Smart Banking: Money Week with Kathryn Orfino and Guest Co-Host Robert Orfino

TRE 16 | IUL


Indexed Universal Life or IUL is a type of permanent life insurance product that allows you to earn interest on your money based on the performance of some external index. Smart banking expert Kathryn Orfino discusses the advantages of using an IUL over a self-directed IRA to fund your real estate deals. She reveals how the wealthy have used this for ages to build money for themselves and their children. Learn more about IUL as Kathryn shares how you can leverage your own money and use it for your private personal investments.

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Smart Banking: Money Week with Kathryn Orfino and Guest Co-Host Robert Orfino

Using IUL For Business And Real Estate

We are talking about smart banking and we have a special guest, Kathryn Orfino, who is our expert on smart banking. Rob, do you want to get us kicked off?

We’re going to talk about the vehicles in which people can lend out. We talked about private lenders. Now, we’re going to talk about the actual products they might have. The big one is the greatest gift from the Federal Government, a Roth IRA. There are some limitations and there are some throttles on that. You have some Solo 401(k)s which you can be careful about. There are some medical savings and education savings for your families. You will learn all about that over at Quest or you can learn about it with Kaaren Hall at uDirect or a whole bunch of these people around the country are doing it. There’s this thing that people know about but don’t quite understand. That’s the IUL, which is the Indexed Universal Life insurance policy. There are not too many boring subjects in my life, but life insurance is one of them. What happens is there are a lot of benefits in structuring some of those life insurance policies for investors. We’re going to talk about the difference between the two and we will get into that. Kathryn, welcome to the show.

I’m happy to be here.

Let’s talk a little bit about what an IUL is first. People hear life insurance and they’re like, “There’s term and then there is some other stuff. Now, you’re investing with your life insurance. That doesn’t even make any sense to me.” What are the basic nuts and bolts of an IUL?

There are two basic kinds of life insurance, term and permanent. Term is like your car insurance. As long as you pay, you have it. When you stop, you don’t. Permanent insurance is a form of life insurance that often can have cash within the policy that can be available to you for different things. There are a number of different types of policies that grow cash within the policy. My favorite is the Indexed Universal Life or IUL. I liked that because it allows you to earn interest on your money based on the performance of some external index. Most people when they have 401(k)s, when they have IRAs, many of them will invest in the stock market. I am a licensed life agent.

What’s lovely about the Indexed Universal Life is you’re protected from downside risk in the market. Once you’ve earned interest, it is always there for you. It will not go away. You also get to participate in the upside in the market up to a cap. What we find over time, I have a particular product that I like to use, and we’re illustrating that at 8%. That cash grows in the policy and what’s great about it is you can use that cash. You don’t ever take it out, but you can use that cash as collateral for a loan to yourself. The version that I like to use, that loan will never go above 5%. In the long-term, you’ve got cash growing at 8%, you’ve got a loan going at worst case 5%, you’re earning 3% on the spread plus whatever you use that money for, hopefully, that will earn you some money as well. It’s like being your own bank. Everyone goes and deposits their money in the bank. Maybe they will make 1% if you’re lucky.

You’re leveraging your own money and you can use it for your own personal investments.

You can use it for whatever you want.

I can take that money. I can invest it into a cashflowing house and I don’t need to put the cash back into the policy. I could take the net and put it in my pocket, which is different from a Roth.

There are not too many boring subjects in life, but life insurance is one of them. Click To Tweet

When you start to get into a lot of these self-directed accounts, Roth, HSA, Coverdell, the funds have to go back. There are some things where you’re prohibited from lending it to yourself and your family and all that. Solo 401(k) is a little bit different. There are a number of limitations that are associated with it. That doesn’t mean it’s bad or one is any better than the other. You’ve got to figure out exactly what it is you’re trying to accomplish in your real estate business so you can pick what works best. That’s why I’m a big proponent of telling people, “You got to figure out what you want to do first.” All this other stuff we talk about is going to work in concert with what your goals are. Maybe Roth is a good idea, maybe it’s not. Maybe IUL makes more sense.

The idea is how we deploy the capital. For sure you need both. This is arrow one, arrow two and then you can figure things out. With the Roth, you’re both growing. That’s tax-free. In the IUL, is that also tax-free?

The IUL, when you set that up correctly, neither you nor your children will ever pay taxes on that money.

One of the other challenges for certain individuals is getting money into the Roth. Let’s talk a little about that. There are two ways you can fund a Roth. You can write your check and the second way is you can transfer from one retirement account to another, from a traditional to a Roth and there will be some taxes incurred and that sort of thing. The real challenge is if you make too much money, then you are prohibited from directly contributing to a Roth unless you’re transferring from one account to another. The max contribution is $5,500 or $5,000 or whatever it is.

If you’re starting out and you’ve started this Roth IRA, you put $5,500 in, unless you can transfer from another retirement account, all your retirement accounts are sitting at your current employer. You can’t transfer those over. You’ve got to have a separation of employment. You can’t fund these things unless you have that separation of employment so you can transfer those dollars over. There are some real limitations there. From what I understand on the IUL, there’s a different way to fund those. Can you talk a little bit about that?

What we do with the IUL and this is a technique that the wealthy have used for ages, 100 years to build money for themselves and their children. It’s used to be every time you got a $2 million, you go and dump the entire thing into a life insurance policy, fully fund it, and then borrow against it to pay it back. The IRS eventually caught onto that and said, “We don’t think that you’re buying this for life insurance. We think this is an investment.” They have rules in place about how much you’re allowed to dump in over a period of time. The lovely thing about software is we can walk you right up to that line while making sure you don’t cross over it. If you cross that line, all of a sudden, everything you dumped in becomes taxable. We take you right up to that line. We let you put as much extra cash in as possible so that it is in there earning interest right away. That additional funding is available to you as a loan for whatever you want to use it for.

You could borrow from yourself to do let’s say a small out-of-pocket expense on an Airbnb and then also cover the furniture and setting up all the other stuff in there.

The hoops to jump through are trivial compared to a lot of other things. You call the life insurance company and say, “I want a loan for this amount” and they send you a check. There’s no credit check, no underwriting, no paperwork like you go through with the IRA to make sure everything is in compliance. You’re taking a loan against your own money. It’s simple.

You’re probably not inclined to foreclose against yourself.

TRE 16 | IUL
IUL: The IUL is a technique that the wealthy have used for ages to build money for themselves and their children.


That’s a brutal world. I’m foreclosing on myself.

I don’t think they’re mutually exclusive. I think you need both and we certainly do. That’s something that’s important when you start deploying capital. Once you start making money in real estate, then the big next question is what do you do with it? It’s like after you buy that first Lambo, then what? You got to figure out a place to put this stuff and here come some strategies where you can grow this stuff. You’ve already paid your taxes on it. That’s big stuff. We talked to people with these policies all the time. You’re already getting 8% in that model. Imagine you can do an Airbnb and make 18%. You can borrow at 5% to make 18% and all of a sudden, the spread gets nice. That becomes a nice product for the stuff that we’ve been talking about and been doing. It’s the same thing on the Roth.

We are talking about how you can invest in real estate with tax-free or tax-deferred vehicles, one of those being a life insurance policy. We’re going to compare that a little bit to a Roth IRA and those things. If this is your first time ever hearing this, “I can invest in real estate with my Roth IRA?” Self-directed accounts blow people’s minds. Now we’re talking about life insurance and how you can borrow from yourself. People are probably like, “I’ve never even heard of this before.” Why don’t you give them the number before we get started?

If you’re interested in any of this stuff, give us a shout at (281) 401-9008. Please text us and then Kathryn you will do a free one-hour consultation. She will get an hour in for you. You can sit down with her. Her time is valuable. Make sure you can do it if you’re interested. Usually, if it’s a husband and wife, she’ll want both partners there. If you’re interested in that free one-hour consultation, that’s our number. If you’re in real estate and you’re making money, now is the time to start looking at some places where you can park that money so that you can invest and grow that money tax-free.

Rob, you mentioned which vehicle could we get $30,000 to $50,000 in the fastest? It’s not like we open an account, I got $100 in it, now what do I do? You need to have a little bit of dry powder, a little juice in that bad boy. Let’s talk a little bit about that. How do you fund these things? How does the practical piece of this thing work?

With the Indexed Universal Life, our limit to how much you can put in is the IRS. I’ve done policies for $70 a month and for $5,000 a month. The rule of thumb is it’s usually about three years before it builds to the point where there’s enough money in there for you to borrow against. After the three-year point with the compounding, it starts to accelerate. How much you want to put in is entirely up to you. I use software to figure out how much we can take you to without violating the IRS guidelines. I love the particular product that I tend to use for this. The company, if it’s going to take you over that IRS limit, they won’t cash the check. They will call you and say, “Did you mean to do this? Are you sure you want to do this?” The answer is “No, not at all.” A good rule of thumb, three years but after that it accelerates.

Essentially, you can lend the money to do anything. The real advantage is you can use it for whatever.

In theory, if you want, you get a stack of $100 and light them all on fire, you could do that.

With the Roth though, what’s the contribution if you’re $6,000?

You've got to figure out exactly what it is you're trying to accomplish in your real estate business so you can pick what works best. Click To Tweet

That’s $5,000 or $6,000 and the catch up is $6,500.

It’s going to take a few years to get a good $25,000 in there and to do that.

You can transfer from different accounts. You can roll stuff over. The other way to do it and this is how we’re going to grow a couple of ours, is partnering with people and all that.

Let’s put a disclosure out there. We have the Private Lender Summit for lenders. If you’re looking for money, that’s not what the room is. In that room, we’re going to be talking about investing in other people like Mike Steele up in Magnolia. We liked that deal. Jason and I would never be asking any of you to put your money together to come and invest in us. You have to do that separately outside of our awareness. That’s an SEC violation.

If you got some money in an IRA, if you got some money in your checking account and you want to do some real estate investing. Real investing where you’re putting it into a fund or you’re lending it out to other real estate investors, the Private Lender Summit is the place to be. Kathryn will be there. Ashley is going to be there too.

We’re going to be talking about foreclosing on notes that have failed. A lot of people are asking that question. Text us and write around, “I want to know more about this life insurance. I want to know about Roths. I want to know about the Private Lender Summit.” Put it in there and we will get back to you.

I love the Private Lender Summit. It’s a high-quality group of serious people. It’s a lot of fun. It’s my favorite thing to put on a month. Let’s go back, it goes into the magic box and the magic box tells us we can get this much money into it. What are they looking for? What are the rules here?

It’s life insurance. The big thing is it does have to be medically underwritten, which means most people qualify but it does have to be medically underwritten. That’s part of a process and it takes a little while to get through. A good rule of thumb particularly if we’re going for larger amounts is realistically it takes about a month to get through the process. The life insurance company is planning on having this with you for the next 50 to 70 years. They’re looking at everything. Once you have it, you can put the money in right up to the IRS guidelines. What’s cool is maybe you start putting in a little bit less with the intent of upping that amount down the road. Down the road, you can put up that amount right up to the IRS limit to that year and then in a lump sum, the difference between what you paid and the max for all previous years.

Now that is a trick because you cannot do that with a Roth and it drives me insane. You can establish the account in your twenties and you’re putting in $50 to $100 a month. In your 30s or 40s, you’re doing a little bit better. Maybe you’re crushing it in the real estate, you go, “It needs to be about $10,000 a month plus one huge lump sum from all those previous years. You drop it all in there.”

TRE 16 | IUL
IUL: How we’re going to grow is partnering with people.


All that extra cash starts earning interest immediately.

On top of that, there are death benefits. It’s also true life insurance benefits on that as well.

Life insurance passes to your heirs tax-free.

The big thing is you can invest in yourself with that money, which is the hold up on the Roth. Everyone was trying to figure and work around, “Which is the gray area? Jeff Watson, tell me how I can invest in my own apartment buildings and put cash in my pocket.” You can’t.

We’re talking about smart banking and how you can use some different vehicles to fund your real estate deals and not pay taxes or pay less in taxes, unless you like paying taxes.

I don’t mind paying taxes. It’s the price of being a citizen. What I don’t like is every year, it’s changing. Tell me what the cost is and I will have that as a line item in my mental pro forma and I can move forward. I love the highways here. I hear people complain about Houston traffic. This is nothing. This is easy to get around. I get it if there’s a record of something like that and Texas is probably the most dangerous highways in the country, that people are crazy here, but the highways are beautiful. They are gorgeous. That came from somewhere. The water tastes good. Have you ever tasted the water in Central Florida? It’s horrible. I get it that my money has to go there. It does sometimes get lost over there with Jimmy Goomba, the contractor. There are always inefficiencies in every system. For the most part, I feel good when I pay my taxes.

All I want is let’s establish the number, whatever that is, if it’s a percent and what’s the step and then you can all fight about where it needs to go.

If you tell me my numbers are for the next fifteen years, I’d worked hard to pay it off this year. “Tell me what I need to pay you for the next fifteen years of my life so I could write that check.” I don’t have to worry about it. I don’t have to feel guilty. No one’s complaining about how much I made.

We’re looking at Roth versus traditional IRAs and Solo 401(k)’s. Some people that are in real estate have heard about those things, but an Index Universal Life policy to self-fund some of your real estate deals is unique. Maybe you could talk about some of the deals you all have seen that have gotten done or some of the clients that you’ve worked with, Kathryn, how they’ve used that vehicle to help grow their wealth.

Once you start making money in real estate, the big next question is what to do with it. Click To Tweet

Something that we see a fair amount is someone doing a flip, hard money for the bulk of it, and the gap funding comes out of the IUL. That is a loan. It’s not an income and it’s not taxable. You use it for the gap funding. You complete the flip. You pay back your loan to the IUL plus the up to 5% interest. It’s a little lower than that but it will never go over that. You have the actual rest of the profit from the flip, which you can keep. That will be taxable but the loan interest is not. It’s an expense of doing the flip.

While you borrow that money, say you take $25,000, you’re borrowing against it. Is it technically not the principal?

The cash never leaves the IUL. It continues to stay there earning interest.

Does that principal still make interest?

Yes, it does.

You’re making money on your gap funding.

Yes. You’re borrowing money and you’re making the Delta.

The way we’re illustrating, that should be around 3% even with the loan outstanding.

5% for the loan and 8%, you’re netting 3% on your money while you’re using it in a real estate deal. Did everybody catch that? I want to make sure everyone got that. Your account is growing at 8% interest. You borrow money from your IUL at 5% to go do some deal. You’re making 3% on your money that you’ve lent to yourself, that you’re now using on a real estate deal and that you’re probably making 20% to 50% on.

TRE 16 | IUL
IUL: We can totally do smart banking and pay as little tax as possible.


If God forbid anything happens, you have life insurance as well. Someone benefits from that.

Let’s talk about making it fun. Let’s go buy an apartment complex. You need $1 million and we need, let’s call it $300,000 out-of-pocket. We could borrow that $300,000 out of our IUL to do the down. We’re borrowing that money at 5%. We’re borrowing from the bank at probably 6% or 6.5% and then we go do that deal. It costs us no money out-of-pocket because it’s the IUL’s money. At some point in the future, you refinance that property, you can send that $300,000 back.

One of our five, one of the smartest people we know in Money Guys, Steven. My understanding is he has a $10 million life insurance that they funded up to the max and all that stuff. He didn’t have the money. He got a borrower to pay for the massive life insurance policy. It’s like a mortgage payment for him but he immediately gets to deploy $7 million. This is how he was going out and buying all those apartments. I don’t know any of the legal or the accountants. I will give you that guy’s information and he will tell you. He is one of the smartest tax guys I’ve ever met in my life. He’s a sharp guy. He has a mortgage payment on his life insurance policy. Someone lent him to slam it from year one with $10 million or whatever it was. He’s able to borrow out of that and does invest. That was at breakfast that when he told me that, I can almost understand what you said to me.

We’re talking about smart banking, how to pay as little taxes, even though Rob said he loves paying taxes. I know you got to do it. We could totally do it because I know exactly what they’re doing. We could totally go on Facebook and start bragging about, “We paid no taxes this year because of depreciation.”

There was a year I paid less than Mitt Romney. I’m not pro grudging, I had a smart accountant. Here’s the rule. You need to and feel good about paying every single penny of taxes that you owe and not one cent more. The problem with people is 65% of Americans overpay on their taxes because they don’t know the deductibles that are available to them. Kathryn, do you have to start with $100,000 or can you start with $100 a month?

You can start at $100 a month.

I met with a Prudential guy back in the day when I was in college and he was trying to explain this to me and I didn’t get it. It’s one of those things now, 25 years later I’m like, “I wish I would’ve done it.” This is one of those things where if you don’t do it now, tomorrow you’re going to regret it. It’s that even six, nine, twelve months of regret. For sure you want to reach out. The last thing I’m going to ask you is are you only allowed to open up a life insurance policy for yourself?

No, you can get life insurance on your spouse, on your children and on your grandchildren.

You can be in control of those assets.

You've got to pick the right vehicle for wherever it is that you're trying to get to. Click To Tweet

Yes, you can.

There are two that you need to open up immediately.

They’re not going to be expensive, I would imagine.

That’s the point of it. If you need to take care of this in your 20s and 30s before your metabolism slows down and you have all kinds of health problems on your way. If you haven’t recognized, I totally married up. I always say I hit the wife lottery. I will tell you a quick little story. I met Kathryn in St. Louis. We were at an online video game convention. We’re total geeks and nerds. She played a dwarf paladin and I played a half-elf ranger. We’re total geeks like that. We met at the convention. She was clearly the prettiest woman there and there was a flock of nerds around her. At the time I was programming games. I was a game designer, I did some programming, and that was fun. I saw her and I’m like, “What is that doing here?” I ghosted her around the convention. I was always within five or six feet outside of the creepy zone, but creepy enough to catch eye-to-eye and stuff like that.

I internet stalked her for six months and finally when we started a relationship, a little online first and then following that, we met. We got married about three years after we met or so. We got married in Disney World. She never talks about herself. I do it all the time. She got into MIT for chemical engineering. She decided she didn’t want to be a chemical engineer after two years and she went and got her finance degree from Northeastern. She was in the Michigan MBA program. She worked for big banks. She did commercial banking in Europe. She got into the tech world because she was interested in that. She taught herself how to code. She got hired by a company that’s still out there but it got bought by Google.

Her claim to fame is she led the teams, remember AOL used to be an hour then it went to $995 a month. Her team was the one that took that from subscription-based to ad-based. That’s when I knew her and she was up at 2:00 in the morning talking to China and Russia. She did this big multibillion-dollar project. She’s wicked smart. She met me, I took her to California and I made her a contractor. In California, if you have one year of construction experience, which we did, and you have a four-year degree, you can sit for the exam. She sat for the contractor exam. She studies everything. She reads the book. She doesn’t study for the test. She reads the materials. She wants to know it.

There she is in a room full of guys. There are two parts to the test. The first part is ethics and law and your given 90 minutes for that test. The other one is code and you’re given three hours for that. She was out of there in twenty minutes. She went to the car, studied and took a little nap. She went back in for the three-hour part. She was out of there after an hour. All these guys were looking at her, “She failed. She must have quit.” She aced it. The same thing with the real estate and life insurance. I’m a complete dummy next to her. I completely married up. She’s beautiful, she’s smart, she puts up with my nonsense. There is total nonsense. There’s singing and dancing with the dog in the morning while she’s trying to sleep. It’s crazy. She’s a total geek like me. I’m lucky I found an accomplice more so and a true partner in life. I’m blessed to have her. I totally hit the wife lottery.

I am sure on the insurance side, you are obviously well-versed in all the products you have, how they work and finding the right product that works for the right person and the right family.

There are 29 different life insurance companies that I work with. It’s always a matter of finding the one that’s the right fit for the situation. That’s why we spend a little time talking together before we sign anybody up for a policy.

TRE 16 | IUL
IUL: The compounding interest is an insanely powerful force. It takes a little while to get started but once it gets rolling, it takes off.


That hour-long consultation you have in them. It’s like, “We need to know everything you got going on here.” We need the entire picture and then what are we trying to accomplish here so we’ve got the right vehicle? I’ve always loved the analogy that is a vehicle because we are going somewhere. I don’t want to drive to LA, I want to get on a plane for that. You’ve got to pick the right vehicle for wherever it is that you’re trying to get to.

If you’re interested in sitting down with Kathryn for an hour, going through and seeing if that vehicle works for you, depending on what stage you’re in and it should, then text us at (281) 401-9008 number.

We’ve got Kathryn Orfino. She has given us a good education on IULs and how you can use them in real estate. You use them in anything. It didn’t have to be real estate. Let’s talk about the peril in waiting.

The cash inside the Indexed Universal Life is earning interest all the time and it’s growing tax-deferred and we set this up correctly and tax-free for you and your family. The compounding interest is an insanely powerful force. It takes a little while to get started but once it gets rolling, it takes off. You don’t want to wait is what it boils down to. I talked to one woman, I believe she was 42. I talked to her and I showed her what this could do for her. She was interested in using it for real estate. It will take a few years to build. She said, “I like it but I’m not ready to do it right now.” About a year later she approached me and I showed her the numbers again. I showed her that by waiting one year, by the age of 65, she had lost $500,000 in additional cash inside the policy that she could have had access to, one year.

It costs you $500,000 a year. No big deal. At 40, if you’re 40. If you’re reading this and you’re in your twenties, that gets expensive.

This is one of those things that not a lot of people talk about and not a lot of people know about. When someone sits down, the family advisor or the family fund guy, he’s setting everyone up with these. “All you guys are going to get this and all you guys are going to get that. We’re going to put the money over here.” There’s a strategy. There’s a step-by-step. It’s Roth and it’s IUL and you got to have both those tools in your box. People are missing out. It’s the one thing that you can’t get back, the time.

You can’t get back time. That’s why whenever we have the conversation about fears. It’s like what am I missing out that I should be doing now? What is it that I’m supposed to be doing now? You don’t get now back. It will drive you crazy if you go into this crazy regret train and all that. What are we missing out on now and what can we fix now that we goofed up yesterday? I think that’s one of those things.

It’s (281) 401-9008. We’re wrapping up our episode here. Hopefully, you’ve picked up some nuggets. We appreciate our efforts down here. We will work on some new things. We will be back and we will see you then.


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About Kathryn Orfino

TRE 16 | IULKathryn Orfino is responsible for all front-office operations, including managing transactions and funds control. She has over 20 years of experience developing and implementing systems for companies ranging from Fortune 50 corporations to startups. She teaches leadership, project management, and other soft skills at companies in the greater Los Angeles area.

From 2009-2016, Ms. Orfino served as President of Alpine Green Property Services, Inc., an Encino, CA construction company specializing in residential renovation and residential energy efficiency.

She is a veteran Program Manager and Client Relationship expert with an unblemished record of success fulfilling commitments to leading domestic and international corporations including Google, DaimlerChrysler, NBC, AOL, The New York Times, and eBay. She is a proven leader who has consistently guided key stakeholders and cross-company, cross-functional, international teams to success with high-profile and challenging engagements while improving profitability, productivity, quality and client satisfaction.

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