Do you want to learn how to leverage a life insurance policy to buy commercial real estate? How can you benefit from a life insurance policy whilst your still alive?
Cory Wright and Rod McKay are in the studio this week to welcome Robert Trasolini and Laurent Munier of Safe Pacific Financial, here to show you just how easy it can be to use a life insurance policy as an investment vehicle to drive you into the commercial real estate game. We really dive into an industry secret this week, so make sure you are taking notes. Enjoy!
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What is Safe Pacific Financial?
We’ve been in the investment insurance space for over 12 years with a focus on life insurance, mostly working with corporate clients. We’re independent brokers and work with every major insurance company in Canada.
Safe Pacific Financial is based in Vancouver and we really specialize in building high value whole life insurance that you can use as collateral to secure loans. This comes up a lot in commercial real estate.
What is a life insurance policy? How do you build equity with life insurance?
Most people think of life insurance as term life insurance where there’s no investment component or opportunity to build up equity. It’s just insurance. You pay into it and if something happens, the money pays out. If nothing happens, the money is gone.
Permanent life insurance, on the other hand, allows you to build up cash and assets to use for other investment purposes.
Why invest with life insurance?
Insurance has its own tax status in Canada. Life insurance in Canada is tax-exempt and the growth within the policy is tax-deferred. That’s why we use insurance in the first place.
A lot of our commercial real estate clients have a portfolio of a few commercial buildings. As the buildings grow in value, they want to cover the future capital gain from an estate planning perspective. That’s where life insurance comes in.
Not only do these clients want life insurance to help with a future tax bill, but they also want to be able to use their life insurance policy to buy more commercial real estate. They don’t want to lose their liquidity. We’re able to achieve both of those goals with whole life insurance.
Why are life insurance policies tax exempt and secure?
Insurance companies in Canada are actually older than Canada itself. So the Insurance Act is older than the Income Tax Act. Insurance has always been separate and exempt from new tax rules. That’s because we want insurance companies to be profitable and to be able to provide a service for society.
We’re usually looking at a participating whole life insurance policy. The growth within that policy is tax deferred and the money is invested with the insurance company itself. The insurance company then pools all that money together and invests it in very secure investments, such as bonds. These major insurance companies have never missed a dividend payment, even throughout world wars and recessions.
The investment component won’t go down after a dividend is paid. That’s why banks like these policies as collateral against other assets. Banks like them so much that they’ll do a loan to value of 80-100% of the premiums going in. That’s how secure these insurance policies are.
What are the costs for whole life insurance vs term life insurance?
Term life insurance is great and it serves a purpose. But whole life insurance is a completely different thing and you can’t compare them apples to apples.
Term insurance is not an asset. With permanent insurance, that money is going to pay out at some time. There’s intrinsic value. If a client wants to put $500,000 into their whole life insurance policy each year, that money is invested with the insurance company. Most companies are paying a 6% dividend.
So not only will clients receive their 6% dividend but they can then use their insurance policy as collateral with a bank. A bank could then give them a $500,000 loan based on their $500,000 life insurance policy, which they could use to buy commercial real estate.
If you can go onto earn a 6% cap rate with your real estate investment, you’re double dipping on the same money. You have cash in your policy that is earning a 6% dividend and that cash is also leveraged at a bank.
What are the tax implications of inheriting a real estate portfolio?
We’re not accountants so this isn’t accounting advice. But if you held properties within a corporation, there would be a distribution of your shares after you died. It would essentially look like you sold all of your shares, so there would be a capital gain owing at that time. That could be a huge bill. With permanent life insurance, you can start saving for that bill ahead of time.
With life insurance, your policy could pay out upon your death and be used to pay any tax bills. Life insurance paid into a corporation also increases the capital dividend account. That allows the money to go from the corporation to the individuals tax-free. That’s another benefit of permanent life insurance.
What is the timeframe for accessing the liquidity of your insurance policy?
We have clients who put funds into a whole life insurance policy and are able to get a line of credit with a bank just a couple of months later. However, there is an application process with whole life insurance that could take 6-12 months. But after your first time, it’s very quick.
Insurance brokers like us would facilitate this process and put you in contact with banks that will help you secure loans.
Can you also borrow money from the insurance company?
Yes, you can get a loan from the bank or you can borrow directly from the insurance company. It’s a very easy process to borrow from the insurance company but the interest rates are a bit higher and there are some tax implications. But yes, you can borrow from the insurance company or a third party, like the bank.
With the insurance company, the process to request a loan is very simple and they are obligated to give you the loan. It’s also a private, unstructured loan so you can choose how you repay it. They set the interest rate but you set your repayment terms. That can be a huge benefit.
What is infinite banking?
Infinite banking is a book written by R. Nelson Nash. It is the concept of using insurance policies as a lending tool to finance your life. The concept is American but broadly applies to what we’re talking about with permanent insurance.
There are lots of different names for this concept and they’ve all been trademarked – plus the banks have their own names as well. But it’s all about building cash value within your policy and leveraging against it. The concept is the same but the names are all different.