Borrowing from Life Insurance for purchase

[poseidon2027]

I know my title says borrowing from life insurance but this may be more about the generalities of acquiring the funds for a catamaran purchase. I was just wondering what some options are that people use for getting the monies. For examples, the Wynn's (from Gone with the Wyn) said they borrowed from their life insurance policy. Im really hoping someone could shed some light on this as I had never heard of doing this before.

Then, Seth from the Sailing Family, said he borrowed against his portfolio. I've done a little research into this and am also looking at this option.

Finally, I found a little information on a boat loan. This seems like the worst ides because of interest rates.

So basically, I was just hoping you more experience sailors could give me a little information on borrowing from life insurance or other ideas I may not know about.

Thanks for all the help!

[valhalla360]

Went with cash. Figure if we can't afford to come up with the cash, likely can't afford such an expensive boat.

Life insurance implies you have a large whole life plan that you have been paying into for a long time (generally a horrible plan to begin with). If you have simple term insurance, there is no borrowing.

If you have a 401k, you might be able to borrow from it but it comes with big risks. If you lose your job, the loan comes due immediately and if you don't pay it off, it's considered a disbursement with income tax and 10% penalty due...just what you want when you just lost your job.

How big of a loan are you looking at?
What is your income situation?
Will your income situation stay the same when you start cruising?

[5BTM]

Borrowing " against" the cash value of a life insurance policy is paying interest to get your own money.

I don't have a portfolio, drive a 13 year old Dodge, live in a house bought 38 years ago, you can say my best investment has been using the same crapper for 38 years.

Took $18K of play money and bought the boat, don' really care if I overpaid or not.

[S/V Illusion]

As others implied, borrowing for a depreciating asset makes no sense. Borrowing against life insurance is jeopardizing your family’s welfare over a toy.

[leboyd]

Cash value life insurance are policies that earn a return. It could be a "whole life" policy, a "universal life" policy, a "variable universal life" policy or an "indexed" policy. Each have their own pros and cons. As previously mentioned, if you don't have one or have a new one, then you don't have enough cash value to make a difference.

For investments, there are two options. One, as also previously mentioned, some companies allow you to borrow against your 401(k) investments. The other is to borrow against a brokerage or managed account. Again, you have to have enough invested to borrow enough to buy a boat/car/anything. Your investments are collateral against the loan (like a house against a home loan). If the value of your investments drop, it's possible that the lending company will require cash from you to put into the account or to pay down the loan.

You definitely need to speak with a financial advisor before you do either of these.

[flightlead404]

Originally Posted by poseidon2027

I know my title says borrowing from life insurance but this may be more about the generalities of acquiring the funds for a catamaran purchase. I was just wondering what some options are that people use for getting the monies. For examples, the Wynn's (from Gone with the Wyn) said they borrowed from their life insurance policy. Im really hoping someone could shed some light on this as I had never heard of doing this before.

Then, Seth from the Sailing Family, said he borrowed against his portfolio. I've done a little research into this and am also looking at this option.

Finally, I found a little information on a boat loan. This seems like the worst ides because of interest rates.

So basically, I was just hoping you more experience sailors could give me a little information on borrowing from life insurance or other ideas I may not know about.

Thanks for all the help!

Borrowing money for toys is a bad choice period. If you can't pay cash for your toys you can't afford them.

If you don't have kids, if your spouse is able to take care of his/herself you don't need life insurance. Borrowing against any sort of retirement savings esp something like a 401(k) is a terrible idea.

Pay cash (or equivalent) for almost everything in life, bounce your last check to the undertaker.

[grantmc]

I'm definitely in the camp that boats are toys and so you buy one with hard earnt cash. The idea of borrowing to buy a boat just baffles me.

Borrowing against a life policy, usually a whole of life, is a commonly offered option. But in my view it's like a pay day loan, a loan of last resort. Something really horrible has happened, and you need cash real fast.

Also if going down the life policy borrowing path, check the policy very carefully (or better yet have a lawyer check it) and find out the consequences if death does occur whilst there's a loan against the premiums.

[captlloyd]

Originally Posted by 5BTM

Borrowing " against" the cash value of a life insurance policy is paying interest to get your own money.

I don't have a portfolio, drive a 13 year old Dodge, live in a house bought 38 years ago, you can say my best investment has been using the same crapper for 38 years.

Took $18K of play money and bought the boat, don' really care if I overpaid or not.

Nailed it ! The only life insurance policy you should have is a “ Term” policy, no investment or savings component involved at all. Whole Life is the insurance industries equivalent of the “ Shell game”.

[Panacea2183]

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

Best advice is don’t over extend yourself
Second best advice, don’t put off your dream
To many people wait to long, next thing you know, health and life get in the way.

Spent 4 seasons cruising Bahamas (6-7 months per year) best time of my life and no regrets. Recently sold the boat. All good

It’s definitely an expense and NOT an investment
you did not mention if your a newbie or seasoned boater
If your new to larger boats, Please get your feet wet first, if you make a budget, multiply it by 2.5 **** happens and your estimates are always low.
Good luck and safe travels, don’t let nay sayers stop your dream!

[sail sfbay]

Go to your local or on-line marine loan broker. I did that for 2 boats with loans > $150,000 and the rates were very low. They got me qualified in less than 24 hours.

[flyingw]

Originally Posted by Panacea2183

BUT!!!
Yes borrowing is always more expensive

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.


Every year is different and everybody's finances are different. Blanket statements don't always or even seldomly apply.

[sagablu]

General advice, do not borrow against a permanent life insurance policy. It makes little difference if it is a whole life policy, variable life, or universal life. I'm going to attempt to briefly explain.

When you borrow funds from any permanent policy you are charged interest on the loan. Additionally, you have removed funds from the policy so you'll receive less growth of value within the policy. So if the loan is not paid back within a reasonable period of time with the interest, you put the viability of the policy in jeopardy. So in other words you can end up with no policy in time. You can' actually find out how this looks. Contact your insurance company directly or your agent and request an in-force illustration that shows the cash value after the loan. In other words you're requesting a hypothetical illustration. The problem is if the policy collapses due to inadequate funding, you would owe tax on any of the gains. Secondly, you may find yourself without life insurance, I assume you purchased the policy with the intention of having life insurance. You need to know what will happen, not assume. A caveat, about half the insurance agents do not understand the details of the internals of permanent life insurance. You may wish to confirm anything you're told with the insurance company directly.

I understand that easy cash can be tempting in this circumstance, but you need to know full well what your getting into.

One more point, for those who have said buy term invest the rest, that can work but you're missing a point. Term insurance is generally over at age 70, there are circumstances where coverage needs to be permanent, a feature that only permanent insurance can provide. I do however agree it is grossly oversold.

FYI, insurance agent for 33 years.

[Tia Bu]

Here's how we did it:

$2000 cash from sock drawer for first boat. Sailed it and worked hard on it two years. Sold it for $7500 cash. Paid that for second boat. Sailed and worked hard on it for two years, sold it for $17,500. Threw in $5000 more cash, bought current boat for $22,500.

Had to put more cash in for various stuff over the past eight years, but still, it's all paid for, and we've cruised about 15,000 miles over the whole adventure.

Watch "Sailing Uma" on YouTube. Read Fatty Goodlander's columns. Read "Sailing Around the World Alone" by Slocum. You don't need a lot of money to do a lot of sailing. You need imagination and a willingness to do the work yourself. You hear this same theme from lots and lots of people out there who really own and sail boats.

And you don't need a catamaran.

[KompetentKrew]

Originally Posted by poseidon2027

Then, Seth from the Sailing Family, said he borrowed against his portfolio. I've done a little research into this and am also looking at this option.

The reason that mortgages have a lower interest rate than credit cards is that the mortgage is secured on the property and there's little risk to the bank - if you fail to pay the mortgage they get their money back by selling the house.

The same is true if your stockbroker offers lombard loans - the borrowing is incredibly cheap, about as low as a mortgage and perhaps even cheaper (in the UK).

But because of the risk is that your portfolio will drop in value the broker will only lend you a fraction of the value of your portfolio. If the value of the portfolio drops then there's a risk that the broker will margin call you, and sell your stocks whist they're down - effectively increasing your stockmarket losses. Borrowing against your stockmarket portfolio is a form of leveraging, and you should understand that leveraging increases your investment risk. Especially since most people don't really understand investment risk in the first place, leveraging is dangerous.

In the UK IBKR are fairly well known for having recently started offering the service to retail clients (I think they also operate in the US). Private banking is accessible if you have more than a million or two in liquid assets, and this kind of service has always been available if you have private banking.

I find the details of this a little confusing, but it looks like IBKR will allow you to borrow up to 25% of the value of your portfolio - i.e. you could borrow $250,000 if your portfolio has a valuation of $1,000,000. You have to maintain that margin however, and 50% stockmarket crashes have occurred a number of times over the last century - if that were to happen, your portfolio would be worth only $500,000 and IBKR would selling off your stock to pay back the loan and keep you at 25%. If my maths is right then they'd sell off a bit over $170,000 worth, so you'd have about $330,000 left and an outstanding loan of $80,000. This is the effect of leveraging - the borrowing multiplied the effect of the 50% crash, so your $1,000,000 portfolio plus a boat turned into $330,000 and you still owe $80,000 on the boat.

This is the kind of thing that is fantastic while the stockmarket is going up - it works great until suddenly it doesn't anymore. I don't think you'd want to do this with even as much as 1/8 of your portfolio - if you were to do that and there was a 50% stockmarket crash then you'd be right on the edge of your margin (assuming 25%), and the broker would start selling down your portfolio if the stockmarket declined any further.

This facility is theoretically available to me, and I have pondered using it but ultimately can't justify it. In theory, I'm living off my portfolio so I should borrow from my broker at 1% or 2% in the expectation that my portfolio will outperform the cost of the loan - in theory I should be able to do this the rest of my life, and still leave a larger estate than I have today. I can't wrap my head around it, and I can't help feeling that an extended period of poor stockmarket performance would ruin me.

Added to that, you're at the mercy of the broker de-risking themselves at any time - they can just decide to sell off your stocks to recoup the loan, and they don't have to tell you the reason. I think there's a higher chance of them doing that if you spend a lot of time out of the country, as they might believe or suspect you resident of another nation, beholden to that country's tax regime, and thus a liability to them. I'm no longer tax resident in the UK and, as a cruiser, try not to become tax resident anywhere - my biggest fear is that my bank or stockbroker will say "sorry, our services are only available to UK residents" and close my accounts. I think the risk of a US bank doing this to a nonresident US citizen is lower, but still nonzero.

I don't believe IBKR lend against stocks held in an ISA or SIPP, the UK equivalents of 401k and ROTH IRA.

Ultimately, I agree with the other comments - if you can afford to do this for an expensive catamaran, you can afford to buy a cheaper boat outright. You can probably afford a very decent boat without doing it.



Links:

• https://www.interactivebrokers.com/e...rgin-rates.php
• https://www.interactivebrokers.com/e...t=101004100808

[captlloyd]

Originally Posted by sagablu

General advice, do not borrow against a permanent life insurance policy. It makes little difference if it is a whole life policy, variable life, or universal life. I'm going to attempt to briefly explain.

When you borrow funds from any permanent policy you are charged interest on the loan. Additionally, you have removed funds from the policy so you'll receive less growth of value within the policy. So if the loan is not paid back within a reasonable period of time with the interest, you put the viability of the policy in jeopardy. So in other words you can end up with no policy in time. You can' actually find out how this looks. Contact your insurance company directly or your agent and request an in-force illustration that shows the cash value after the loan. In other words you're requesting a hypothetical illustration. The problem is if the policy collapses due to inadequate funding, you would owe tax on any of the gains. Secondly, you may find yourself without life insurance, I assume you purchased the policy with the intention of having life insurance. You need to know what will happen, not assume. A caveat, about half the insurance agents do not understand the details of the internals of permanent life insurance. You may wish to confirm anything you're told with the insurance company directly.

I understand that easy cash can be tempting in this circumstance, but you need to know full well what your getting into.

One more point, for those who have said buy term invest the rest, that can work but you're missing a point. Term insurance is generally over at age 70, there are circumstances where coverage needs to be permanent, a feature that only permanent insurance can provide. I do however agree it is grossly oversold.

FYI, insurance agent for 33 years.

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