Borrowing from Life Insurance for purchase

[twig]

I used a home equity loan then paid it off as fast as I could.

[Kd9truck]

Cut the amount you need to borrow in half, buy a mono hull. Is someone else paying your premiums? Like folks have said, buy a boat with cash, if you’ve gotta borrow to buy how will you pay for operational costs? there will be plenty of time to get in debt later. Do you have any applicable skill sets? (You will need them). Buy a vessel in neglect of these skill sets at a discount, and get to work, If you are savvy with a wrench, find a vessel with engine problems.

Good boats (all boats) are hard work mate. And expensive. Two boats are 2x the price.

[poseidon2027]

Thanks everyone for all the great responses. After reading through everything though it looks like I definitely need to provide a little more background as I see a lot of assumptions being made.

My plan is to sell everything and go off sailing full time for a few years with my wife. Our kids will be in or out of college by then. We plan to do this in 6-8 years, market depending.

When we sell our homes we will have about 60-75% of the boat purchase price, yes it will be a catamaran, no we will not even consider a monohull so lets please stay on topic in that regard. After retiring we will still have a steady income, so outfitting, repair work, daily expenses etc. will be covered.

I am trying to determine the best way to come up with the remaining 25-40%. I can easily sell some assets and cover this cash but I want to see if there is a better way so I can keep my money working for me. And from the minimal research I have done, some of the options I read about are securities-based line of credit, borrowing from life insurance, equity loan or HELOC, or boat loan.

Securities-based line of credit - this is the route I am leaning towards. I am hoping to have enough in my brokerage to leverage less than 20% to keep risk minimal. I'll be able to make the small interest payments and keep my money making money. I know there is always a risk of a call but I see it is a minimal risk if things go according to plan (famous last words).

Borrowing from life insurance - This is the new idea I heard about on Gone with the Wynns. Its what they did and sounds appealing to me. I dont have life insurance yet but can get one and start funding this for the next 6-7 years until I need to borrow from it. So I would need to know which type to get. If something happens to me, regardless of what happens with the money, my loved ones will be fine financially from all our other assets.

Equity loan or HELOC - Doesnt really appeal to me and I wont have a home anyways so it doesnt matter.

Boat loan - I assume has the highest interest rate, so I would need to see what my monthly payments would be to see if this makes sense. Initial thoughts are that line of credit payments would be cheaper and just makes better sense.

I know this is a lot of new information but I hope it helps everyone see my line of thinking and reasonings. Let me know your thoughts and I'll answer any questions. Thanks for all the help.

[valhalla360]

Originally Posted by flyingw

However, boats in general have gone up 10/20/30% or more in the past few years. So borrowing at even 6% or 8% to buy would have been actually cheaper.

Wild increases in boat values during wildly unusual economic situation of the last few years would imply, boat prices are likely to come crashing back down...making it drastically worse option right now.

[valhalla360]

Originally Posted by captlloyd

If you “ buy term and invest the difference “ you will not need insurance after 70.

The purpose of insurance is to cover a rare financial event that you otherwise couldn't cover.

So once you have enough saved up that you can cover the living expenses of those who depend on your income, you don't need insurance and the administration expenses and profits the insurance company must include, means it's a poor investment.

So if you are in position to retire, you shouldn't have need for insurance as your kids are generally out of the house and you should have enough to cover your spouses living expenses if you die. Unless you have a late life child or other unusual situation, retired folks generally don't need insurance.

[valhalla360]

Originally Posted by poseidon2027

Borrowing from life insurance - This is the new idea I heard about on Gone with the Wynns. Its what they did and sounds appealing to me. I dont have life insurance yet but can get one and start funding this for the next 6-7 years until I need to borrow from it. So I would need to know which type to get. If something happens to me, regardless of what happens with the money, my loved ones will be fine financially from all our other assets.

Whole life insurance (goes by some other names), is basically a two part insurance:
- Part of the premium goes to paying for the actual insurance.
- Part of the premium goes into an investment.

Typically, the early premium payments have little or nothing going toward the investment portion and even when it does, the investment returns tend to be horrible.

So unless you are getting into whole life insurance for some other reason, you may have to spend $300k to get enough for a $30k loan. Far better to just save up the $300k and then spend $30k on the boat.

[wheelerwbrian]

Originally Posted by Panacea2183

BUT!!!
Yes borrowing is always more expensive
To many options to solve by others opinions

It’s not always more expensive. If you have to sell equities instead of borrowing against them, you’ll pay 15% capital gains. It all depends on the rate and time of the portfolio loan, and you’re ability to make the payments in as short a time as possible. It’s math.

[flightlead404]

Frankly I have never been able to figure out the point of life insurance for someone with no non-adult kids/no dependents that are unable to earn their keep (e.g. special needs).

Never had it, never will.

[conchaway]

"If you have nothing, and you borrow; YOU HAVE LESS THAN NOTHING!"

[S/V Illusion]

Originally Posted by flyingw

However, boats in general have gone up 10/20/30% or more in the past few years. So borrowing at even 6% or 8% to buy would have been actually cheaper.


.

Can you (or anyone else) provide any empirical data to verify that claim?

It sounds more like a rationalization by someone who borrowed money to buy a toy.

[Lake-Effect]

Originally Posted by poseidon2027

I am trying to determine the best way to come up with the remaining 25-40%.

Are you intending to buy something new? That you will have to equip? You are likely to lose 20% or more in depreciation and costs the first time you sail it off the dock as owner.

Borrowing from life insurance - This is the new idea I heard about on Gone with the Wynns. Its what they did and sounds appealing to me. I dont have life insurance yet but can get one and start funding this for the next 6-7 years until I need to borrow from it.

From Investopedia:

How Soon Can You Borrow Against a Life Insurance Policy?

You can borrow from a life insurance policy as soon as there is enough cash value built up to take a loan in the amount you need. Depending on how your policy is structured, this can take several years to accrue.

...if I'm reading this right, you can only 'borrow' the extra money you've put into it. So let's add it all up: the expense of life insurance, the tepid investment performance of the extra money... and you're basically borrowing your own money that you already paid in... which won't be that much after 6 or 7 years.

Doesn't make much sense to me; you'd be further ahead by simply saving and investing for that 6 or 7 years til you've acquired the extra money you need.

I suspect you'll find that the folks mentioned who borrowed against whole life plans had been paying into them for decades.

[AKA-None]

If you can afford to buy a full life policy to borrow against would it not make sense to invest it then sell the investments when you need the money?

[S/V Illusion]

Originally Posted by poseidon2027

I am trying to determine the best way to come up with the remaining 25-40%.

I dont have life insurance yet but can get one and start funding this for the next 6-7 years until I need to borrow from it. So I would need to know which type to get. If something happens to me, regardless of what happens with the money, my loved ones will be fine financially from all our other assets..

Interestingly, you neglected to list the one method which makes the most sense - save enough to pay.

Given your 7 year plan, you have plenty of time to accrue enough additional cash rather than borrow.

It makes no sense to fund an insurance policy for 7 years from which you later borrow when you could simply save it in the first place. This all sounds more like a wild scheme to fund a dream without any practical forethought.

[valhalla360]

Originally Posted by wheelerwbrian

It’s not always more expensive. If you have to sell equities instead of borrowing against them, you’ll pay 15% capital gains. It all depends on the rate and time of the portfolio loan, and you’re ability to make the payments in as short a time as possible. It’s math.

At 5% over 4 years, the interest is going to cost you the 15% anyway (or darn close).

If you are only taking out a 6 month loan, it's likely a lot simpler to just save up the extra and pay cash.

Could you find a narrow sliver where it might come out a tiny bit in favor...yeah but once you account for investment risk, it's no longer a good option.

[poseidon2027]

Originally Posted by valhalla360

Whole life insurance (goes by some other names), is basically a two part insurance:
- Part of the premium goes to paying for the actual insurance.
- Part of the premium goes into an investment.

Typically, the early premium payments have little or nothing going toward the investment portion and even when it does, the investment returns tend to be horrible.

So unless you are getting into whole life insurance for some other reason, you may have to spend $300k to get enough for a $30k loan. Far better to just save up the $300k and then spend $30k on the boat.

Ok, this makes sense. Since I would only be funding the insurance for 6-7 years, the balance might not be enough for me to borrow against, makes sense. Thanks for clearing that up.

Originally Posted by Lake-Effect

Are you intending to buy something new? That you will have to equip? You are likely to lose 20% or more in depreciation and costs the first time you sail it off the dock as owner.From Investopedia:

How Soon Can You Borrow Against a Life Insurance Policy?

You can borrow from a life insurance policy as soon as there is enough cash value built up to take a loan in the amount you need. Depending on how your policy is structured, this can take several years to accrue.

...if I'm reading this right, you can only 'borrow' the extra money you've put into it. So let's add it all up: the expense of life insurance, the tepid investment performance of the extra money... and you're basically borrowing your own money that you already paid in... which won't be that much after 6 or 7 years.

Doesn't make much sense to me; you'd be further ahead by simply saving and investing for that 6 or 7 years til you've acquired the extra money you need.

I suspect you'll find that the folks mentioned who borrowed against whole life plans had been paying into them for decades.

I havent decided if it will be new or 2-3 years old. I'll make that decision in a few years. Going to follow the catamaran market in the mean time. I know prices have skyrocketed the past few years. So if there isnt a crash, maybe it'll plateau? Who knows. Point is, I have to wait and see how the market goes then decide. If wait times for new cats are still 2-4 years out ill have to make that decision quicker.

I think you're right that saving and investing will be better than the life insurance route. This makes me think the overall best solution will be to borrow from myself and pay the small interest payments, seems like the best option.

Originally Posted by AKA-None

If you can afford to buy a full life policy to borrow against would it not make sense to invest it then sell the investments when you need the money?

Yup, looks like this is the way. Keep saving and investing then just borrow from myself whatever I need when the time comes.

Originally Posted by S/V Illusion

Interestingly, you neglected to list the one method which makes the most sense - save enough to pay.

Given your 7 year plan, you have plenty of time to accrue enough additional cash rather than borrow.

It makes no sense to fund an insurance policy for 7 years from which you later borrow when you could simply save it in the first place. This all sounds more like a wild scheme to fund a dream without any practical forethought.

Have you been reading anything I write? I have enough cash to buy it now if I want to, but that doesn't make financial sense. I will already be using cash (from the sale of my homes) to pay for 60-75% of it. Taking money out of my investments to buy a depreciating item will lower my principle, thus lowering my compounding interest and lowering income. It is the absolute last thing I want to do. Not sure what makes this sound like a "wild scheme", but maybe you should get out of your appropriately named vessel and do some finance research.