Infinite banking. That's what it's called. When you use a dividend paying whole life insurance policy to fund a purchase or investment. In this case, you might choose to use funds from the insurance policy to buy luxury property.

Obviously, in order to utilize this method, you—or your family—must have saved and capitalized the policy over time. Simply stated, dividend paying whole life is more than just insurance. It's a way for you to borrow from yourself.  So you can pay yourself—instead of giving your hard earned money away to the banks.

Here's a quick summary on using your (or your family's) dividend paying whole life insurance policy to fund the purchase of a luxury residential property. Specifically, I’m referring to the tax consequences here. Note: I'm not a tax accountant, so please review with your tax advisor.

But here's the synopsis.

For simplicity, I’m segmenting this discussion into three buckets (or scenarios) so you can understand and choose what's best.  

The dollar amount can be anything.  But in this example, let's assume the home purchase is for $400,000.

 

Scenario 1:

Person A has a dividend paying whole life policy; let's assume with a cash value of at least $400,000. In this case, let's assume Person A is you. Person A (you) borrows $400,000 from your dividend paying whole life insurance—and you buy a home to live in. Each month, you pay back the whole life policy with principal and interest. The interest returns paid back to the insurance policy are not taxed to you, and therefore your policy continues to grow tax free. No different than the way dividends earned in the policy each year continue to grow tax free. This assumes the insurance company assesses no costs against you to incur the borrowing.

Scenario 2:

Person A has a dividend paying whole life policy; with a cash value of at least $400,000. Person A loans money from Person A’s policy to Person B who intends on buying a house. Let's assume Person A in this scenario is your father. And let's assume Person B is you. Person A (your dad) borrows $400,000 from his whole life insurance policy; and then loans it to you for the acquisition of a home (the collateral is the property).

When Person B (you) makes a payment each month, the payment is made back to the insurance policy thru Person A (your dad). That's the subtle twist. Because Person A is receiving the interest income, and then subsequently directing it back to the life policy, Person A will have to pay tax on the interest earned off Person B.

However, if it could be argued that Person A borrowed the money from the insurance company for investment, Person A might be able to deduct the interest which Person A is being charged by Person A’s own insurance policy. This interest would be known as “investment interest.” Because the funds were used by Person A to invest in a real-estate-backed mortgage note.

Basically, for this second scenario, and for tax purposes, your dad is a middleman between Person B (you) and his insurance policy.  In each situation, you should consult with your tax advisor as to whether the interest charged to Person "A"—by their policy—is deductible.

Scenario 3:

Person A has a dividend paying whole life policy. Person A can assign ownership to Person B. Person B could then borrow from the policy as its owner. This could convert a “Scenario 2” situation to a “Scenario 1” situation—and better income tax consequences. The problem with this “Scenario 3” is (i) there may be adverse gift tax consequences to Person A (which you and your dad should discuss with your tax advisor) and (ii) Person A may not wish to surrender ownership of the policy.

In summary: if you intend on borrowing money from a bank when you buy luxury property, then you might consider using the stored cash available in your whole life policy instead.

If you're in the market to buy luxury Chicago property like a pro, then feel free to contact us for your risk-free consultation.  I'll be waiting for you here.