Why sell permanent Insurance?

[Crabcake Johnny]

Personally, I have an overfunded indexed UL which has performed very well so far. However, I would never encourage a client to take equity out of their house or business to get such a plan so that they can generate a retirement income. It is simply not a tolerable level of risk.

At the end of the day, it all boils down to the specific cash flow status of the individual client. You cannot make sweeping statements about the effectiveness of such a product and expect them to hold true every time. There will be cases where they fit and cases where they won't.

We live in a society that now endorses the 30 and soon to be 40 year mortgage with next to nothing down. Now that is okay, but using ones equity is to much risk? Now you have to understand that simply doesn't make sense at all!

Now if you express that the mortgage should be done only with at least 20% down and should be no longer in duration then 20 yet 10 years is better then you have a point. If not then I have no real reason to give credence to your point of risk. Lets face it, most mortgages today make no sense at all. This idea of equity management is no more then eliminating the risk of such long mortgages.

100% agree. I have three good friends who are all in big trouble with their mortgages. Everyone's stretched to the max on payments and two of them did adjustable rate mortages with zero down. I have friends who are taking out equity loans to go on vacations and buy cars thereby erasing the accrued value in their homes. The 15 year mortgage with 20% down and making sure you can make the payment with one week's worth of earnings after taxes is the proper choice. More and more people are becoming house poor.

 

[maxreferrals]

So you can buy Term, place money in a safe account and purchase a LTCi policy or you can just buy W/L! Plus you have the CI Ryder along with the WP one can place within these contracts making it a partial secondary DI policy with a plan of continuence if disaster strikes.

I'm at a lost to find another financial tool that do so much as the W/L Policy can do. Can I go out and buy a LTC policy that can fill in as a Life Insurance Policy? No. Can I invest in a MF and expect if something happens to me in 5 years that my LTC or any continuious fulfillment of that account be available? No. In other words, there is nothing to compare to the W/L Policy!

Question: So this pitch/selling proposition is that this is a "one-stop, all-encompassing product?" Convenience factor...

 

[James]

So you can buy Term, place money in a safe account and purchase a LTCi policy or you can just buy W/L! Plus you have the CI Ryder along with the WP one can place within these contracts making it a partial secondary DI policy with a plan of continuence if disaster strikes.

I'm at a lost to find another financial tool that do so much as the W/L Policy can do. Can I go out and buy a LTC policy that can fill in as a Life Insurance Policy? No. Can I invest in a MF and expect if something happens to me in 5 years that my LTC or any continuious fulfillment of that account be available? No. In other words, there is nothing to compare to the W/L Policy!

Question: So this pitch/selling proposition is that this is a "one-stop, all-encompassing product?" Convenience factor...

No, I think its best to be used as a product that enhances other products.

 

[Airborne1]

Separation of home equity and EIUL funding

Personally, I have an overfunded indexed UL which has performed very well so far. However, I would never encourage a client to take equity out of their house or business to get such a plan so that they can generate a retirement income. It is simply not a tolerable level of risk



Exactly what risks are you referring to ?

I've heard many so called "financial professionals" say this is too risky for most people but I've never them enumerate the reasons why.

Care to elaborate ?

 

[James]

Re: Separation of home equity and EIUL funding

Personally, I have an overfunded indexed UL which has performed very well so far. However, I would never encourage a client to take equity out of their house or business to get such a plan so that they can generate a retirement income. It is simply not a tolerable level of risk



Exactly what risks are you referring to ?

I've heard many so called "financial professionals" say this is too risky for most people but I've never them enumerate the reasons why.

Care to elaborate ?

I think the main risk used is the "Failure to Carry thru the Plan". Which one would think ends in mortgage money being used on spending instead of investing, but that tends to happen anyway! Plus if they don't carry thru on overfunding their UL then you have a underfunded UL that'll end up in lapsing and possible taxation issues if money was withdrawn from the insurance contract.

 

[Guest]

Airborne1: Exactly what risks are you referring to ?

I've heard many so called "financial professionals" say this is too risky for most people but I've never them enumerate the reasons why.

A few risks I can think of:

1. You lose your job, are unemployed for a protracted period of time. How do you pay for that mortgage and insurance premium?

2. You are disabled (though you can buy a DI rider so that is no big deal). However, that rider would pay the minimum premiums to keep it funded. What happens when you are no longer disabled or when the disability premium payments end (I know on my policy it ends at age 60)
and now you have to pay huge COI on the amount at risk because there was no overfunding.

3. DEFLATION hits the economy. We have experienced only INFLATION, in recent decades, but there is such a thing as deflation. You mortgage your home, the value falls, if severe enough, it could fall in value to less than you owe on your mortgage. Meaning, your mortgage outstanding is more than the value of the home.

4. You get divorced. Assume there are children. The wife gets a decree that says the life insurance must be kept in force. But, you no longer live in the home. Can you afford to pay for a home (or do you have to sell it) and pay for the policy.

5. I hope you realize expecting to withdraw "tax free" loans is exceedingly risky. You better always be able to keep the policy in force or face a huge tax bill.

6. What happens if you have all these "tax free" loans and all of a sudden you are too mentally feeble (through age or illness) to manage the policy to keep it in force - - again, potential tax bill.

7. Another Hurricane Katrina hits where you own this home. The P&C company refuses to pay for your totally demolished home because it says damage was caused by flooding, not wind.

[OK I know alot of people will think it is good to have a fully mortgaged home if the P&C Co. will not pay off. But, for the debtor, that mortgage is still a legally enforceable debt. No big deal right, you still have the CV in the policy. Well, take out a huge loan, if you can't pay the premiums, and the policy lapses, now you have a mortgage AND a nice tax bill. Taxes are not dischargeable through bankruptcy.]

8. Just some things I thought of off the top of my head. I am sure there are others I have not thought of. It boils down to a bird in the hand is worth two in the bush.

Are you willing to pawn a sure thing, something you own (in the form of a second mortgage) to buy something else and pay for both.

It is not only a financial decision, but also an emotional one.

 

[James]

Yet the problem I see is that the risk you specify and others about this strategy is far less risk than having equity built up that you'll lose if any of these things happen! Everything has a risk, yet the idea of having equity in the home is far riskier than not having equity, sure the risk to the bank is greater if you have no equity but I like it that way!

In the end I'm totally convince that emotion is driving this debate for those that support equity ownership Vs equity management.

 

[Airborne1]

Why separate equity & Fund an EIUL

marcircus said

A few risks I can think of:

1. You lose your job, are unemployed for a protracted period of time. How do you pay for that mortgage and insurance premium

The EIUL is max funded within a five year period using the equity in the home and diverting other retirement monies from IRAs & ineffective qualified plans; there are no more payments to the EIUL after that. If I put you in a 5/1 ARM, I reduced your monthly mortgage payment by hundreds of dollars per month and gave you a liquid side fund for emergencies. Your statement about losing your job for a protracted period of time is exactly the reason you should separate the equity in the first place. If you were unemployed for 18 months, how would 98% of Americans weather the storm WITHOUT destroying their qualified plans ? You cannot take a loan if you're unemployed and you cannot write off losses in a matching plan. You may get a break from the IRS on the 10% penalty, but you'll still owe income taxes. When you're strapped for cash, the last thing anyone needs is the IRS holding out their greedy hands in addition to other bill collectors.

2. You are disabled (though you can buy a DI rider so that is no big deal). However, that rider would pay the minimum premiums to keep it funded. What happens when you are no longer disabled or when the disability premium payments end (I know on my policy it ends at age 60)
and now you have to pay huge COI on the amount at risk because there was no overfunding.


The basic concept is to overfund the EIUL in the first 5 - 7 years; thereafter no premium payments are necessary. COIs can be reduced at later ages by one of 2 methods, but those who often promote whole life over UL, EIUL, or VUL don't often get why.


3. DEFLATION hits the economy. We have experienced only INFLATION, in recent decades, but there is such a thing as deflation. You mortgage your home, the value falls, if severe enough, it could fall in value to less than you owe on your mortgage. Meaning, your mortgage outstanding is more than the value of the home.

That would a primary reason to separate equity from the home in the 1st place, BEFORE the equity was drastically reduced by market conditions. The goal in Missed Fortune is to preserve and enhance the equity in the home. Separating the equity gives YOU choice & control over the money, not the lender.


4. You get divorced. Assume there are children. The wife gets a decree that says the life insurance must be kept in force. But, you no longer live in the home. Can you afford to pay for a home (or do you have to sell it) and pay for the policy.

Again, this strategy involves max funding in 5 - 7 years; then no more premium payments.

5. I hope you realize expecting to withdraw "tax free" loans is exceedingly risky. You better always be able to keep the policy in force or face a huge tax bill.


Overblown by financial professionals who seek to mystify the public enough to steer them away from permanent insurance. The illustrations done during the 1 on 1 consultations usually demonstate how much can be loaned out without depleting the principal, or starting to deplete the principal at a ripe old age. Your concern of risk relates more to a VUL rather than an EIUL. I would've recommended an EIUL in your situation and for most of the public in general. Far less complications and risks involved.


6. What happens if you have all these "tax free" loans and all of a sudden you are too mentally feeble (through age or illness) to manage the policy to keep it in force - - again, potential tax bill.

I offer a yearly review of their policy/situation. For someone who has diminished capacity, I would try to involve one of their family members. But, when all is said and done, NO one can save you from yourself.

7. Another Hurricane Katrina hits where you own this home. The P&C company refuses to pay for your totally demolished home because it says damage was caused by flooding, not wind.

[OK I know alot of people will think it is good to have a fully mortgaged home if the P&C Co. will not pay off. But, for the debtor, that mortgage is still a legally enforceable debt. No big deal right, you still have the CV in the policy. Well, take out a huge loan, if you can't pay the premiums, and the policy lapses, now you have a mortgage AND a nice tax bill. Taxes are not dischargeable through bankruptcy.]

Again, the premiums were already paid in the first 5-7 yrs. using the equity in the home or by reducing the downpayment applied to the mortgage initially - no premiums are necessary after that.

In your example above, How would you like to have been in yr. 10 of a 15-yr mortgage when Katrina happened & your P&C company did not cover the loss ? You made ALL those extra payments in an attempt to reduce your long-term interest costs on the mortgage for nought !
By the way - you do of course realize you cannot deduct losses on personal real estate.

Here's my personal story-My wife and I were laid off close to each other during the last recession. After going through savings and only being offered 10-15% of the equity by the lender, we started tapping qualified money & ended up selling the house to avoid foreclosure.

It's foolish to think it can't happen to you - there are many examples coast to coast where the equity was lost but here's a couple close to home

1. Developer in Virginia Beach was almost finished with developing a residential area, and residents had already moved in. During the last few houses under construction, it was discovered the soil/water was contaminated by military activity nearbydecades ago. How would you like to have put down a large downpayment or put all the equity from your previous home in this development ? Your P&C coverage is worthless.

2. It rained for almost 5 days straight which caused some flooding in Alexandria, VA. The additional problem it caused was storm drains overflowing into yards/homes. This was not covered by P&C, and the federal government denied aid.

The problem with most financial professionals is their statement "your home is not an investment", which is paradoxical. If your home is not an investment, than it should NOT be used to store value, just people. I disagree with any so called professional that says your home is not an investment. Here's why - In most cases, it is at least the 2nd if not the largest asset owned by Americans, and the largest debt. IF YOU TREATED IT LIKE AN INVESTMENT, you would not foolishly squander the equity, nor would you be susceptible to total loss if you can't make the payments.

Separating the equity from the home is nothing more than diversifying an asset.

You absolutely need to separate emotion from logic to understand this


You need to read Missed Fortune 101 and look at EIULs. There are only a couple of good EIULs that could be used in conjunction with separation of home equity. In general, EIULs are a much better product for the majority of American versus VULs and Whole life.

 

[J.R.]

1. Developer in Virginia Beach was almost finished with developing a residential area, and residents had already moved in. During the last few houses under construction, it was discovered the soil/water was contaminated by military activity nearbydecades ago. How would you like to have put down a large downpayment or put all the equity from your previous home in this development ? Your P&C coverage is worthless.

>>>>>Do you have a link to this article. Specifics about the developer would be useful as well. An environmental study should have been completed prior to building.

The problem with most financial professionals is their statement "your home is not an investment", which is paradoxical. If your home is not an investment, than it should NOT be used to store value, just people. I disagree with any so called professional that says your home is not an investment.

>>>>>I agree with you on this point. People need to look at buying a house as an invesment, although the no-money down, invest the difference mentality of some financial professionals is not for the entry-level investor.

 

[James]

Re: Why separate equity & Fund an EIUL

You need to read Missed Fortune 101 and look at EIULs. There are only a couple of good EIULs that could be used in conjunction with separation of home equity. In general, EIULs are a much better product for the majority of American versus VULs and Whole life.

While I agree with your ideas for the most part I find the book or books missed fortune misuses numbers and/or projections. I think one would be more succesful in actual numbers if you use other resources, such as the idea that you don't need to match or have a greater return Vs the mortgage rate. Most think this, that you have to achieve a higher return then your mortgage rate, but you have to remember that the mortgagae loan rate is simple while the investment is a compounding rate.