“If you must play, decide upon three things at the start: the rules of the game, the stakes, and the quitting time.” — Chinese proverb

Get QuoteSo last week, Tony Forcucci at The Anthidote Report left this interesting comment on my Sitting Pretty post that mentioned the debate between Term Life insurance vs. Whole Life insurance. If you don’t know the difference between these two insurance products, then click here for a primer.

There are two schools of thought and I personally, subscribe to Suze Orman’s team with regards to term life insurance. She advises, “Keep it simple and buy term life insurance; it’s good only for a specific number of years and then expires. That’s okay — life insurance wasn’t meant to be permanent; it’s there to protect your family before you’ve had a chance to accumulate enough funds (through investments and savings) to do so.

But Tony provided a different perspective that I had never heard of or considered. I’ll let you read it first and then I’ll add a few comments below.

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First of all, I’d like to say up front to my comment that I do not sell any financial products nor do I sell life insurance. I am NOT in that business. I also recommend that anyone reading this go to their professional financial advisor for advice and not rely on this below comment as coming from someone in that line of work – I am not. Having said that I’d like to shine a light on something you may not have ever been explained about Whole Life Insurance.

Most people do not know how to approach or USE this product in the right way. There is a concept known as the velocity of money. The idea here is to use the same dollar 3, 4, 5 times. A way (maybe the best way) to do this is to do it through Whole Life Insurance. Look here:

What does a bank want? Your money. How much of it does it want? As much as possible. For how long does it want it? For as long as possible. Keep this idea in you mind as you read the below.

Most people in their 20’s or 30’s look at life insurance the wrong way – they want as much coverage for a little as possible. The reality is however that statistically speaking the chances of you dying at this age are pretty low. What you need in this stage of life is financial power to build upon. Here is how you use Whole Life Insurance to pump up your ability to grow your net worth.

Open up a $500,000 or a $1,000,000 policy and this will cost you about $6,000 to 10,000 per year in premium. Let’s use the $1,000,000 policy for my example.

In five years time, how much have you put into a Whole Life policy? $10k x 5 = $50,000. For the first 5 years, your cash value is always worth less than the amount you put in. But around year 5 or 6 it breaks even then continues to grow. OK. Now the way to approach this is to not only put in your $10,000 premium but to double fund it and put in an additional $10,000 per year (all of which is always immediately yours at full value). This is called a PUA (Paid Up Addition). Now after 5 years you’ve got $100,000 in your life insurance policy (cash value). What now?

You can borrow against this without touching your specific money. You borrow against this to purchase appreciating assets (a rental property for example).

When you borrow money from your policy you have effectively become your own bank. So let’s say your borrow $20,000 to get into a $200,000 rental. The interest rate may vary from company to company but the policy I’m familiar with lends money at 8% and rebates back to you 7% for a net cost of 1% money. Remember – you are not using your money from the policy, it is coming from an enormous pool of billions of dollars. This means you borrow at 1% while your policy money continues to work for you. You buy a rental for $20k down on $200k property. Even if this property appreciates at the rate of inflation (3%) you are ahead of the game 2%.

Buy let’s say you rent this property – now you’re doing great. On top of that you get to depreciate this property. Now you’re doing really great. Now let say this property in 5 years is worth $300,000. You are up big time all using the same dollar 3-4 times. You leveraged the purchase, you borrowed at effective 1%, you rented it, you depreciated it, it appreciated, and you sold it for a profit. It all started because you “super-funded” your whole life policy and used it as the way to acquire property, all the while maintaining its ability to continue to grow for you.

You can do this more than once. Later on in life, when you actually NEED a death benefit, the policy is worth quite a lot and when you start making withdrawals, the money comes out Tax Free (unlike many retirement vehicles such as a 401K or a traditional IRA).

The up front sacrifice is no doubt hard ($20k per year for 5 years) – but why would you want to give your money to an institution that will not let you have it back for 30/40 years? They are using your money to do exactly what I explained you can do with it.

Suze Orman and company are against a Whole Life policy because most people do not have the up front kind of money it takes to make this worthwhile (a $1,000 annual premium is not gonna cut it if you want to be serious about this). Plus Suze is certainly against the up front big commissions the salesman makes. But who cares? Look what you can do with just 5 years of putting your nose to the grind.

There are different ways of looking at wealth planning and as I said up front, you nor your readers should rely on my two cents as replacing professional guidance in this area — it’s just something I’ve come across in my world that I’d thought I’d share with you.

Tony Forcucci
The Anthidote Report

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Tony makes some valid points but I’m still skeptical. I would like to read the fine print of the company’s policy that lends money at 8% and rebates back to you 7% for a net cost of 1% money. That seems too good to be true. Let’s assume this was true then I like his “use money to make money” approach by borrowing against the policy to purchase appreciating assets, specifically rental properties.

But borrowing could be tricky so I would caution people to read the fine print and do their research. Kathy M. Kristof at The Los Angeles Times warns readers: Borrowing From Life Insurance Can Have Dire Consequences. Click on the article to find some horror stories that will scare anyone.

At MoneyInstructor.com you’ll find the same cautionary tone but agree that it’s an option if you need the money. They write:

“If you do have enough equity in your life insurance policy, you may be able to use it as collateral for a loan, or cash it in outright. As a loan, you must pay it back as you would any other type of loan. Because the loan is secured against a solid asset however, you are likely to be able to get an attractive interest rate, and this may offer you a major advantage”

“The first thing to consider is the cost of money. If you are in need, what are the alternatives to leveraging your life insurance, and what will those alternatives cost? If your credit is sterling enough and you can obtain a low-interest signature loan without using your life insurance as an asset, then take the signature loan and leave the insurance policy unencumbered. However, if the only way you can raise money is by getting advances on credit cards that carry interest rates of 18 to 24 percent, it’s likely you’ll be better off borrowing against your life insurance.”

“When you first purchase your life insurance policy, think ahead and decide whether you may need to borrow against it in the future. Policies will differ, but most will have a loan clause that will allow a loan to be taken against it for as much as 90 percent of the policy’s cash value.”

But the above is not an apples-to-apples comparison. Needing money is different from leveraging money and this is Tony’s point. I agree with him in principle, I’m just still skeptical in his specific approach. However, his idea makes me consider how my money is working for me and I’m in favor of people broadening the scope of this conversation.