- 135
Most people don't have the discipline to correctly pull it off over time...
EIULs and Missed Fortune
- Thread starter honestagent
- Start date
- 2,152
Steve said:
I really don't know what that has to do with anything? Most people lose their homes because they can't make payments over some time period? I know what you are saying but if I take that mindset I wouldn't sell insurance, most people will not continue to make premiums, most plans lapse because of that specific reason so no one should sell insurance is your conclusion?
- 135
Sorry, that's not at all what I mean. I see a big difference in people's thoughts on investing for short term or long, and buying a product -- like insurance. (Far too many people in this country do not have the discipline to do any of these correctly. I'm not speaking of them right now!)
I just think that when people alter something like their mortgage term, too many of them are going to stop "investing the difference" at some point, or at some time during that fifteen years and mess up the practicality of the idea.
Some of these scenario's are great on paper, but follow through for most is lost at some point.
I would rather say, go for the fifteen year mortgage, manage your budget better, AND through proper budget management, come up with that same (in your scenario) amount of money and invest it. Everyone is better off then!
I just think that when people alter something like their mortgage term, too many of them are going to stop "investing the difference" at some point, or at some time during that fifteen years and mess up the practicality of the idea.
Some of these scenario's are great on paper, but follow through for most is lost at some point.
I would rather say, go for the fifteen year mortgage, manage your budget better, AND through proper budget management, come up with that same (in your scenario) amount of money and invest it. Everyone is better off then!
- 2,152
Steve said:
So you would advice people to take a higher risk, be in a worst financial picture base on some personal assumptions?
- 135
No, but if they can't afford the 15, (in your situation saying it's high-risk,)then they also can't afford the duration of 30 plus the difference, which means they're in the wrong house!
- 2,152
Steve said:
No I said the 15 year mortgage is a suckers bet, I never said anything about affordability. I believe that was you promoting taken the 15 year mortgage and budgeting not I. I simply made the point that the 15 year mortgage is not a good risk compared taken out a 30 yr mortgage and manageing the difference, by doing that the person hasn't the equity but does have cash of about the same amount of what they would of had in equity. Now the only question is it better to have cash or equity?
I just don't see the sense of what you are trying to say?
G
Guest
Guest
Thanks alot Melmunch3!
Thanks alot James!
G
Guest
Guest
Here is an article I found on the subject: http://www.uexpress.com/scottburns/index.html?uc_full_date=20050906
Here is the article from the link:
The following was written by Scott Burns
09/06/2005
TAKING MISSED FORTUNE TO THE REALITY LAB
The premise of "Missed Fortune 101," a popular insurance book, is that all of us would be better off with no equity in our homes and no money in traditional IRAs or 401(k) plans. We can do a whole lot better, the book asserts, by putting lots of cash into a life insurance policy so we can take it out later, tax-free.
As much as I would like Douglas R. Andrew's idea to work, it doesn't survive testing in the Reality Lab.
I really wish it did work. Like most of the people who will respond to the seminar advertisements appearing in major newspapers, I'm older and have some money. My wife and I have money tied up in IRAs, SEP-IRAs and a 401(k) plan. It's enough money that withdrawals will trigger full taxation of Social Security benefits. That means our effective federal income tax rate can be as high as 46.25 percent on money that was put aside at 25 percent to 33 percent.
That's not the way qualified plans were supposed to work.
So I read "Missed Fortune 101" full of hope.
In a very lucid explanation of the different types of life insurance policies, Andrew eliminates variable universal life because of its expenses and volatility. He settles on two choices:
Traditional cash value life insurance with returns based on what the insurance company earns on its portfolio.
Equity index-based policies. Throughout the book, he uses a 7.75 percent return assumption on equity index policies.
In fact, I have a universal life policy. I have owned it for 13 years. While Andrew routinely assumes that you can earn more in a life policy than you will pay on a mortgage, that isn't the case with my policy. It's paying 4.50 percent plus a 0.75 percent bonus for those who have held their policies at least eight years.
story continues below
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So I'm earning 5.25 percent. That's less than current mortgage rates. Yes, some policies pay more. But others pay less.
So I responded to a mailbox flier that offered an interesting booklet: "Minimize Taxation of Your Social Security Retirement Benefit." I met with the insurance agent who sent the booklet. A week later he offered a $494,000 life insurance policy with five premiums of $50,000 that would go into an equity index life insurance policy. The money would be allowed to grow for an additional 10 years. In the 16th year (at age 80), I would be able to borrow $25,000 a year for the rest of my life, tax-free, even as the death benefit increased.
All this was based on an equity index return assumption that was about 8.6 percent.
If the policy performed at the guaranteed rate of 2 percent, however, the outcome was very different -- the policy would exhaust my $250,000 of premium payments in the 12th year. There would be no lifetime income of $25,000. The only way to benefit in any way would be to die within 12 years -- before the policy collapsed -- so my family could collect the death benefit.
High taxes sound pretty good compared to that.
If you examine recent equity index returns (the return on large common stocks excluding dividends), that 8.6 percent index return looks pretty reasonable. From 1991 through 2000, according to Ibbotson Associates, capital appreciation of the S&P 500 index was 12.2 percent a year, compounded. Even burdened with an annual cap or limited to a percentage of the gain -- as most equity index policies are -- 8.6 percent looks very likely.
Unfortunately, the '90s were an unusual period.
While equity appreciation (excluding dividends) was over 10 percent through the '80s and '90s, it was under 3 percent in the '60s and '70s. In the 78-year period from 1926 through 2003, according to Ibbotson Associates, index appreciation ran at a compound annual growth rate of 5.9 percent. About 1 percentage point of that came from rising price-to-earnings multiples.
Bottom line: With P/E ratios at relatively high levels today, future index appreciation is likely to be closer to 5 percent than 6 percent -- if the policy has no cap or participation limit. If earnings multiples decline, it could be closer to 4 percent.
That's better than the 2 percent guarantee -- but far below the 8.6 percent assumed and projected. Andrew uses a 7.75 percent assumption that is nearly as unrealistic as what I was presented.
Then there are the last two burdens: commissions and life insurance costs. These can be devastating. After five years and $250,000 of premiums, the cash value of the policy I was offered would have been $140,000 at the guaranteed 2 percent. That's a loss of $110,000. At projected returns, it would have been worth $220,000, a loss of $30,000.
No doubt some can do better, and the actual result would be somewhere in between. The only thing certain is that most people will be disappointed, perhaps disastrously, with the consequences of exchanging home equity or tax-deferred retirement accounts for life insurance.
Here is the article from the link:
The following was written by Scott Burns
09/06/2005
TAKING MISSED FORTUNE TO THE REALITY LAB
The premise of "Missed Fortune 101," a popular insurance book, is that all of us would be better off with no equity in our homes and no money in traditional IRAs or 401(k) plans. We can do a whole lot better, the book asserts, by putting lots of cash into a life insurance policy so we can take it out later, tax-free.
As much as I would like Douglas R. Andrew's idea to work, it doesn't survive testing in the Reality Lab.
I really wish it did work. Like most of the people who will respond to the seminar advertisements appearing in major newspapers, I'm older and have some money. My wife and I have money tied up in IRAs, SEP-IRAs and a 401(k) plan. It's enough money that withdrawals will trigger full taxation of Social Security benefits. That means our effective federal income tax rate can be as high as 46.25 percent on money that was put aside at 25 percent to 33 percent.
That's not the way qualified plans were supposed to work.
So I read "Missed Fortune 101" full of hope.
In a very lucid explanation of the different types of life insurance policies, Andrew eliminates variable universal life because of its expenses and volatility. He settles on two choices:
Traditional cash value life insurance with returns based on what the insurance company earns on its portfolio.
Equity index-based policies. Throughout the book, he uses a 7.75 percent return assumption on equity index policies.
In fact, I have a universal life policy. I have owned it for 13 years. While Andrew routinely assumes that you can earn more in a life policy than you will pay on a mortgage, that isn't the case with my policy. It's paying 4.50 percent plus a 0.75 percent bonus for those who have held their policies at least eight years.
story continues below
--------------------------------------------------------------------------------
advertisement
--------------------------------------------------------------------------------
So I'm earning 5.25 percent. That's less than current mortgage rates. Yes, some policies pay more. But others pay less.
So I responded to a mailbox flier that offered an interesting booklet: "Minimize Taxation of Your Social Security Retirement Benefit." I met with the insurance agent who sent the booklet. A week later he offered a $494,000 life insurance policy with five premiums of $50,000 that would go into an equity index life insurance policy. The money would be allowed to grow for an additional 10 years. In the 16th year (at age 80), I would be able to borrow $25,000 a year for the rest of my life, tax-free, even as the death benefit increased.
All this was based on an equity index return assumption that was about 8.6 percent.
If the policy performed at the guaranteed rate of 2 percent, however, the outcome was very different -- the policy would exhaust my $250,000 of premium payments in the 12th year. There would be no lifetime income of $25,000. The only way to benefit in any way would be to die within 12 years -- before the policy collapsed -- so my family could collect the death benefit.
High taxes sound pretty good compared to that.
If you examine recent equity index returns (the return on large common stocks excluding dividends), that 8.6 percent index return looks pretty reasonable. From 1991 through 2000, according to Ibbotson Associates, capital appreciation of the S&P 500 index was 12.2 percent a year, compounded. Even burdened with an annual cap or limited to a percentage of the gain -- as most equity index policies are -- 8.6 percent looks very likely.
Unfortunately, the '90s were an unusual period.
While equity appreciation (excluding dividends) was over 10 percent through the '80s and '90s, it was under 3 percent in the '60s and '70s. In the 78-year period from 1926 through 2003, according to Ibbotson Associates, index appreciation ran at a compound annual growth rate of 5.9 percent. About 1 percentage point of that came from rising price-to-earnings multiples.
Bottom line: With P/E ratios at relatively high levels today, future index appreciation is likely to be closer to 5 percent than 6 percent -- if the policy has no cap or participation limit. If earnings multiples decline, it could be closer to 4 percent.
That's better than the 2 percent guarantee -- but far below the 8.6 percent assumed and projected. Andrew uses a 7.75 percent assumption that is nearly as unrealistic as what I was presented.
Then there are the last two burdens: commissions and life insurance costs. These can be devastating. After five years and $250,000 of premiums, the cash value of the policy I was offered would have been $140,000 at the guaranteed 2 percent. That's a loss of $110,000. At projected returns, it would have been worth $220,000, a loss of $30,000.
No doubt some can do better, and the actual result would be somewhere in between. The only thing certain is that most people will be disappointed, perhaps disastrously, with the consequences of exchanging home equity or tax-deferred retirement accounts for life insurance.
- 2,152
Now didn't I say that when projecting W/L or UL (equity or not) to assume 5%? I guess I was correct, what I disagree with the author is the home interest loan. Depending upon your credit, if good and you know how to shop the market you should be able to obtain a interest real close to 5%. In fact I brought this house I'm now living in for under 5% making it ideal to not have any equity in it!
Plus if one chooses another investment or saving vehicle that is fine, one should be smart enough to know what one has the tolerence for and what they don't have tolerence for. When using a solid insurance contract 5-6% should be the target. If its more great but several have a floor of 4 or 4.5 meaning you can't go down very far at all. Mass Mutual I beleive is leading the boat with nearly 6 to 8% return with dividends in their Par WL contract base on a 100 plus year average!
Plus if one chooses another investment or saving vehicle that is fine, one should be smart enough to know what one has the tolerence for and what they don't have tolerence for. When using a solid insurance contract 5-6% should be the target. If its more great but several have a floor of 4 or 4.5 meaning you can't go down very far at all. Mass Mutual I beleive is leading the boat with nearly 6 to 8% return with dividends in their Par WL contract base on a 100 plus year average!
G
Guest
Guest
New life insurance strategy to gain wealth has pitfalls
How is this for an idea? Free the "lazy" dollars trapped in the equity of your home by mortgaging it 100 percent. Start drawing money out of traditional IRAs and 401(k) plans before minimum required distributions trigger a possibly heftier tax bill after age 70 and a half.
Then put all that newfound money in the vehicle best suited, if structured properly, to provide a steady stream of tax-free cash flow: investment-grade cash-value life insurance.
No, I haven't gone bonkers. This is not my idea, and many financial planners I've talked to dismiss it as a ploy to sell life insurance (and collect commissions). I have problems with the way I've seen the idea presented in advertisements and financial seminars. But I don't want to reject out of hand some of the concepts underpinning the strategy, which is explained in the conventional-wisdom-challenging books "Missed Fortune" and "Missed Fortune 101" (Warner Books) by Douglas R. Andrew.
This admittedly counterintuitive strategy consists of paying the greatest possible premium to buy the least amount of death benefit and still have a contract qualify legally as life insurance. That way, the excess premium (the amount beyond what's needed for the actual insurance) grows tax-deferred, generating cash value.
Managed properly, this growing cash value can be accessed tax-free through withdrawals that don't exceed the premium paid and/or policy loans in which the interest charged is mostly if not totally offset by the interest credited on the cash value. As a bonus, the beneficiary gets a tax-free death benefit after the insured dies.
"I would say the reason (this strategy) gets a bad rap is that most people flat out don't understand it," said Andrew, president of Paramount Financial Services in Salt Lake City. "I would say 99 and a half percent of life insurance agents don't understand how to do it."
These policies require monitoring to make sure the size and timing of premiums, withdrawals and/or loans do not violate any rules, create a big tax liability and/or cause the policy to lapse. But the strategy can make sense, particularly for people in high tax brackets who don't want stock market risk and can afford to pay sizable premiums and wait the several years needed for the cash value to overcome high initial costs, including agent commissions.
My problem is with the idea that people who can't afford these policies otherwise take money from their home equity or retirement plans.
Some advertisements for this strategy imply there is some magic way to withdraw money tax-free from deductible IRAs and 401(k) plans. There isn't any. The strategy actually consists of offsetting the taxes due on withdrawals with a higher tax deduction by taking out a bigger mortgage, preferably an interest-only mortgage. The false assumption is that the entire mortgage interest can always be deducted (for example, a taxpayer in the 25 percent bracket paying $15,000 a year in mortgage interest would always save $3,750 in taxes).
"That's just not true," said Martin Zickert, a financial adviser in Vero Beach, Fla. "They seem to forget the concept of standard deductions." You benefit only from the amount that itemized deductions exceed the standard deduction, which for 2005 is $10,000 for a couple filing a joint return, plus an additional $1,000 for each spouse who is at least 65. Also, "the idea of an interest-only loan makes me really nervous," Zickert said. "Someday you are going to have to pay the principal back."
Andrew's argument is that the life insurance cash value would grow more than large enough over time to be able to repay the mortgage loan. Illustrations used to support this argument typically are based on interest rate and/or return projections that are higher than any minimum interest rate guaranteed by the insurance company.
"The idea of buying life insurance to gain wealth can work very well," Zickert said, "but you have to make sure (the money for the premiums) is excess money you don't really need."
My other concern is the implicit suggestion that this strategy is the only way to go.
"Every strategy out there is going to work for somebody, but the question to ask is, is it right for me?" said Patrick Astre, a certified financial planner in Shoreham, N.Y.
● Contact Humberto Cruz at [email protected] or in care of Tribune Media Services, 435 N. Michigan Ave., Suite 1500, Chicago, IL 60611.
http://www.azstarnet.com/sn/printDS/94267
How is this for an idea? Free the "lazy" dollars trapped in the equity of your home by mortgaging it 100 percent. Start drawing money out of traditional IRAs and 401(k) plans before minimum required distributions trigger a possibly heftier tax bill after age 70 and a half.
Then put all that newfound money in the vehicle best suited, if structured properly, to provide a steady stream of tax-free cash flow: investment-grade cash-value life insurance.
No, I haven't gone bonkers. This is not my idea, and many financial planners I've talked to dismiss it as a ploy to sell life insurance (and collect commissions). I have problems with the way I've seen the idea presented in advertisements and financial seminars. But I don't want to reject out of hand some of the concepts underpinning the strategy, which is explained in the conventional-wisdom-challenging books "Missed Fortune" and "Missed Fortune 101" (Warner Books) by Douglas R. Andrew.
This admittedly counterintuitive strategy consists of paying the greatest possible premium to buy the least amount of death benefit and still have a contract qualify legally as life insurance. That way, the excess premium (the amount beyond what's needed for the actual insurance) grows tax-deferred, generating cash value.
Managed properly, this growing cash value can be accessed tax-free through withdrawals that don't exceed the premium paid and/or policy loans in which the interest charged is mostly if not totally offset by the interest credited on the cash value. As a bonus, the beneficiary gets a tax-free death benefit after the insured dies.
"I would say the reason (this strategy) gets a bad rap is that most people flat out don't understand it," said Andrew, president of Paramount Financial Services in Salt Lake City. "I would say 99 and a half percent of life insurance agents don't understand how to do it."
These policies require monitoring to make sure the size and timing of premiums, withdrawals and/or loans do not violate any rules, create a big tax liability and/or cause the policy to lapse. But the strategy can make sense, particularly for people in high tax brackets who don't want stock market risk and can afford to pay sizable premiums and wait the several years needed for the cash value to overcome high initial costs, including agent commissions.
My problem is with the idea that people who can't afford these policies otherwise take money from their home equity or retirement plans.
Some advertisements for this strategy imply there is some magic way to withdraw money tax-free from deductible IRAs and 401(k) plans. There isn't any. The strategy actually consists of offsetting the taxes due on withdrawals with a higher tax deduction by taking out a bigger mortgage, preferably an interest-only mortgage. The false assumption is that the entire mortgage interest can always be deducted (for example, a taxpayer in the 25 percent bracket paying $15,000 a year in mortgage interest would always save $3,750 in taxes).
"That's just not true," said Martin Zickert, a financial adviser in Vero Beach, Fla. "They seem to forget the concept of standard deductions." You benefit only from the amount that itemized deductions exceed the standard deduction, which for 2005 is $10,000 for a couple filing a joint return, plus an additional $1,000 for each spouse who is at least 65. Also, "the idea of an interest-only loan makes me really nervous," Zickert said. "Someday you are going to have to pay the principal back."
Andrew's argument is that the life insurance cash value would grow more than large enough over time to be able to repay the mortgage loan. Illustrations used to support this argument typically are based on interest rate and/or return projections that are higher than any minimum interest rate guaranteed by the insurance company.
"The idea of buying life insurance to gain wealth can work very well," Zickert said, "but you have to make sure (the money for the premiums) is excess money you don't really need."
My other concern is the implicit suggestion that this strategy is the only way to go.
"Every strategy out there is going to work for somebody, but the question to ask is, is it right for me?" said Patrick Astre, a certified financial planner in Shoreham, N.Y.
● Contact Humberto Cruz at [email protected] or in care of Tribune Media Services, 435 N. Michigan Ave., Suite 1500, Chicago, IL 60611.
http://www.azstarnet.com/sn/printDS/94267
