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Thoughts on Whole Life Insurance as an alternative to banking?

Anything related to investing, including crypto

Rabby

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If you were worried about becoming a litigation target, you could stuff some money into single premium whole life.

The cash value and death benefit are sheltered from litigation and creditors. Even if they take everything else, you have paid-for life insurance with no premiums due.

It guarantees your heirs get something. Or you can borrow the cash value. Not that I'm buying one, or selling one.

Downside: It becomes a Modified Endowment Contract (MEC) in the US, which has less favorable taxation features than regular whole life.

@JScott why do you say it's "more expensive?" Do you mean you pay more up front? Anything that isn't financed over time has this feature... when you pay cash for a house, you pay $200,000 on day 1. When you finance it you pay less on day 1, but more over the amortization period.
 
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Rabby

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Did you calculate the calories you burn writing 480 checks instead of one? Kidding.

Fair enough if you have a theory to base it on.
 

Kevin88660

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Usually single premium policies do not have high protection. They are more geared towards cash value.

So a fair comparison would be cash value of single premium premium (low protection) versus the cash value of a regular premium policies. Single premium policies according to my experience actually accumulates return faster. I am in the business doing comparison everyday. The reason is simple. The company pays you more when you are willing to commit your money for a longer period of time (sacrificing liquidity). Think of it as having a 3 years fixed deposit saving versus having a one year fixed deposit saving and auto roll over for the next two years, the former will generate better interest.

The next point is a bit more in depth for those folks interest in the finance business. Insurance companies love selling regular premium. Sales agents have contracts indicating the minimum amount of regular premium sales they have to make every year but never on the single premium ones. The reason is highly behavior. Most clients suffer from sunk cost delusion. They tend to surrender their single premium policies after it has broken even and made money. But having your policy break even at year six and surrender it at year 7 “for a profit” is an enormous bad decision but most people have poor concept about time value of money and they will keep doing this. This leaves insurance company at disadvantaged scenario because after the client surrender his policy he has to make a new sale to continue the business volume (for a product that is ideally designed for a 15-20 years time horizon). This means new administration and distribution cost, a problem that insurance companies do not have to face for regular premium policies.
 

Insurancepro

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Again, if you pay for 30 years and then stop paying, you lose that $500K death benefit, despite your 30 year payment history. You will retain the cash value of the policy.
Very ignorant statement. After 30 years you could have dividends or PUAs cover the premium. You could also schedule the policy to be contractually paid up after a certain number of years. There are also mandatory nonforfeiture options. Assuming didvidends are used to buy PUAs, the dividend in year 30 should be about twice as much as the premium, and the reduced paid up nonforfeiture option should be about 25% higher than the original face amount.
 

Kak

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Very ignorant statement. After 30 years you could have dividends or PUAs cover the premium. You could also schedule the policy to be contractually paid up after a certain number of years. There are also mandatory nonforfeiture options. Assuming didvidends are used to buy PUAs, the dividend in year 30 should be about twice as much as the premium, and the reduced paid up nonforfeiture option should be about 25% higher than the original face amount.

You might want to cool the inflammatory remarks. @JScott is hands down one of the smartest guys on the forum.

As far as life insurance policies are concerned, there isn't much out there I like less as an investment than some blowhard telling people what they're ignorant about.

This seems almost intentionally complicated. Customers are probably ignorant by design.
 
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Insurancepro

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Smart people don't typically make ignorant statements. If he's as smart as you say, I'll recharacterize what he wrote as deliberately misleading.
 
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Insurancepro

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Whoever told him that was stupid. All types of life insurance have the same tax treatment. "I heard a 401k has better tax treatment than a 403b. I haven't looked into it but I thought I would post about it anyway."
 

Kevin88660

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It is not fair to compare insurance products with the performance of equity index because most of them invest in a portfolio that is more focused on bonds.

If you believe that most of your money should be in equity that make you 10 percent a year, it is largely a risk preference.

What I am saying is, if you do an apple to apple comparison, and find a product provider with competitive fee structure, it can save time and provide less risk for a lot of people who are not interested in doing their own investment in the wild wild west.

I just do not agree with the Dave Ramsey BS that insurance is ripping everyone off and everyone will get 12 percent putting their money in U.S. equity. Dave, how about I give you the money and you guarantee me 6 percent return with your property as collateral and you get to keep the rest of the profit. Don’t expect Dave having the balls to do that!
 
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Kevin88660

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If you were referring to my post before yours, I specifically said the S&P Composite index. Not bonds.



As long as your investing horizon is long enough, historically (for nearly 100 years) there is been very little risk in the S&P Composite. Now, you could argue that the future is not indicative of the past, but I could make that same argument against insurance companies -- they may all default and go out of business.

But, if you want to assume that history is a good indicator of future performance, the S&P Composite should return about 10% over any sufficient period of time.



Why do you characterize putting money in a 100 year old equity index to be "the wild wild west?"

I've heard people fear-mongering real estate, crypto, and other asset classes...but the S&P Composite? Come on.



I can't speak for Dave Ramsey, but I don't know too many people who invest in real estate who wouldn't offer you a 6% return with their property as collateral. Most secured real estate lending is at higher rates than that, and I know plenty of very successful investors who would be happy to borrow millions long-term at 6% with property as collateral.

In fact, I'll borrow as much as you have at 6%, secured by real estate...I'll turn around, arbitrage it out at 10-12%, and everyone will be happy! :)
S and P composite is basically pure equity.

What I am saying is, your disagreement with insurance products is largely in you believing in putting your money in pure equity and wait for then to appreciate. Absolutely nothing wrong with that.

My defense of the industry is as follow. Insurance products invest in a mix of bonds and equity, more heavily in bonds. If you compare insurance products versus someone investing in a similar basket of bonds and equity. Insurance products do not really charge you a high fee and diluting your return much, in comparison with the time you saved and the capital guarantee it provides.

The funny thing is, I don’t really disagree on your view in investing that much. I actually advised young clients to put money in equity etfs but they insist to buy insurance products. I shut up then do the deal. But just bear in mind that not everyone is the same.

I think your view is better repositioned that as “ I do not like insurance products because they invest in instruments that are too safe, whereby I can invest in riskier products and have a long investment time horizon and eventually get a superior return.” Well then I do not see any issue with that.

Back to the question on property financing, Singapore banks offer floating rate of about 2.5% per annum. Fixed rate would be higher but the the banks generally do not give fixed rate more than three years. If you can offer 6 percent on secured lending here it will be the money chasing you not the other way. Could you elaborate more the real estate lending in your area?
 

Insurancepro

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Wooooow man! Discounted cash flow... Net present value... Double rainbow.... What does it meeeeeeean? You must have taken at least one college course. You might even own a financial calculator. We're not worthy of such an intellect. So smart and and successful, and still have the time to write such a long post to me? I'm honored.

I'll give you the benefit of the doubt. Please show me where I compared insurance to an investment. Alternatively, please explain why you said that whole life requires that you pay forever. It was either ignorance or deliberate misrepresentation.
 

100k

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Wooooow man! Discounted cash flow... Net present value... Double rainbow.... What does it meeeeeeean? You must have taken at least one college course. You might even own a financial calculator. We're not worthy of such an intellect. So smart and and successful, and still have the time to write such a long post to me? I'm honored.

I'll give you the benefit of the doubt. Please show me where I compared insurance to an investment. Alternatively, please explain why you said that whole life requires that you pay forever. It was either ignorance or deliberate misrepresentation.

Personally, I don't care whether investing your money in real estate or the S&P 500 will give me better return or not.

What I want to know is:

Can I buy a whole life insurance policy, pay only once (i.e $500k or $1 mil.) and never have to pay into it again, have it grow for 30-60 years and in the meantime be able to borrow against the insurance policy's cash value without the net death benefit going down (i.e without losing the power of compounding) so long as I repay the loan with interest.

^^That's what the whole infinite banking is about.

 
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MTEE1985

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This seems almost intentionally complicated.

It seems that way because it is. It’s why we seldom recommend whole life policies. It’s very difficult if not impossible to determine before signing up what % of your premium is being allocated to death benefit vs. expenses vs. cash value.

Now there are some circumstances that warrant it such as ultra high net worth individuals who are looking for a supplemental instrument for gifting to heirs, but I would call this the exception rather than the rule as these folks don’t need cash in the meantime so higher premiums nor a longer timeline don’t affect them. As the article below mentions you need to pay into these policies for roughly 15 years before they begin to be the better choice.

@JScott to your points the chart below is one of the better comparisons I’ve seen comparing different options. Obviously this is leaving out the S&P alternative but figure $5,000/year for 40 years at 10% probably gets you about $2,500,000.

26001


It is not fair to compare insurance products with the performance of equity index because most of them invest in a portfolio that is more focused on bonds.

don’t tell that to my golfing buddy who runs PIMCO’s investment credit bond fund which has returned 7.5% since 2000 while yielding 3.5%.

Bottom line from everything I’ve ever studied and learned is that the policies have benefits for the right people but for probably 95% of consumers, they are not the best choice.
 
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IceCreamAction

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Underwriter here, studying chartered general insurance but actually studied actuarial for life in uni.
My GM always argues with me for taking whole life because of following:

  1. Lets say whole life is $600 vs $150 even $200 premium for term
  2. Basis is you can get a higher return on investing the $400/450 difference than putting 600 a month into a life insurance premium which only really benefits estate competitively compared to investing if you die young.
  3. Ditto on generational wealth and estate planning versus whole life. I consider whole life the lazy route.
  4. Term to 65 is great for someone starting a family and is main breadwinner. I personally consider whole life a luxury.
No matter what anyone says number 2. is correct, if not insurance companies would not make money.
 
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Walka08

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Independent Life and Health Agent here, thought I'd clear up a few things:

Whole life has its place, but do not buy into this infinite banking nonsense. There are much better returns out there and you are trading that for the death benefit and tax treatment.

To protect a new family I usually recommend level term. Its cheap, easy to understand and gets the job done.

Dave Ramsey makes a lot of money from term life insurance advertisers, so his advice is biased against whole life.

There are single premium whole life policies where you make a single up front payment and get a fixed or variable return depending on the type of policy. You can borrow from the cash value like with regular whole life and the outstanding loan + interest would be deducted from the death benefit.
 

100k

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Independent Life and Health Agent here, thought I'd clear up a few things:

Whole life has its place, but do not buy into this infinite banking nonsense. There are much better returns out there and you are trading that for the death benefit and tax treatment.

To protect a new family I usually recommend level term. Its cheap, easy to understand and gets the job done.

Dave Ramsey makes a lot of money from term life insurance advertisers, so his advice is biased against whole life.

There are single premium whole life policies where you make a single up front payment and get a fixed or variable return depending on the type of policy. You can borrow from the cash value like with regular whole life and the outstanding loan + interest would be deducted from the death benefit.

I've spent a little more time looking into this whole life insurance stuff for family banking and correct me if I'm wrong but;

you can buy a high-cash value mutual whole-life insurance policy that allows you pay premiums for around 7-10 years, and after that you can decide to stop paying into it because - you also earn dividends (because its part of a Mutual) and those dividends can be used to cover your premium costs.

On top of that; you're able to borrow against the cash value - however you must pay it back with interest (ideally one higher than 5%) and keep the policy in tact, and should you fail to pay back the loan, then what you owe will be deducted from your policy when you pass away.

View: https://www.youtube.com/watch?v=AaT5v6tY9Sw


View: https://youtu.be/_Jea0lRiQB0?t=285


View: https://www.youtube.com/watch?v=DsTnuoAXMNk
 

fluffhead

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This is a very interesting concept to me as I continue down the path of financial freedom...

To set the stage here, I am about one thing and one thing only...finding the most efficient way for me to earn the highest risk-adjusted return on my capital possible.

I get what @JScott is saying here...historically speaking the S&P earns 7-8% per year on average. That far outweighs the 3-5% a whole life policy offers. So in theory (and I haven't ran the math myself), but the combination of term life insurance + investing the savings (versus whole life premium) into the S&P would offer superior returns.

The first thing I noticed here is that the 7-8% is pre-tax gains versus the 3-5% (which [and again I'm no expert] whole life return which is tax free?). Post-tax it would seem that the returns are very similar in nature. Another thing to consider are the diversification benefits here. A portfolio that encompasses both direct equity investing and whole life "investing" likely offers diversification benefits that aren't being touched on here. Finally, the loan aspect of whole life is intriguing. I can take a loan out of the policy while not impeding my returns. This compares to direct equity investing whereby if an emergency arises (or I want to invest in real estate), I need to sell my position which comes with tax implications and I give up the 7-8% annual returns.

Please correct me if I'm wrong with any of this, as again I'm no expert. Assuming I'm right, it seems like there are some hidden benefits to whole life that this debate is missing.

The only other "cost" here would be opportunity cost. I could take the $50k I've paid into this policy that's earning 4-6% and put it into an income producing rental property, which in all likelihood would yield me much more attractive returns and offer similiar-ish characteristics (home equity line on portfolio, cash our refinance). For me, all roads lead back to real estate investing but I'm also starting to consider diversification benefits.
 
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fluffhead

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This says nothing about passivity. Assuming that's the case, the best risk-adjusted returns will likely be generated through active income strategies, like starting your own business. If you're shooting for more passive (but not completely passive), that's when you should consider real estate strategies such as buy-and-hold (triple-net probably has the best risk-adjusted returns) or lending.

Agreed. Just read a pretty telling article that backs what you're saying. The upfront fees kill your IRR. The article I saw suggested that the cash balance at the end of year 7 was about 50% of what he paid in premium...that doesn't seem like a sound investment to me!

Not to hijack the thread at all, but where does one put assets while accumulating for a real estate purchase. I save all year and then once I hit a certain # I can allocate to REI, but how do I maximize my gains while I'm in the accumulation period?!
 

Tom H.

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Sorry for resurrecting an old thread, I want to chime in because I'm a regular guy (not a financial professional) with a whole life policy.

My policy is structured for cash value, it's intended function is to act as a savings account more than anything else. The policy costs me money for the seven years (if you ignore that I am also buying the death benefit for my young family), it starts showing a positive return in year 7 and then increases by a guaranteed 4-5%. This is ignoring that it's a mutual company that pays a non-guaranteed dividend on to of the guaranteed returns. At some point around year 10 (I think), the expected dividends should cover my premiums.

I'm not interested in maximizing my return or building wealth through investment, I'm interested in safety and minimum risk.

My choice to use a whole life policy is largely influenced by my personal politics (or something like that). I don't trust banks, I don't trust Wall Street, if I could I'd keep all of my wealth in precious metals and similar assets. Since I do need financial services, I prefer to do business with a mutual insurance company that has been around since the 1800s.

I like that there are no tax complications to figure out with my policy and there are no assets, just a contact that guarantees I can borrow money at a prime rate, anytime, no questions asked. Also repayment of the loan is totally up to me, I don't need to replay if I don't want to i.e. I can spend it on retirement or emergency, don't have to wait to die to cash out.

I'm sure there is more money investing in equities, but that's not what I want to spend my time doing, and my goal is just to have an alternative to a savings account so that I have access to funds for entrepreneurial projects.

---

I want to mention a concept I didn't see in the previous discussion: all money your spend is financed. You either borrow and pay a fee, or spend your savings and forego earning a fee. With the whole life policy, it's like savings, but you never diminish your principal like you would with a savings account.

Well, my 2 cents!
 

Tourmaline

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I've been researching building your own bank as well.

Everyone comparing using a life insurance policy as a bank and comparing it to investing seems to be missing the point.

The point is to:
A. Be able to finance anything your self, on your repayment terms, and capture some of the interest that would otherwise go to a bank. It gives a large amount of financial freedom.
B. Have a vehicle that guarantees growth of investment. Yes there are fees up front, but typically by year 7 the policy will pull ahead compared to bonds.
C. Not lose out on the opportunity cost of spending money - e.g. Buying a car in cash means the cash cannot appreciate.
D. Tax advantages, protection from creditors/being sued, with a perk of death benefit too.
E. After a long enough time you can make the policy pay for its premiums too.

One thing I've recently been wrapping my head around is that there is no guaranteed rate of appreciation of the cash value of a policy. But that it will appreciate is guaranteed. Cash value is tied to the present value of the death benefit, it's not appreciation based on any securities rather it's appreciation based on inherent value of the policy itself.

It's kinda like bonds in a sense? The present value of a bond is a reflection of what a bond will be worth when it matures. The cash value of a policy is a reflection of what the policy will pay out upon death.

I'm interested in if anyone else has actually implemented this.

I find it super interesting that the super rich take advantage of whole life insurance policies too!
 
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Tom H.

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I've been researching building your own bank as well.

Everyone comparing using a life insurance policy as a bank and comparing it to investing seems to be missing the point.

The point is to:
A. Be able to finance anything your self, on your repayment terms, and capture some of the interest that would otherwise go to a bank. It gives a large amount of financial freedom.
B. Have a vehicle that guarantees growth of investment. Yes there are fees up front, but typically by year 7 the policy will pull ahead compared to bonds.
C. Not lose out on the opportunity cost of spending money - e.g. Buying a car in cash means the cash cannot appreciate.
D. Tax advantages, protection from creditors/being sued, with a perk of death benefit too.
E. After a long enough time you can make the policy pay for its premiums too.

One thing I've recently been wrapping my head around is that there is no guaranteed rate of appreciation of the cash value of a policy. But that it will appreciate is guaranteed. Cash value is tied to the present value of the death benefit, it's not appreciation based on any securities rather it's appreciation based on inherent value of the policy itself.

It's kinda like bonds in a sense? The present value of a bond is a reflection of what a bond will be worth when it matures. The cash value of a policy is a reflection of what the policy will pay out upon death.

I'm interested in if anyone else has actually implemented this.

I find it super interesting that the super rich take advantage of whole life insurance policies too!
Your point "C" is one I try to point out to people. When you take a policy loan you don't diminish your principal.

I will look at my illustration and try to think about your question regarding cash value appreciation. I believe my illustration is based on the assumption that I max out paid up additions, with a guaranteed appreciation of 4%. Then my cash value is a combination of some percentage of my normal death benefit, plus 100% of PUA. The PUA is what makes the whole thing function as your own "bank".
 

FastLaneSoCal

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Your point "C" is one I try to point out to people. When you take a policy loan you don't diminish your principal.

I will look at my illustration and try to think about your question regarding cash value appreciation. I believe my illustration is based on the assumption that I max out paid up additions, with a guaranteed appreciation of 4%. Then my cash value is a combination of some percentage of my normal death benefit, plus 100% of PUA. The PUA is what makes the whole thing function as your own "bank".
I will chime in here and mention some of what I do with and for clients. This is informational only and I am not trying to change anyone's mind or sell anybody anything. I don't care if people agree or disagree with this approach, but figured I might be able to add some clarity for those fortunate enough to have built substantial wealth or on the road to doing so. I have found much value from others' posts here, so perhaps I can share some myself.

In this environment of huge deficits - damn near close to $28 Trillion and climbing...

https://www.usdebtclock.org/

we feel higher taxes (income, cap gains, estate) are inevitable since our politicians will never stop giving out handouts and will definitely not end social security, medicare, medicaid.

So, we seek out any tool available to plan and mitigate taxes whenever possible. Permanent life insurance has some of the best tax treatment of any vehicle: tax deferred growth, Income tax free death benefits to heirs, and tax-free distributions (since they are taken as loans). Notice I said permanent, not Whole Life (which is only one form of permanent life insurance).

There are two areas where we use life insurance (other than coverage for untimely death):

1) Massively over funding policies to accumulate large amounts of cash to taken out tax-free 10-15 years later (allowing for some great compounding) for a variety of purposes - retirement income, travel, long term care needs, etc...The products we use are more flexible than whole life, allow for some nice potential upside linked to various equity indexes, while not participating when those indexes are negative for a given year. The power of this compounding, uninterrupted by negative returns is very real. When taking the money out there is no tax - since it is a policy loan so not income. The KEY is that while the money we take out is charged interest, that interest is paid by other cash in the policy AND the amount we take out will still earn investment credit. So, we play the arbitrage of paying interest of 5% on tax-free withdrawals and earning something above that (close to 2% spread since I have been working with these).

We are essentially just "borrowing" the life insurance chassis to take advantage of the tax benefits and thus efficiently design policies to have as little death benefit as possible (before becoming a MEC which is taxed differently). It is akin to a Roth IRA - but my clients and most of you on this forum make too much money to put money into Roth IRAs and even so the contribution limits are really low.

2) Buying huge policies in various efficient ways to provide tax free liquidity to heirs upon death - or 2nd death if a married couple. While the estate/gift tax exemptions are currently $11.7 Million per spouse...it is highly likely these will be greatly reduce - perhaps even this year. Any assets over and above these exemptions are subject to 40% Federal estate tax which is due from the heirs 9 MONTHS LATER AND MUST BE PAID IN CASH. This is where the life insurance comes - instant liquidity to pay these taxes so illiquid assets (real estate, closely held businesses) don't need to sold to pay the bill.

Some of my clients are working with attorneys to proactively gift some of their assets to Dynasty trusts which are irrevocable and for the benefit of their kids/grandkids. Believing the $11.7 Million exemptions will be reduced, they are using the exemption for gifting during life. This is complex with many moving parts, but a sounds strategy for the right person/family - especially when gifting assets which will appreciate significantly...because those assets will now appreciate "outside of the estate"...

For those assets left in their estate we calculate what they might conservatively compound at and then make an educated guess where estate tax exemptions and rates might be and then design strategies to ensure the liquidity will be there at the time the heirs need it.

When the solution is life insurance we often take advantage of low interest rates by borrowing at very low rates to pay huge premiums for short periods of time (typically 10 years). There are some great lenders making these loans and since they are 100% collateralized at all times - through the death benefit or a combination of the cash value and and liquid accounts) and thus lend at attractive rates 12 month LIBOR + a spread. Currently around 2.65% right now.

Most of my clients are wealthy and entrepreneurial and very focused on IRR. So while they "could" make huge premium payments they prefer using leverage when it makes sense. In this case they feel good about using OPM (other people's money - in this case the banks/lenders) and having those dollars put into a vehicle which has comfortable averaged well over 6% for decades - thus arbitrage. They often know what their own IRR is meaning what they can earn by reinvesting in their business, or real estate. So, not only are they very likely going to earn a spread of a few % over their loan amounts, they don't have the opportunity costs of using large amounts of their money for insurance premiums and can earn at their own favorable IRRs. (The do usually pay some amount for interest out of pocket, but it is very small as a percentage of premiums). Ultimately, the loans will usually be paid back from cash out of the policy perhaps 15 years later or so.

In some cases, clients will write off interest on these loans by classifying them as "special purpose loans" for their company...but I let them decide that with their CPAs. I have heard arguments for and against this being legitimate so I stay away from advising in this area where I am unqualified...

For anyone still reading, I may have spurred more questions than providing answers. I would just caution anyone from expecting to use GOOGLE to find quality advice on any mainstream financial topics. The "Script" as @MJ DeMarco would say is to max out your 401k, use over the counter mutual funds or index funds, buy term if life insurance is needed or whole life to "be your own bank". None of what I do will be easily found in a Google search and there is much complexity - including quality of lenders, insurance companies, client suitability, understanding risk, conservatively projecting, etc...

I tell my successful friends/clients that they are the 1% of the 1% the wealthy (which they truly are in a global perspective) and to use "solutions" peddled to the masses easily found on the internet b/c of SEO means they are missing out on ideas and strategies available to them because of their wealth and success.

Whatever you do, keep an open mind and don't blindly accumulate and invest without factoring in in income and possibly estate taxes on your future wealth. Thanks to MJ and many others for creating and cultivating this "most excellent" forum. (spoke in my best Keanu Reeves voice from Bill and Ted's Excellent Adventure)
 

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