Return on Investment

[NewAgent2017]

15 year fixed mortgage rate is around 3%. Internal Rate of return on a good whole life insurance is at least 4%.
Throw in the 30% marginal income tax bracket, mortgage cost will drop to 2.1%.
Is there a reason one wouldn't refinance a paid off house , then throw in the lump sum into a whole life policy?
Welcome thoughtful discussions. peace

 

[DHK]

1. Don't turn a tax-free capital asset into one that can become taxable by putting it into a MEC contract.

2. Most companies don't allow 'premium financing' and they view this as a form of premium financing. (Yes, I've checked and you'll always want to check in advance.) There has been a lot of abuse on this subject previously, so many companies won't allow it due to the potential risk of foreclosure on homeowners. The abuse was centered more on interest-only mortgages, but insurance companies are conservative by nature and most won't allow it. There may be some that do, but they will require that you sign a waiver of liability so YOU are fully responsible.

3. Age plays a part in such a strategy because a reverse mortgage line of credit can increase at a GUARANTEED "rate of interest" - say 5.75% per year and the unused portion can compound for as many years as they live in the home.

The best and most "compliance friendly" advice would be to NOT pay additional into a home mortgage, refinance existing mortgages to a 30-year fixed for maximum cash flow, liquidity, and tax deductions... and pay for life insurance out of the found cash flow.

 

[NewAgent2017]

Thank you, DHK!

Agree age and family financial strength will play a critical part - for couple in mid-40s/early 50s, with minimum life insurance but paid off house (yes, I know, a "What??!!" for insurance pros here"), this probably would lend a unique way to reassess/reallocate family assets.

Didn't think it would fall on the gray edge of premium financing as I haven't heard about the term before. I had googled and filled up my blank page of "premium financing" the past one hour

"don't know what you don't know", as how the saying goes, there are so many things to learn in the insurance industry, I appreciate your well-rounded insights!

 

[pfg1]

There are a ton of options, and that is a big discussion with way more info needed than is here. Certainly it could be a good option, but as an advisor recommending that can be a slippery slope now adays.

The way to do it (if you were going to) is a max funded non-mec contract. Again, specifically how to design - more info would be needed.

 

[VolAgent]

Two issues that were danced around, but not directly addressed.

1. If you took out a new mortgage and receive a lump sum, what do you do with it? If you do a single premium whole life, it will almost certainly be a MEC and thus limit options for taking income later. If you do a life pay, 10 pay, etc., where are you going to park the money in the meantime to make the payments? What is to keep the money for getting spent for other needs/wants?

2. It is almost certain the cash value will be lower than initial premium for several years. This would likely be a concern to any buyer of the policy, assuming you are looking at this as a marketing strategy versus a personal strategy for your own needs.

Also, I admit I am not aware of the compliance aspects of home equity line of credit or a home mortgage on a property you already own free and clear. Does the lender ask the reason, and if so is buying a life insurance policy one they will accept?

Finally, it seems like a huge compliance nightmare as a life agent if you can find a company that will take the money. As long as it is isn't a reverse mortgage, I believe you can find some companies that will do it. But you better document, document, document.

 

[DHK]

Two issues that were danced around, but not directly addressed.

1. If you took out a new mortgage and receive a lump sum, what do you do with it? If you do a single premium whole life, it will almost certainly be a MEC and thus limit options for taking income later. If you do a life pay, 10 pay, etc., where are you going to park the money in the meantime to make the payments? What is to keep the money for getting spent for other needs/wants?

SPIA 10 pay period certain would do the job.

2. It is almost certain the cash value will be lower than initial premium for several years. This would likely be a concern to any buyer of the policy, assuming you are looking at this as a marketing strategy versus a personal strategy for your own needs.

True, but the policy should be structured as 'just under MEC guidelines' for it to be remotely appropriate.

Also, I admit I am not aware of the compliance aspects of home equity line of credit or a home mortgage on a property you already own free and clear. Does the lender ask the reason, and if so is buying a life insurance policy one they will accept?

Finally, it seems like a huge compliance nightmare as a life agent if you can find a company that will take the money. As long as it is isn't a reverse mortgage, I believe you can find some companies that will do it. But you better document, document, document.

It's been a while since I was a banker, but last I checked, using HELOC or cash out refinance proceeds for debt consolidation, emergency funds, starting up a business (talk about a risk), are usually all acceptable reasons for borrowing against one's home, even if it is free and clear.

But to take the proceeds to "invest" in life insurance and/or securities... is generally seen as an abusive sales practice. I wouldn't DARE touch it with securities. But even if you did, you must be able to document that you did NOT solicit (recommend) the borrowing against someone's home to invest.

Back at the credit union (in 2007), I met with a member who had $150,000 borrowed out of his home equity line of credit for a specific purpose, but that purpose was no longer available. So, he wanted to invest with me. After meeting with him, I contacted my compliance officer and explained the situation. He simply asked me if I had solicited the HELOC borrowing, and I explicitly said no. He said to just document it in my notes and in our system and it would be fine for compliance (prevent complaints) purposes. I think I sold him CAIBX, but C-shares (1-3 year time frame). Of course, in 2008, that fund tanked about 30%... but that's part of the risk of investing. Never heard anything about a complaint of any kind (I had left the firm by then).

Anyway, sometimes you can do "risky" things, but it depends on who initiated the risky transactions and, as VolAgent said - document EVERYTHING. Don't be afraid to contact company compliance departments either. That's what they are there for! Better to ask and be safe, than to do something and screw things up for the company, the client, and yourself.

 

[walthamny]

Here are some of the cons to consider.

You refinance a paid off house, you lower your credit score and decrease your borrowing capacity for other types of unsecured loans.

The tax calculation you have does not account for AMT or the clawback on mortgage interest deduction.

In some states, homes have unlimited protection in case of a lawsuit whereas Cash value life insurance is very state specific, sometimes no protection at all.

You borrow against your home and 10 years later, you decide to move near to be your kids or grandkids. What if you can no longer get a mortgage? What if the house value drops 50%.

if you have multiple beneficiaries, you have to make sure the mortgage is being paid when you die while they sort out and sell the house. While you will have life insurance to offset, it does not pay that quickly in the first 2 years. The beneficiaries better have the funds.

 

[regularAgent]

15 year fixed mortgage rate is around 3%. Internal Rate of return on a good whole life insurance is at least 4%.
Throw in the 30% marginal income tax bracket, mortgage cost will drop to 2.1%.
Is there a reason one wouldn't refinance a paid off house , then throw in the lump sum into a whole life policy?
Welcome thoughtful discussions. peace

Yes there is a reason for that, but first you have to look at it in a different way, Everything here is going to depend in the age of the owner, and the kind of mortgage he poseses at the time and the equity of the house, even thought, putting any money into a whole life it doesn't made sense.
But what about if the owner y at least 60 and own a term or a IUL decreasing similar to the amount of the mortgage, and he made all the arrangements to complete a reverse mortgage (62 years old). If the equity is good enough he get the that money and divided into a two annuities, one with LTCi, and another annuity as income producing, for a life time. Is this investment is over $250,000 probable he would expect to get a good money for LTC when he turn 70 and he can star distribution in the other one at seventy, maximizing his Social Security (if he have it) at the age of 67.
In the other hand if he is. Below 42. He better find a CFP to diversified the investment, cashing off the house and buying half of the money in a cheaper ine but we'll located one and the rest the CFP will said.
When he died, the Term or IUl paid the mortgage, and he has the income and the LTCi, there is also a annuity that doble the amount in 10 years, getting close to the 7%. This can be use as income producer after that time.

 

[VolAgent]

SPIA 10 pay period certain would do the job.



True, but the policy should be structured as 'just under MEC guidelines' for it to be remotely appropriate.

They weren't said as insurmountable obstacles, just issues that need to be addressed. Need to make sure that the money doesn't end up getting spent. They can easily stop using the SPIA for premium. And they still may not understand why the cash value is less than total premiums.