Yudi Goldfein is a wealth advisor based out of Toms River, New Jersey

The commercial real estate markets have been frozen for a while, but they’re starting to thaw. As deals start to trickle in again, it’s more important than ever to do your homework before investing.

Yudi Goldfein is a wealth advisor based out of Toms River, New Jersey. While he and his team typically work with the very affluent, his investment principles are relevant to all. In his role as a wealth advisor, he manages his clients’ investment portfolios, helps implement their retirement and estate planning strategies, and keeps all their finances organized. As many of his clients also invest in private offerings, such as real estate deals, Yudi gets a front-row seat to the activity in that world.

Quick Glossary of Terms

Bad debt: Unpaid rents that aren’t likely to be collected

CAPEX: This is short for capital expenses. This term refers to the cost of upkeeping the property.

Capital stack: The structure of all debt and equity involved in the deal. The lower in the capital stack, the safer the position.

Comps-Comparable properties: Often used to show where pricing or rents are in a market.

CRE: Commercial real estate

Depreciation: Even when a property has gone up in value, investors can often take tax losses, referred to as depreciation.

GP: General partner, often interchangeable with sponsor or syndicator.

IRR: Internal rate of return. A complex formula often used when evaluating an investment.

LP: Limited partner/investor

NOI: Net operating income. This refers to the profit left after adding all income and subtracting all expenses.

Occupancy: Percentage of units that are occupied with tenants.

OA: Operating agreement (this is the legal contract between the GP and LPs).

RR: Rent roll.

Do you see a difference in how your non-Jewish clients invest versus your frum clients?

Absolutely. The contrast is striking. The average non-Jewish client stays far away from private investments, which are all about trust. They’ll usually divide their money between the bank, some publicly traded stocks, bonds and mutual funds. They typically also have an IRA or a 401(k), as planning for retirement is a big focus.

Typical frum clients have all their money invested in private investments, such as nursing homes or real estate deals. Maybe they’re also trading stocks on their phones, but they typically don’t have much of a financial plan. When they come into our office, we’ll figure out how to minimize their tax burdens, and make sure their portfolios are well diversified. Asset allocation is a complex topic, but unfortunately, we see many who keep 100 percent of their investments in one asset class. That’s a recipe for disaster.

What do you mean by asset classes?

There are many places you can put your money. Some common asset classes are US stocks, international stocks, bonds, commodities, real estate, etc. You can also consider buying a small business or lending with a heter iska (consult your local Orthodox rabbi for details). The important part is that you are well diversified.

If you like real estate, there are different ways to put real estate in your portfolio. You can buy publicly traded real estate stocks, called REITs. There are large private equity real estate funds. You can buy a single-family rental. You can buy a commercial real estate property yourself. Or, most commonly, you can invest in someone else’s CRE deal, also known as syndication.

What’s the difference between public investments and private investments?

Publicly traded investments, such as stocks and bonds, are much safer. Their financials are typically audited by large accounting firms. They’re liquid, and you can sell them any day the market is open. Millions of shares trade hands every day and you know what they’re worth at any given time.

Private investments, such as real estate deals, are a totally different animal. First of all, you’re adding the element of fraud, or what I call “ganev risk.” In a private investment, someone else is in control of your money, and can misappropriate it if he chooses to. Additionally, you’re trusting his financial reporting, as there typically isn’t anyone auditing it. While the potential for someone to steal your money or misrepresent something is practically nonexistent in the public markets, in a private deal, you’re completely trusting the guy behind it. While most people are honest, our community has seen many bad apples prey on other people.

Secondly, you can’t decide when to sell. That’s up to the sponsor of the deal. You’ll only get your money back when he decides to sell or refinance. This is called illiquidity.

And thirdly, you really don’t know at any given time what your equity stake is worth. Say you invested $100K in a deal two years ago… is it worth $125K now? Maybe $50K?

I’m not saying you should never invest privately, but it’s important to be aware of the additional risks. Personally, I invest in private offerings as well, but you have to do a ton of due diligence.

I hear a lot about commercial real estate. Can you elaborate?

First of all, there are many subsets of CRE. There’s multifamily (apartments), self-storage, office, retail, etc. What you read in the news about office isn’t relevant to self-storage. It’s also important to understand that each city is its own market. The Indianapolis multifamily market is performing very differently from the Phoenix multifamily market.

What do we need to know about the difference between residential real estate and commercial real estate (CRE)?

If insurance on your personal home goes up, it won’t change the value of the house. But in commercial real estate, you’re buying it for the income it produces. Every dollar of income directly affects the value of the property. If your expenses go up, the value of the property goes down. That’s why the key to CRE is finding ways to increase the NOI. One common strategy is to do a value-add. That means improving a property so it can fetch higher rents, increasing the NOI. In some markets, a $100 rent increase on one unit can increase the property value by $25,000.

Is real-estate more of a long-term or short-term opportunity?

Typically, real estate is a long game and there’s no quick money. It’s slow, steady, and it takes a while. But from 2020 to 2022, CRE was the hottest asset class out there. Many investors absolutely crushed it during this time. While rents typically grow two to three percent per year, many cities saw unprecedented rent growth of over ten percent per year during the pandemic. Additionally, the Fed cut interest rates to zero and left them there far too long. This combination of extreme rent growth and low interest rates caused cap rates to compress, (which means valuations skyrocketed). Many people made very quick money, as they put money in a deal and they got it back a year later, which was really unheard of up until that point. But you have to remember that that’s the exception. Generally, real estate is always going to be a long game.

What should I know before investing in a commercial real estate deal?

I’m going to assume you decided how much of your portfolio should be in real estate, and that this is money you can afford to lose.

Every time you’re offered a deal, the OM [offering memorandum] is going to look great. Remember that anyone can project anything. You can change one assumption in Excel and the whole deal can jump from average to amazing. Investors want to see high projected IRR, so it’s fairly common for OMs to contain projections that are extremely inflated. It takes a lot of CRE expertise and proficiency to be able to do the appropriate due diligence necessary to see if an offering is a good deal or not.

Understand the background that happened before this deal came to you. The seller hired a broker to make this property look as attractive as possible and market it to potential buyers. Even on an “off-market” deal, there are likely plenty of other groups that looked at it. Each one underwrote it, which means they tried to estimate future income and expenses. They then decided, “We can’t pay more than $20M for this, otherwise our returns will be too low.” While there are other nuances to an offer besides price, typically one of the highest bidders is the one who wins the deal. That means the group with the rosiest projections, or willing to finance it in the riskiest way, is usually the one to win the deal.

During the height of the bubble, many experienced real estate groups stuck to their fundamentals. They underwrote conservatively, and avoided riskier short-term debt. These groups were usually outbid by more aggressive groups, and many barely transacted. In my humble opinion, the groups that were “quieter” during the boom are the ones investors should pay more attention to.

Years ago, when I knew nothing about commercial real estate, a friend approached me. He said that his company was doing a deal and showed me that everything looked great — did I want in? I liked the idea of earning passive income every month, with a nice check on exit.

I did very, very minimal due diligence because I knew this guy owns a few thousand units. I went in with no idea what I was getting into. At the beginning I received monthly distributions. But those stopped when they got a tax reassessment that was way higher than anticipated. I still own my portion — as I’m stuck in this deal until the sponsor decides to sell.

Interest rates have soared, which means that the cost of borrowing money is more than it was before. How does that affect your recommendations? In today’s climate, do you recommend people consider investing in real estate?

First of all, there are many different interest rates. There’s prime rate, overnight rates, and treasury rates of differing maturities, and which one the lender is using will depend on the type of debt you are taking out.

That being said, while today’s rates seem crazy to people who have only been around a few years, if I were to ask you, “What were the rates like when you were born?” you’d go back and realize that the rates now are not insane. Some are even lower than average.

One of the risks you need to manage while investing is interest rate risk. Some asset classes, such as real estate, are much more sensitive to fluctuations in rates than others. Low interest rates cause real estate values to jump, while higher rates bring values down. We all know the saying “Buy low, sell high.” In real estate lingo, that means buy when rates are high and sell when rates are low. Unfortunately, many did the exact opposite.

Be wary of anyone who claims to know where interest rates are headed. Nobody can predict where rates will go. If anyone was able to predict rates, he’d be a billionaire.

What is the bare minimum people need before they can consider investing in real estate?

Real estate deals typically have minimums of at least $50,000. However, we all know the saying, “Don’t put all your eggs in one basket.” Now, if someone only has $50,000, and they decide they want to put that into a real estate deal, then they’re putting all their eggs in one basket. And we’ve seen people do worse. We’ve also seen people take a home equity line on their house and borrow money in order to invest, which can be a dangerous move.

In 2020–21, many folks violated these cardinal rules of investing and still did really well. They made bad decisions but were rewarded for them. People watched and now think, “Oh, I should dump all my money there, too,” but it’s too big a risk.

Whenever I hear, “Oy, someone lost their life savings,” or “They lost their entire down payment for their house,” my first question is, “Why was all your money in one investment?” It’s not a responsible way to behave.

I’ve heard about cap rates, but it seems so confusing. Can you explain?

Cap Rate = NOI/Property Value

Cap rates are a measure of investor sentiment about a particular market. If investors are very confident in the growth of one market, they’ll pay a low cap rate, which means a high valuation. Conversely, if investors deem a market risky, or they think the NOI may fall, they’ll only be willing to pay a higher cap rate, which means a lower valuation.

Cap rates also vary by types of CRE. For example, apartments are considered safer than office buildings, so they’ll typically trade at a lower cap rate. Remember, nobody can control cap rates. There are many factors that affect cap rates, such as interest rates and the availability of debt. Here are examples:

Say you have two properties that are both producing $1 million of NOI. One is a brand-new apartment building in Austin, the other is an older shopping center in Philly. The apartment building may trade at a 5 cap, which means investors are willing to accept a 5 percent return, based on the trailing 12 months of income. This asset would sell for $20 million, as the $1 million NOI would equal a 5 percent return on $20 million. The shopping center may trade at an 8 cap, as investors require a higher return to compensate for the additional risk. The shopping center would only sell for $12.5 million, as the $1 million NOI equals an 8 percent return on the $12.5 million.

I would caution investors not to place too much emphasis on the going-in cap rate. Firstly, not everyone includes the same income and expenses when calculating NOI, so this can be manipulated. Second, cap rates only look backward and tell part of the story.

What’s leverage?

Nearly all CRE investors use leverage, meaning they finance a portion of their acquisition with debt. This is one of the biggest benefits of CRE, as there are many lenders willing to lend against CRE. Say someone is buying a property for $10 million; he’ll often borrow 50% to 80% of that from a bank. Investors only need to come up with a fraction of the purchase price to get the deal done.

Let’s say someone takes 75 percent leverage, and the property goes up in value by ten percent. Instead of making ten percent, he’d make 40 percent. Leverage typically juices the cash flow during the hold period as well. It’s no wonder, then, that many investors like to take the max leverage they are able to get.

However, leverage is often described as a double-edged sword. Many investors are now learning the hard way that leverage cuts both ways. Good times become explosive and bad times become catastrophic. If this same property were to fall 25 percent, this investor would lose 100 percent. Investors who have been through multiple adverse market cycles typically use lower leverage, as they’ve seen many over-leveraged folks get wiped out. Even the legendary Moshe Reichmann, perhaps the greatest CRE investor of all time, ended up losing most of his portfolio in the early 1990s, as it was extremely leveraged.

As an investor, you need to understand that a leveraged investment is significantly riskier than a regular investment. You should only invest in leveraged investments with money that you can afford to lose. By borrowing to invest, the lender now has first rights to the property, and you come second. Lenders typically have many forms of control, especially when things aren’t going according to the plan. You can’t always hang on until the market recovers when there’s debt that needs to be serviced.

What’s preferred equity?

Preferred equity, or pref equity, refers to an investor that has priority over other investors. I’ve seen deals where $100 million was needed to close, and $75 million came from the bank. Instead of raising $25 million from a bunch of investors, the GP got a $10 million check from one investor, under a preferred equity structure. The last $15 million was raised from regular investors, a.k.a common equity. This pref equity investor was in a much safer position that the other LPs, as he was second in line after the bank.

Pref equity typically has a total interest rate, say 15 percent, and a current pay, let’s say 7 percent. That means 7 percent must be paid throughout the course of the deal, and the remaining 8 percent accrues until there’s an exit or refi.

The important part for LPs is that they are now third in line, as they sit behind the bank and the pref equity. If the property falls in value, or cash flow becomes constrained, you can be sure the bank or pref equity will move to protect their interests, at the expense of the common equity. In this scenario, the common equity will only be paid once the bank and the pref equity receive what they are owed.

We’re seeing a lot of distressed deals take in pref equity instead of doing a capital call. Investors in these deals should understand that they are now subordinated by the pref equity. Hopefully things turn around quickly, as it can be hard to get ahead when there’s pref equity burning at 12% to 15%.

I invested in a deal last year, and shortly afterward distributions stopped. I just got the dreaded capital call email. If I don’t put in more money, my equity stake in the deal will get diluted. Should I be contributing to the capital call?

Unfortunately, this is a very common question these days. There’s no one size fits all answer; this needs to be evaluated on a case-by-case basis. You never want to throw good money after bad. The first question to ask is: What’s my current equity worth, and how did you arrive that valuation? Also ask exactly what this money is being used for. If it’s to refinance out of a bridge loan to debt at better terms, that can make sense. But if it’s just to keep the deal alive for another year, hoping that interest rates fall, that’s a different story. Hope is not an investment strategy.

I know one syndicator who had a deal on a high interest bridge loan that wasn’t doing well. Rather than ask his investors for more money via a capital call, he really demonstrated to his investors that they’re all suffering together. He stopped billing his management fee and flew down to the property on his own dime. He even covered some property expenses himself. He truly values investors’ capital and puts their interest first.

You’ve repeatedly stressed the importance of due diligence. How does one do due diligence properly?

I’m friends with many syndicators, and some are clients as well. The vast majority of them know what they’re doing, they’re good at what they do, and they’re honest. But there is a small percentage of bad apples who either don’t know what they’re doing or are dishonest. These bad apples give the industry a bad name. Then there are high-profile scams and Ponzi schemes. Always do your research.

How? I break every deal into four core parts.

1. The guy or company running the deal: Are they honest? Are they straight? Do they have their books under control? Throughout the course of the deal, there will be many conflicts of interest. There will be many times the GP is offered a kickback or a way to profit at the expense of investors. This cannot be stressed enough — only invest with people you can trust. If there’s anything fishy, or if the guy’s a gambler in any way, stay away. There are plenty of other places for your money.

Attitude is important as well. Look for someone who appreciates the tremendous achrayus of taking other people’s money.

2. Their expertise: What’s their track record? Do they have experience managing this type of property? I saw an office guy go into multifamily and his first deal blew up because he didn’t have experience with that type of asset. They need to have property management experience. That means dealing with tenants, repairs, maintenance, etc. They also need to have a deep understanding of the financial side of the business. This includes financial modeling, dealing with the lender, which improvements will generate ROI, etc.
3. The actual deal and actual asset you’re buying: This is the meat and potatoes of due diligence. Does this valuation make sense to me? Is this market growing? Is there a lot of new supply nearby? Are the comps truly similar? What’s historical occupancy and bad debt? What are your assumptions regarding tax reassessments? What about insurance? Are you using third party management? How is the capital stack structured? What are your refi or exit assumptions? Is the syndicator putting his own money into the deal? How much? Is he putting in more than just his acquisition fees?
4. The partnership: Even if you like the sponsor, he’s honest, he knows what he’s doing and it’s a good deal at a good price with a plan that makes sense, the partnership agreement needs to be fair. Review the OA. What fees is the GP charging you upfront? What fees is he charging you to manage it? Is there a preferred return? How are cash flows above that split? Is there a catch-up? What’s the promote? Is he charging guarantor, disposition or refi fees? How is depreciation being shared? What rights do you have as an investor? Interests will never be fully aligned, but I prefer to see lower up-front fees, with a larger cut to the GP on the backend if the deal does well.

Once you’ve covered these basic points, I suggest that you make sure the assumptions about returns are realistic. If I tell you that I think this building could be making $5 million in three years from now, but it’s making $2 million today, that’s probably not a realistic assumption. But if the current NOI is $4 million, perhaps it is realistic. You need to find out where the building is holding today.

The easiest way to do that is to request the T12. That’s an Excel sheet showing the breakdown of the last 12 months of income and expenses at this property. Get the RR as well. You can see how many units are vacant, how many tenants are behind on rent, etc. When you’re armed with that actual information, that will give you a much better chance at making a good decision about whether or not to go into the deal.

Many investors get blinded by a high projected IRR, and they don’t pay much attention to the downside. It’s important to stress-test each deal, to understand how risky it is. What happens if occupancy falls to 85 percent? Or bad debt goes to 7 percent? Or rents stay flat while expenses rise 5 percent? Can this deal still afford to service its debt? As nothing ever goes exactly as planned in real estate, it’s prudent to see how much margin for error there is in each deal. Once you get an idea of the downside, you can decide if there’s enough potential upside to justify the risks.

What are acquisition fees?

Sourcing and closing a CRE deal takes a tremendous amount of time, effort, and resources. Often a sponsor will look at 100 deals, walk ten properties, and close on one. Industry standard is to charge investors an acquisition fee of one to two percent of the total purchase price. As CRE deals are usually highly-leveraged, that fee is really a three to ten percent sales load. If an investor puts in $100,000, only $90,000 to $97,000 is going into the building (even less if you factor in closing costs).

Large acquisition fees create a tremendous misalignment of interests between GPs and LPs. Sponsors are incentivized to transact, even on questionable deals. CRE syndication turned into a game of volume, not performance. During the good times, most investors never questioned this structure. But many investors collectively paid hundreds of thousands of dollars of acquisition fees on deals that never distributed and are in distress. They’ve begun to question why they should pay large upfront fees when no value has been provided. If the deal makes money, of course the GP should be rewarded. But is it logical to pay large up-front fees, in order to have the “opportunity” to lose $100,000?

The good news is that things are changing. There are many ways to structure the GP/LP partnership. We’re starting to see investors demand structures that reward GPs for performance, not merely transacting. One example is no acquisition fee but a larger promote.

Where are the billionaires?

Many investors believe they can earn 20 percent a year without taking much risk. If that were the case, we’d see many more billionaires in our community. If someone had $500,000 invested 40 years ago at 20 percent, he would have over $1 billion today, even if he never added a penny to it. There are many millionaires in our community, but very few billionaires. Twenty percent per year is obviously not an easily achievable number.

And any words in conclusion?

Keep in mind that real estate has always been very cyclical. There are booms and there are busts. Unfortunately for those already invested in real estate, it appears we’re in the first inning of a downturn. Valuations have fallen significantly. Many investors don’t even realize the $100K they put in a deal may not exist anymore. But there’s always a silver lining. The best time to invest is when others are fleeing. The next couple years will likely bring tremendous opportunity for those with the stomachs to invest. As always, do your due diligence and pick your partners wisely.

Moving away from real estate, can you tell us more about general investing?

Many people have a fear of the stock market, as they’ve seen people lose everything by investing in stocks. It’s important to understand that those who went bust usually went about it in a very risky way. Most of them traded options, which is very different than just buying stocks. Some traded on margin, which means they borrowed money (at high rates) to buy more stocks. Others picked stocks, trying to find “hot stocks.”

Most investors would be much better off with simple, low-cost diversified index funds. The US stock market has never had a 20-year period with a negative return. The stock market has been a massive wealth creation machine, for those that can stomach some volatility. It isn’t nearly as risky as many people mistakenly think. Years ago, you had to pay a broker to trade for you. Or mutual funds with large sales loads were common. Thanks to John Bogle, we now have index funds with expense ratios that are nearly free. It’s easier than ever to open an account and start with small amounts of money.

I have money available but I’ll need it in three years. Should I still invest?

Absolutely. Especially with treasury rates over 5 percent today, it’s baal tashchis to keep more than a couple months’ worth of expenses in a checking account. Investing doesn’t just mean the stock market. Investors with shorter time horizons typically stick with more conservative portfolios, such as fixed income.

Car leases are a fortune these days, and I don’t want to buy a used car. What should I do?

There’s a middle ground that can be a good option for many. Buying a new car and keeping it for at least five years can give you the new, reliable car at a lower cost per month than leasing. Earlier this year, my wife and I were in the market for a minivan. Leases were pricey, and slightly used minivans were too expensive to be worth it. I called up the closest seven Honda dealers, and negotiated with the most competitive one for a new Odyssey. One hour on the phone saved us $5,000. Also, many dealers are offering zero to four percent financing as an incentive these days.

What are some common mistakes you see frum families making?

1. Not making saving a habit. Ideally parents should encourage even young kids to save and invest. But even if you wait until you get married, the younger you start, the more impactful it will be, due to compounding. Saving for a down payment should start right away, even if you only have a small amount to put away.
2. Rushing. Don’t rush into a real estate deal; you need to do your due diligence. Same for insurance; if you choose to buy any form of permanent insurance, it can be structured in many ways. Make sure to call a few agents, especially one that is independent, meaning he isn’t captive to one insurance company.
3. Not shopping around for big-ticket items. Don’t drive to Costco to save 25 cents a gallon on gas. That won’t move the needle. But often a quick call could save thousands of dollars on larger purchases.
4. Not shopping around for mortgage rates. There’s a common misconception that all lenders have the same rates. In reality, rates vary tremendously between different mortgage shops. When I bought a house, I wanted to use a friend of mine at one of the well-known heimish companies. But his best rate was 3.25 percent, while the frum guys at a larger, national lender had the same terms at 2.875 percent. That may not sound like much of a difference, but over the life of the loan it’s close to $60,000. You certainly should shop around within the pool of qualified and experienced mortgage brokers whom you can trust to close.
5. Not maximizing your credit cards. If you use credit cards (responsibly), make sure to use a card that gives at least 2 percent cash back. Otherwise, you’re leaving money on the table. If you prefer points and miles, be sure you’re getting at least $2,000 of value out of every $100,000 of spend.
6. Mixing insurance and investing. See sidebar on next page.

Whole life insurance is often pitched as a chasunah or retirement plan. What are your thoughts on using WLI as an investment?

The essence of financial planning is understanding a specific client’s goals and ability to take risks. Some want to retire comfortably or leave a sizable yerushah. Some want to help their kids buy houses; others are just saving to pay for their kids’ weddings. Some are okay with volatility in their investments; others prefer investments that grow slowly but safely. Even for those who are seeking “safer” investments, insurance company products very rarely have a place in a frum family’s portfolio. Let’s break down why that is so.

First of all, it’s crucial to distinguish between term life insurance and other types. Term life insurance is simple, cheap and very flexible. Most families would be best served by a simple term policy for each parent. Similar to your auto insurance, you pay a small premium in exchange for coverage for a defined term, in case of a loss. It’s important to stress that the negative attention life insurance gets is exclusively related to the permanent products, not term life insurance.

Permanent insurance is a whole different story. These products are dramatically oversold in the frum world, particularly in heimish circles. Permanent insurance products come in many different shapes and sizes, but they are very rarely an ideal investment vehicle for a frum family. Whole life insurance is the most common type, and that’s why many (incorrectly) refer to all permanent insurance products as WLI. While they typically combine life insurance with an investment component, there are many issues that come up.

The first is that you are obligating yourself to make ongoing payments for many years, often your whole life. I see many couples buy these policies when they are young and have few expenses. A few years down the line, their expenses have grown and they can no longer afford the policy. As these policies are front-loaded with fees and commissions, if you cancel it in the early years, you typically take a massive loss. Forget about growth, many policies don’t even break even until seven to ten years in. Often there are surrender fees as well. As a matter of fact, the Society of Actuaries has found that about 80 percent of whole life policies are surrendered prior to death. Clearly, many buy these policies without fully understanding them and later regret it.

Take a look at Michael and Rivky, a young couple with one toddler. Their rent is $1,800 monthly, and other expenses are minimal. Between Rivky’s job, some parental help, and Michael’s kollel check, they can put away $3,000 a month. Many couples in their position start WLI policies, with monthly premiums in the thousands, thinking they will always be able to afford them.

Fast-forward five years and a couple more kids. Even though Michael took a job, their budget is much tighter. Their $1,800 rent has turned into a $4,500 mortgage, plus other home ownership costs. The Camry became an Odyssey. There’s tuition, health insurance, taxes, plus a much bigger grocery bill. All too often, they up canceling the policy and losing a significant chunk of what they put in.

Even if someone does retain a WLI product for his whole life, the returns are meager, especially after you factor in inflation. It’s also important for customers to be aware that agents can net huge commissions on WLI, and to make sure their agent’s recommendations are in their best interests. They can make sense in certain niche cases, such as for the extreme wealthy who want to avoid estate taxes. Other examples include providing liquidity in an illiquid estate, or certain business partnerships. But the typical middle-class family is significantly hampering their future by buying these polices. I’ve also seen situations where families had to delay buying a house because their WLI payments were so high.

Take Aryeh and Mindy, a middle-class couple in their thirties. They already have enough coverage via term life insurance. They make a nice living and can easily afford the $2,500 monthly WLI payment Aryeh’s friend wants to sell them. He says, “All the wealthy have WLI. It grows safely and it’s tax efficient. Some of it is guaranteed. You can even borrow against it. It will provide coverage for your entire life. It’s really a no-brainer for someone like you.” Some of this may be true, but is WLI really the best option for them?

Let’s see. There’s no such thing as a free lunch. If the insurance company is providing a benefit, Aryeh and Mindy are paying for it. They already have enough term coverage in case of a premature death. There are likely much better places for them to put their money. Paying down any student loans, auto loans or their mortgage might provide a better return than WLI. Contributing to a 401(k) or IRA may also be a better option. In many cases, a 529 college savings account can be used for tuition and should be considered. Even if none of the above make sense, they still shouldn’t buy the WLI. Insurance companies aren’t better investors than Aryeh and Mindy. They can invest on their own, in a very conservative portfolio, without the additional layer of fees. They’ll have the same peace of mind, and they’ll likely be much better off financially. Additionally, they’ll have much more flexibility in case their goals or risk tolerance changes. It’s very easy to set up an auto transfer into an investment account, and there are organizations that can assist with this.

Additionally, many people feel, “If I can make 5 percent with very little risk, should I be taking stock market risk to earn 10 percent? I’m okay making half.” But 5 percent is not half of 10 percent, it’s not even close. Investing $2,000 a month for 40 years at 5 percent will turn into $2.8 million. But the same $2,000 invested at 10 percent for 40 years will turn into over $10 million.

While insurance companies do offer other products that have potential to earn better returns than WLI, the devil is in the details. I’ve seen many policies that allow the insurance company to change caps, crediting rates, costs, etc., after you’ve purchased the policy. I’d never lock away my money with an “opponent” who can change the rules in the middle of the game.

So yes, there certainly are situations where permanent insurance is appropriate. That being said, especially when dealing with lower to middle-class families, those situations are exceedingly rare.

(Originally featured in Mishpacha, Issue 988)