000]
And these are estimates
[1002]
the net commissions
[1002]
will be a little bit different on these
[1004]
but still 85%
[1007]
$25,500
[1008]
and you're putting in
[1009]
a significant larger amount of money
[1013]
if you really want to be fair
[1014]
we've got another $270,000
[1017]
toward PUAs
[1019]
and this company pays a 3% rate on PUAs
[1022]
$8,100 add it to the 25,500
[1026]
there you go
[1027]
even if you try and get it closer
[1029]
$30,000 and change
[1030]
compared to the $100,000 policy
[1032]
but which one has a greater
[1034]
consumer value?
[1035]
A big difference there
[1038]
so when it comes to full transparency
[1041]
sometimes it is important to understand
[1044]
how commissions work
[1046]
what's motivating the sale
[1047]
and I'm not saying that
[1049]
all small companies and agents are bad
[1051]
no
[1051]
there's times we work with people
[1053]
and I talk about the
[1054]
4 major mutual companies all the time
[1056]
but we look at the situation
[1057]
they've got an old term policy
[1059]
with a small company
[1060]
we convert that the whole life
[1061]
because it makes the most sense
[1063]
with that small company
[1064]
maybe they can't roll it over
[1066]
or convert it to a larger company
[1068]
and they've got health issues
[1070]
whatever
[1070]
I don't want to go off on a tangent there
[1072]
but if I'm the consumer
[1075]
this is the kind of stuff
[1076]
I want to be aware of.
[1077]
So this individual we're working with
[1080]
he wants awareness on this
[1081]
now he has it
[1082]
and he's set up to succeed
[1084]
he actually sees value
[1086]
right off the bat
[1087]
that he can use for his real estate portfolio
[1089]
he still has that hit right off the bat
[1091]
but still positive way earlier on
[1094]
he sees the value and says okay
[1096]
I got the hit but I'm okay with it
[1098]
because now I actually see it move forward
[1100]
and it's not an $80,000 hit
[1104]
well it is close to that with a 1035 exchange
[1108]
but anyway
[1109]
we can get into the numbers another time.
[1111]
I hope you enjoyed this one
[1113]
if you have questions
[1115]
feel free to reach out anytime.
[1116]
If you enjoyed
[1117]
please hit the like button
[1118]
subscribe for more
[1120]
and we'll talk to you soon.
[1121]
Thanks so much.
[1123]
Hey guys Steve Parisi here
[1125]
if you enjoyed the content you just saw
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[1129]
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