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A critique of "Missed Fortune 101"
Old 07-17-2006, 01:15 PM   #1
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A critique of "Missed Fortune 101"

Over the weekend, I read the book "Missed Fortune 101," by Douglas R. Andrew (http://www.missedfortune.com/index.aspx).* In his book, Mr. Andrew describes an unorthodox strategy for saving for retirement:* He advocates maintaining little or no equity in one's home during the accumulation phase while investing the principal payments and tax savings in equity-indexed universal life insurance.* In retirement, the premium payments can be withdrawn for income (tax-free, of course), and then, once the premiums have all been withdrawn, the investment gains can continue to be withdrawn tax-free by taking out loans against the cash value of the policy at an effective rate of 0%.* The policy death benefit and any remaining cash value will pass to one's heirs tax-free.

Because I was skeptical of some of Mr. Andrew's claims, I searched these forums and the internet for any potentially helpful commentary on this book, but came up with very little.* Scott Burns did review it in a couple of his columns, but he didn't go into as much detail as I would have liked.* Those columns can be found here: http://tinyurl.com/aajda and http://tinyurl.com/dl9et.

After spending the weekend reading and thinking about the book, I decided that it might be helpful to others if I were to post some of my thoughts here.

In some ways, Mr. Andrew's strategy is similar to my own.* I do believe that it is often better to save for retirement than to pay down the balance on one's mortgage.* However, there are some points on which Mr. Andrew and I disagree.

First, Mr. Andrew believes that home equity has a 0% effective rate of return.* On the contrary, the rate of return is equal to the interest rate on the mortgage.* The fact that the rate of return is nonzero is evident because an individual who has paid off his or her mortgage will have less after-tax expenses than an individual who has not.* However, this is a minor point for me because I agree with Mr. Andrew that funding a retirement plan would be a better use of one's money.

Second, Mr. Andrew believes that an individual who invests his or her mortgage principal payments and tax savings in universal life insurance will end up with a larger after-tax retirement income than if he or she had invested instead in a qualified retirement plan, such as a 401(k), 403(b), or IRA.* This assertion would be true if an equal dollar amount were invested in both cases and if the after-fee investment rates of return were equal.* However, Mr. Andrew fails to account for the additional tax savings that would be generated by contributing to a qualified retirement plan in addition to maintaining a mortgage.* If these savings were also invested, thus ensuring an after-tax disposable income that would be equal in both cases, then both strategies would produce the same after-tax retirement income, assuming that the individual's marginal tax rate remains unchanged over time.* (It is worth mentioning that a Roth retirement account would also produce the same end result under these assumptions.)* Furthermore, I believe that investing in a 401(k), 403(b), or IRA would be the better choice because the fees and expenses incurred would likely be less than those of a life insurance policy.* However, I do admit that I had not previously considered the possibility of investing in life insurance after maxing out my annual retirement account contributions; I might consider using this strategy when that time comes.

Third, Mr. Andrew believes that it is better to increase the balance of one's mortgage over time by refinancing every few years as the house appreciates in value and to invest the cashed-out equity.* While I concede that one might achieve a larger after-tax retirement income using this strategy compared to maintaining a constant mortgage balance, I prefer the latter option because of the psychological benefits: the sleep-at-night factor.

Of course, for those who prefer to pay down their mortgages (I don't want to open up the arbitrage can of worms), these last two points are moot.
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Re: A critique of "Missed Fortune 101"
Old 07-17-2006, 01:25 PM   #2
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Re: A critique of "Missed Fortune 101"

First: The dead-equity issue of your house is well documented. You can make a case for using that equity for investments. As long as the after-tax return on the investments exceeds the after tax cost of the home loan you would be ahead. What is missing here is the risk issue. Investing in your house is pretty low risk. Investments with home equity are high(er) risk. Some people think that you shouldn't use your home as a rsik-based investment. Clearly the referenced author disagrees.

Second: Universal life is a weak investment. I don't see any advantage of using it for a home equity investment or any other investment. Do a search on this forum about universal life (or whole life) and you'll get the drawbacks of this approach. If I was to use home equity for investments I would choose other investments besides universal life.

Third: The dead-equity issue again. See the first item response
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Re: A critique of "Missed Fortune 101"
Old 07-17-2006, 01:28 PM   #3
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Re: A critique of "Missed Fortune 101"

Uh, you forgot the biggest problem with this wacky/foolish strategy: the mammoth expense ratio you would incur within the life insurance policy that swamps all other considerations. *Insurance salesman love to pitch this "strategery", but it is a very poor choice. *You pay so much for the funds within the policy, policy administration fees, and life insurance coverage, and any commissions, that you will never come out ahead of low cost mutual fund/ETF alternatives. *Anyone who tells you otherwise is either looking to sell you a huge policy or has already bought one.
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Re: A critique of "Missed Fortune 101"
Old 07-17-2006, 01:54 PM   #4
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Re: A critique of "Missed Fortune 101"

Not to hijack the thread, but many years ago I tried buying additional disability insurance from Megainsurance Co. Their salesman was happy to schedule an appointment, but when he showed up, he all but brushed aside my questions about disability insurance and tried to sell me life insurance instead even though I told him that I was happy with what I had at work and didn't need more life insurance. Do these salesmen really make that much more money on life insurance compared to disability insurance*
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Re: A critique of "Missed Fortune 101"
Old 07-17-2006, 01:54 PM   #5
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Re: A critique of "Missed Fortune 101"

Yeah, I agree about the higher fees and expense ratios of universal life policies compared to many mutual funds.

In my opinion, Mr. Andrew's biggest mistake is item number two, above, where he "proves" the "superiority" of his strategy over IRA's and 401(k)'s by comparing apples to oranges.* He even goes so far as to recommend that people should withdraw all of their money early from those accounts, pay the taxes and penalties, and then invest what's left in universal life.* Unbelievable!
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Re: A critique of "Missed Fortune 101"
Old 07-17-2006, 07:53 PM   #6
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Re: A critique of "Missed Fortune 101"

http://r0k.us/insurance/vp/visibleLife.html

We have discussed this guys ideas on the richdad forum .

One of the reasons I think its better to do the roth than max the 401k is cause of the unknown tax issues. I would imagine that much of the fees would be offset by getting the money without paying taxes. Of course I still think there are better ways to do this. On the richdad site I basically said you can do the same thing buy buying a house and having the tenant pay off the loan. You can have a property manager so you dont spend too much time being a landlord.
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Re: A critique of "Missed Fortune 101"
Old 07-19-2006, 02:40 PM   #7
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Re: A critique of "Missed Fortune 101"

Complexity, big assumptions about the distant future, and a commission-based investment product are not what i would bet my retirement on. That scheme will appeal to someone who is arrogant and greedy. One who is reasonable and willing to accept market returns will not go near that scheme. Did the salesman also say "Don't tell anyone else that you are getting in on this hot deal, there isn't enough to go around. It will be our secret."
Saving for retirement is hard. Many are looking for a shortcut. Some others have found a product to sell to those looking. Equity-based annuities have been outed, so here comes the replacement.
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Re: A critique of "Missed Fortune 101"
Old 07-20-2006, 05:33 PM   #8
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Re: A critique of "Missed Fortune 101"

Quote:
Originally Posted by brewer12345
Uh, you forgot the biggest problem with this wacky/foolish strategy: the mammoth expense ratio you would incur within the life insurance policy that swamps all other considerations. Insurance salesman love to pitch this "strategery", but it is a very poor choice. You pay so much for the funds within the policy, policy administration fees, and life insurance coverage, and any commissions, that you will never come out ahead of low cost mutual fund/ETF alternatives. Anyone who tells you otherwise is either looking to sell you a huge policy or has already bought one.
BINGO! I read the book too and was intrigued, that is until I ran the numbers! BIG BIG BIG commissions for the 'sales' advisors and a long road back to break even for the schmuck that buys it. Andrew's website touts the 'high closing rate and HUGE PAYOUTS" for brokers that sign up for his "training" program...Buyer beware......
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equity repositioning works... very well.
Old 03-30-2008, 03:01 AM   #9
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equity repositioning works... very well.

All these comments on Missed fortune 101 are interesting. I can see, that none really read the book completely. I design these plans for clients. In the plan, we consider taxation, expenses (cost of insurance and otherwise), cash flow, et. al. Many of my clients have had other financial plans designed before, and they comment that none were so thorough. Additionally, in the state approved/regulated illustrations from the companies, it compares apples to apples, side by side, your IRA to a maximum funded, and properly structured UL Contract. And yes, even after fees, it still outperforms the IRA (taxes are an expense the UL contract doesn’t have, but the IRA does). It does this because, on the withdrawal phase of retirement, if you need a net spendable $100,000 a year, all you take is $100,000. If you need the same from an IRA, you must take $150,000 (taxes) to net $100,000. In the UL policy the otherwise payable taxes are still in the policy earning interest and compounding. I have rescued many clients from there stock market losses, with a safe and dependable plan, my clients are doing very well, and all is moving along, just as we designed it to. I agree the strategy is counter-intuitive on the outset, but there is so much more to the mechanics of how and why it works internally in the policy and plan design. And over time, I make about the same as any other advisor, for managing the same money, remember, we design the policy for the least death benefit to hold the most cash. In other words, my commissions are based on the death benefit, and it is the least allowed by IRS code to hold the cash we are depositing. And I have invested an average of 30 hours per client, year one, with annual reviews to follow. It’s not as lucrative for the advisor as you might think. But if it is structured for the client properly, it is very profitable for the client, and VERY low risk. I will concede however, that there are allot of advisors out there NOT doing it correctly for their clients. I welcome your questions and comments. P.S. In Europe and other countries, UL contracts are commonly used like we use an IRA here. Also they have mortgages in several countries, where you can reinvest your equity in a portfolio they provide within the same bank and keep/earn the arbitrage. The U.S. is actually way behind on these and other strategies.
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Old 03-30-2008, 03:11 AM   #10
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Good luck with it to anyone who tries it. Let me guess this genius is a Life Insurance Sales Person.
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Old 03-30-2008, 04:22 AM   #11
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To answer chinaco, I design various strategies for clients. (Generally they come to me to save them from what their 1% fee brokers did to them, ya get what ya pay for). Often these strategies include, real estate, various exit strategies for businesses, structured sale, asset protection, estate planning, tax strategies, private funds, and yes, IRA’s, 401k, ROTH and the like, as well. Some plans take 6 to 9 months to implement, we have attorneys and CPAs we partner with to complete many parts of these plans. Yes these often include Life Insurance too. Calling me a ‘life insurance salesman’ is like a cardiologist, administers ‘first aid’. I have consulted, Avery Dennison, Anixter Bros, ITT Industries, Vinnell Corp, Ratheon, and a dozen more… and wrote business plans professionally for many years. Looking at a financial plan more as a business plan, opens your eyes to profit where others just see expense… As for Missed Fortune… the wealthier the client, they are already doing it. It’s the others, the 'know it all wanna bee's' that just don’t get it, don’t want to, and never will.
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Old 03-30-2008, 06:34 AM   #12
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Quote:
Originally Posted by KevinBrunner View Post
To answer chinaco, I design various strategies for clients. (Generally they come to me to save them from what their 1% fee brokers did to them, ya get what ya pay for). Often these strategies include, real estate, various exit strategies for businesses, structured sale, asset protection, estate planning, tax strategies, private funds, and yes, IRA’s, 401k, ROTH and the like, as well. Some plans take 6 to 9 months to implement, we have attorneys and CPAs we partner with to complete many parts of these plans. Yes these often include Life Insurance too. Calling me a ‘life insurance salesman’ is like a cardiologist, administers ‘first aid’. I have consulted, Avery Dennison, Anixter Bros, ITT Industries, Vinnell Corp, Ratheon, and a dozen more… and wrote business plans professionally for many years. Looking at a financial plan more as a business plan, opens your eyes to profit where others just see expense… As for Missed Fortune… the wealthier the client, they are already doing it. It’s the others, the 'know it all wanna bee's' that just don’t get it, don’t want to, and never will.
Geeze! Another insurance agent.. er.. excuse me financial planner?

I have worked in the Insurance Industry for most of my career... mostly Life Insurance and Financial Services in a variety of career positions in management and non-management. I know how it works from marketing to finance and a fair amount of actuarial principles.

Life Insurance can have some advantages in certain situations (your personal situation) for tax purposes in estate planning. But for most is it about mitigating the risk of loss of income!!! It is rarely the preferred vehicle for an investment or growth of assets. Mainly because of the fees.

Buy term (to mitigate the loss of income) and invest the rest! That is the old tag line and it make a lot of sense.

The funny part is that I know few actuaries that invest in Life Insurance policies... that says something!

You keep it up and you will be debunked in a brutal manner.
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Old 03-30-2008, 08:21 AM   #13
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Have not read the book and don't care to do it.....

But reading the posts here this is my take so far....

Your main benefit is that you are buying life insurance that you will then 'use' via withdrawals and loans when you need the money... but never pay income taxes on the gains... ie, you keep this thing going until you die and then the no taxation for life insurance kicks in... so ALL gains go tax free...

And it this IS the main feature of this.... what happens when you grow very old and have little money left, but still have to continue to buy that HUGE life insurance policy to keep all the income tax free.... just a question...


This strategy also locks you in.... you can never change your thinking......ever...

IIRC.... the IRS was trying to get some changes for loan withdrawals way back when I was doing taxes to prevent this kind of 'abuse'... I guess they were not successful..
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Old 03-30-2008, 08:23 AM   #14
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Do these salesmen really make that much more money on life insurance compared to disability insurance*
Yes.............
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Old 03-30-2008, 08:27 AM   #15
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All these comments on Missed fortune 101 are interesting. I can see, that none really read the book completely. I design these plans for clients. In the plan, we consider taxation, expenses (cost of insurance and otherwise), cash flow, et. al. Many of my clients have had other financial plans designed before, and they comment that none were so thorough. Additionally, in the state approved/regulated illustrations from the companies, it compares apples to apples, side by side, your IRA to a maximum funded, and properly structured UL Contract. And yes, even after fees, it still outperforms the IRA (taxes are an expense the UL contract doesn’t have, but the IRA does). It does this because, on the withdrawal phase of retirement, if you need a net spendable $100,000 a year, all you take is $100,000. If you need the same from an IRA, you must take $150,000 (taxes) to net $100,000. In the UL policy the otherwise payable taxes are still in the policy earning interest and compounding. I have rescued many clients from there stock market losses, with a safe and dependable plan, my clients are doing very well, and all is moving along, just as we designed it to. I agree the strategy is counter-intuitive on the outset, but there is so much more to the mechanics of how and why it works internally in the policy and plan design. And over time, I make about the same as any other advisor, for managing the same money, remember, we design the policy for the least death benefit to hold the most cash. In other words, my commissions are based on the death benefit, and it is the least allowed by IRS code to hold the cash we are depositing. And I have invested an average of 30 hours per client, year one, with annual reviews to follow. It’s not as lucrative for the advisor as you might think. But if it is structured for the client properly, it is very profitable for the client, and VERY low risk. I will concede however, that there are allot of advisors out there NOT doing it correctly for their clients. I welcome your questions and comments. P.S. In Europe and other countries, UL contracts are commonly used like we use an IRA here. Also they have mortgages in several countries, where you can reinvest your equity in a portfolio they provide within the same bank and keep/earn the arbitrage. The U.S. is actually way behind on these and other strategies.
OK........I'm convinced. You're an insurance hack that has never had a fiduciary interest in your client's well-being. Quit feeding them BS, I have been an FA for a long time and I for one KNOW BETTER.
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Old 03-30-2008, 08:39 AM   #16
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The funny part is that I know few actuaries that invest in Life Insurance policies... that says something!
Heh, and when I used to rate creditworthiness of life insurers, there were 3 companies that most of my colleagues and I bought whatever term, etc. we needed.
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Old 03-30-2008, 09:45 AM   #17
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To answer chinaco, I design various strategies for clients. (Generally they come to me to save them from what their 1% fee brokers did to them, ya get what ya pay for).
Interesting, you "Save" them money because it's BURIED in a 400 page prospectus they don't take the time to read? You must be the "king of bundled products"............

Quote:
Often these strategies include, real estate, various exit strategies for businesses, structured sale, asset protection, estate planning, tax strategies, private funds, and yes, IRA’s, 401k, ROTH and the like, as well. Some plans take 6 to 9 months to implement, we have attorneys and CPAs we partner with to complete many parts of these plans.
You are not the only person doing that on this board.......

Quote:
Yes these often include Life Insurance too. Calling me a ‘life insurance salesman’ is like a cardiologist, administers ‘first aid’. I have consulted, Avery Dennison, Anixter Bros, ITT Industries, Vinnell Corp, Ratheon, and a dozen more… and wrote business plans professionally for many years. Looking at a financial plan more as a business plan, opens your eyes to profit where others just see expense… As for Missed Fortune… the wealthier the client, they are already doing it. It’s the others, the 'know it all wanna bee's' that just don’t get it, don’t want to, and never will.
Nice comment..........was that from your latest insurance company sponsored free lunch event??
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Old 03-30-2008, 10:23 AM   #18
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I read the book, and thought that perhaps for high-net worth, high current income that there was some merit to portions of the strategy. Hey if I could get a tax-free rate that was as good as a taxable investment net return if not better wow sign me up. But the problem is exactly what others have posted fees,fees, fees, .. VULs appear to be a bad product when the stock market is making 25% gains each year. Many of the people who followed that strategy are probably truely missing their fortune.
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Old 03-30-2008, 11:16 AM   #19
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I have an idea. Perhaps "KevinBrunner" would post the name of the product and/or the prospectus so all of us can look at it. I am assuming there's nothing to hide................
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Old 03-30-2008, 12:11 PM   #20
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I do have to say there is something in the life insurance part that has some merit. My mother wanted to buy a single premium annuity way back when (before I knew much)... but I did convince her to buy one that was part of a life insurance product.... it is like a CD.. the interest rate resets every year and the value grows... but you do not have to pay any income tax on the increase...

Now, if she never touches the money, then when she dies it pays out as a life insurance policy with a higher face value than the CD value... without every paying any income tax on the increase... so for a high income person, this is attractive. But as I said, we are 'stuck' with this investment. It is not worth paying the income tax hit on the gain over the last 20 years all at once.... but at least it is a good rate for a CD.
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