EIUL and Mortgages

[midwestbroker]

I have been referred to a program that works with EIUL and funding them using your mortgage payment. Here is my best rendition of it:

Clients Mortgage: $1500 per month.
Refinances for a lower rate making the new payment $700
The difference is put into an EIUL
The mortgage is doing a reverse amortization – but the EUIL is supposed to be making more then the reverse, in essence making more money

They recommended a book by Douglas Andrew called Missed Fortune 101, as well as readings from Ed Slott. I am familiar with Ed Slott as he is an IRA guru, but I do not know the other guy.

I listened to the call and watched the web seminar last night. I also looked on the web, as usual, some people are for it, others against it.

From what I can tell about it:

Pros:
No cost leads that have already seen the client presentation online
They are not telling clients to dump all their money into it – rather use their mortgage to fund a policy that can build more cash then their mortgage can (they use a 5 year spread)

Cons (more like questions)
Will the EIUL make more in interest then the reverse amortization will accumulate?
What are the tax implications of doing this?
I know that I will have more but those are the ones that stick out.

Anyone else heard of this or looked into it? This is all new stuff to me.

The EIUL is through Indianapolis Life.

 

[Crabcake Johnny]

Cons - the EIUL after fees averages 4% return, his mortage rate is 5% so he has a net loss of 1% and destroyed the equity in his home. The housing market crashes and he has to sell his home and he tanks.

 

[James]

No doubt, this is the (in a backwards way) 30/15 strategy using LI instead of other various saving vehicles. You can make about 2% or so less in rates earned Vs the rate of the loan and still come out ahead. Yet by using a LI contract under this specific idea (if the idea is to pay off mortgage) I don't see why one would use a LI contract? When you go pay off the mortgage you'll need to take out nearly all the cash meaning you'll end up collapsing the policy sooner or later losing the tax advantage. That is if this idea is to pay off the mortgage.

 

[James]

Cons - the EIUL after fees averages 4% return, his mortage rate is 5% so he has a net loss of 1% and destroyed the equity in his home. The housing market crashes and he has to sell his home and he tanks.

No, most of your better permanent policies are paying 6%, Ind. Life I do believe is screaming 7-9% earned in the EIUL's, in fact 4% is guarantee in one of their policies. Once again, if the idea is to pay off the mortgage one can earn up to or around 2% less than the actual Mortgage interest rate and still come out ahead. Plus, most places the housing market is holding its own, sure places like Boston and San Fran may be facing the "Facts of Life" as housing prices have so surpass anyone ability to pay the price but that is very much target specific areas.

 

[midwestbroker]

That is a big con John.

That is the whole thing about this. They are dealing with a hypothetical return on the EIUL. If you have a fixed rate mortgage, then you know what to expect. They want you to have an ARM that is dependent on an EIUL that has no guarantee. If the EIUL return is less then the interest of the mortgage, then what? That is a situation I know I would not want to be in. You have just added more debt to their mortgage with an under performing product.

That seems like a pretty big gamble to me since the home is the #1 asset / investment people will make.

Plus, I have always heard that you should not mix your investments with you insurance.

 

[midwestbroker]

So, James, you are saying this could work?

I have the feeling that I just opened up a really big can of worms!

 

[James]

That is a big con John.

That is the whole thing about this. They are dealing with a hypothetical return on the EIUL. If you have a fixed rate mortgage, then you know what to expect. They want you to have an ARM that is dependent on an EIUL that has no guarantee. If the EIUL return is less then the interest of the mortgage, then what? That is a situation I know I would not want to be in. You have just added more debt to their mortgage with an under performing product.

That seems like a pretty big gamble to me since the home is the #1 asset / investment people will make.

Plus, I have always heard that you should not mix your investments with you insurance.

Basically your first post about not understanding or apparently not having a strong feeling about this was a bit of a misstatement? First thing, an ARM can be fix, secondly the permanent ins. as with Ind. Life as you noted has a guarantee 4% interest rate, meaning if your mortgage rate is 6% or less you come out ahead or worst break even. As I suggested, doing it the way your suggested seem odd to me to begin with but it can and will work if you get the numbers right. Management of these vehicles is without a doubt the weak point for most people, as you have to make sure they will carry thru.

No doubt, the idea of home is shifting and changing. Once again the ARM is more traditional than the fix with 20% down is, in fact the Fix with 20% down is a suckers bet, and the sucker isn't the bank.

 

[James]

So, James, you are saying this could work?

I have the feeling that I just opened up a really big can of worms!

Apparently you did it on purpose as I suspected or so it seems? Yes, it is quite simple, today's fix loan with 20% down and balance over 20-30 years is a fools game that we as a society have fallen for. Basically sold via emotional hype that is nothing more than crap. Yea like all families in America are the Walton's.

 

[Crabcake Johnny]

Heaven forbid the mortagage is adjustable rate. Then never in a million years. They have foreclosures now at a record rate. The only thing protecting most homeowners in times of tragedy is their equity. Why would anyone want to play their equity to buy life insurance? Sounds like something life insurance companies would recommend. Wonder why.

 

[James]

Heaven forbid the mortagage is adjustable rate. Then never in a million years. They have foreclosures now at a record rate. The only thing protecting most homeowners in times of tragedy is their equity. Why would anyone want to play their equity to buy life insurance? Sounds like something life insurance companies would recommend. Wonder why.

So you get disable and can't work, now how does your Equity help?