Today, I want to dive deep into two of my favorite assets: life insurance and real estate. I’ll explain why these two asset classes are fundamental to my strategy and how they share remarkable similarities.
The Versatility of Real Estate and Life Insurance
In previous episodes, we’ve explored various asset classes, including real estate, businesses, paper assets, and commodities. While all of these have their place in a diversified portfolio, two assets that I consistently rely on are real estate and life insurance. Specifically, I use life insurance as a vehicle for warehousing my cash. It’s a core component of my strategy for becoming my own bank. My liquidity resides in a dividend-paying whole life insurance policy, overfunded and structured with a mutual insurance company.
Now, you might wonder, “How are these two assets—real estate and life insurance—similar?” Let’s break down the key ways in which they align and why I consider them both essential to a robust wealth-building strategy.
How Real Estate and Life Insurance Align
1. Structured Payments and Ownership:
- When you purchase real estate, you typically take out a mortgage and make payments until you own the property outright. Once you’ve paid off the mortgage, you own the real estate free and clear.
- A life insurance contract works similarly. You can structure a whole life insurance policy to require a set number of premium payments over a certain period—5, 10, 20, or even 30 years. After that, you own the policy outright, free and clear.
2. Appreciation in Value:
- Real estate is known for appreciating over time. If you’ve invested in a rental property or commercial real estate, the value can increase based on market trends and property improvements, which can significantly boost your equity.
- A well-designed, overfunded whole life insurance policy also appreciates in value every year. The death benefit and cash value of the policy grow over time, offering predictable and steady growth.
3. Building Equity:
- As you make mortgage payments on a piece of real estate, you build equity in that property. This equity can be accessed through a home equity line of credit (HELOC), allowing you to use the value you’ve built up without selling the property.
- Similarly, with a whole life insurance policy, each premium payment builds cash value, which you can access through a policy loan. This loan allows you to borrow against the equity of your policy while still keeping the policy in force.
4. Accessing Liquidity:
- Both real estate and life insurance offer the ability to leverage your equity without needing to sell the underlying asset. With real estate, you can take out a HELOC, and with life insurance, you can access a policy loan.
- One key advantage of life insurance over a HELOC is stability. In times of market downturns, banks may freeze or reduce HELOCs as real estate values decline. In contrast, the cash value of a life insurance policy remains stable, even during economic uncertainty, making it a more reliable source of liquidity.
5. Cash Flow Generation:
- One of the greatest appeals of investment real estate is the potential for positive cash flow. After covering all expenses like mortgages, maintenance, and taxes, the income left over from rent is cash flow that you can use or reinvest.
- With life insurance, cash flow comes in the form of dividends. When mutual insurance companies pay out profits, they distribute dividends to policyholders. These dividends are often tax-free and can be used to increase the policy’s cash value, withdrawn, or reinvested elsewhere.
6. Tax Benefits:
- Real estate offers numerous tax advantages, such as depreciation and the ability to defer capital gains through 1031 exchanges, which allow investors to transfer equity from one property to another without immediate tax consequences.
- Life insurance policies also offer impressive tax benefits. The money you put into a whole life policy grows tax-free, and dividends are also tax-free. When you take a policy loan, it’s not considered taxable income, and the death benefit is typically paid out tax-free to beneficiaries. Additionally, you can execute a 1035 exchange to transfer funds from one life insurance policy to another, maintaining the tax-deferred status.
7. Asset Protection:
- Properly structured real estate investments can offer some asset protection benefits. With the right legal structures, such as LLCs, you can protect yourself from certain liabilities.
- Life insurance policies often come with asset protection features as well. In many states, the cash value within a whole life insurance policy is shielded from creditors, providing an added layer of security.
8. Retirement Income and Exit Strategy:
- Real estate can serve as a source of retirement income. Investors can live off the cash flow generated from rental properties or, in some cases, use a reverse mortgage to access the equity in their home.
- Life insurance also offers a way to create tax-free retirement income. Through a whole life policy, you can access your accumulated cash value and set up a private “pension.” This allows you to draw down on the policy in retirement without incurring taxes.
9. Liquidity upon Exit:
- When you sell a piece of real estate, you generate liquidity that you can use for other investments or expenses. The same applies to life insurance, where the policy’s death benefit creates liquidity for your estate when you pass away.
- With proper estate planning, both real estate and life insurance can be passed on to beneficiaries, ensuring that your wealth continues to benefit your loved ones after you’re gone.
10. Leverage Opportunities:
- Banks are often eager to lend against real estate because of its tangible value. Similarly, banks will lend against life insurance policies through premium financing. For individuals with certain net worth and income levels, banks will even lend money to pay premiums on high-value policies.
11. Transferability and Sale:
- Real estate investments can be sold, and mortgage notes can be traded. Life insurance policies also have a market for life settlements or viatical settlements, allowing policyholders to sell their policies to investors.
Why These Assets Are Core to My Strategy
The similarities between real estate and life insurance make them ideal partners in a comprehensive wealth-building strategy. They both offer opportunities for steady growth, cash flow generation, and tax advantages, and they both provide a level of stability and predictability that is essential for long-term financial security. By using life insurance as a liquidity warehouse, I can take advantage of these benefits while keeping my cash accessible for investment opportunities in real estate or other ventures.
I’m a firm believer in the power of real estate as a wealth-building vehicle, and I’ve witnessed firsthand the potential of life insurance to provide security, liquidity, and growth. Each of these assets plays a critical role in my overall approach, allowing me to maintain flexibility and control over my financial future.
Crafting Your Own Path to Financial Freedom
Real estate and life insurance are powerful tools in building a stable and prosperous financial future. Each offers unique advantages, yet they share many core characteristics that make them ideal for long-term wealth creation. By understanding how to leverage these assets effectively, you can create a resilient strategy that provides both immediate cash flow and long-term growth.
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Disclaimer and Waiver
Michiel Laubscher & Laubscher Wealth Management LLC is not an investment advisor and is not licensed to sell securities. None of the information provided is intended as investment, tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other offerings. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information contained herein is at your own risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Michiel Laubscher & Laubscher Wealth Management LLC does not promise or guarantee any income or specific result from using the information contained herein and is not liable for any loss or damage caused by your reliance on the information contained herein. Always seek the advice of professionals, as appropriate, regarding the evaluation of any specific information, opinion, or other content.
