Aboutleboyd Expertise I can answer questions relating to life insurance, estate planning, business succession/continuity planning and tax-effecient retirement planning. I have advised clients for many years on these areas, and how they relate to life insurance.
Likewise, I have worked with many on Long-Term Care needs.
Experience I have been a top producer for the past 5 years. Prior to that I was the CEO of an international company, having the concerns from a clients perspective (now having been a client of NYL for more than 15 years)
Organizations Society of Financial Services Professional
Million Dollar Round Table
Education/Credentials In addition to an BBA and an MBA from a top-10 school. I have earned the LUTCF, NASD Series 6, 7, 63 and 66 licenses.
Awards and Honors Top Life Producer
Top Long-Term Care Producer
Question QUESTION: I am very interested in the concept of taking home equity to buy an EIUL. My concern is if the insurance company becomes insolvent, I will only have up $100,000 of protection from the CA Guarantee Association(from what I have researched on my own). If an EIUL is funded with 50k, 75k, 100k for the purpose of letting it grow to use as a source of retirement income 20 to 30 years later, the risk would be significant as your cash value should be far above $100,000. What are your thoughts on this?
ANSWER: Darren,
I am unaware of anyone who has actually lost any death benefit or cash value because of a failure in a company. Historically, the policies are picked up by another insurance company, providing the same protection and cash value.
What can change in this situation is the contract language. When a company takes a policy from a failed company, they have the right to change the contract and thereby affect the purpose of purchasing the contract.
I'm not a big fan of EIUL, but that's irrelevant. The key is to make sure you purchase it from a very stable company - and that doesn't mean a company who advertises a lot.
Verify the credit ratings of the company - remembering that an "A" rating doesn't mean the same thing it meant in school when you made an "A" in a class. An "A" rating can actually be an average or below average rating. Look at the rating system of the rating organization and then consider the rating of the insurance company. This is the best way to try to protect yourself.
One item that you might want to consider is whether you want to load up the policy at the beginning of the policy. A life insurance contract has tax free growth *as long as the policy doesn't "MEC"*. Prior to 1989, you could put as much into a policy as you wanted without losing the tax advantages. The tax laws changed wherein if you put too much into a policy too quickly, the government considers that you are using it mostly for investment and not for insurance and therefore taxes the withdraws based on regular income tax rates. (The death benefit will still be income tax free on MEC policies. It's only the withdraws that are affected.)
Each policy is different depending on the face amount and the insurance rating. The insurance company will provide you with the maximum amount you can put into the contract in any single policy year without causing the policy to MEC. Based on your question, you will want to stay below this amount.
Hope this helps.
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QUESTION: Thank you for the quick response! I am considering an EIUL because that is what is recommended in the book "Missed Fortune". What type of product would you recommend using?
Answer Darren,
Doug Andrews concept of using the equity in your home to invest and to make more money on the spread is not necessarily a "bad" strategy. In fact, there are very few strategies that I would call "bad", just like there are few investments, insurance products, annuities and such that I would call "bad".
However, every strategy and product is "bad" if it doesn't fit the situation. What's "right" for one 30 year old married person with 2 kids (5 and 3), $150k income and $500,000 net worth is not necessarily right for another 30 year old married person with 2 kids (5 and 3), $150k income and $500,000 net worth.
His strategy is a *very* risky strategy, no matter how great he makes it sound.
I'm generally much more conservative. Why? I've lived through the fall of 1987, the fall of 2000 and the latest fall. I've also lived through very how interest rates.
If you assume that you can get a fixed second mortgage or equity loan for 6% and an average rate of return at 7% (reasonably moderate/aggressive ROI) on investments, you make 1% more. Not bad, but what if your loan rate is callable or floats? What if something happens to your income and you have to surrender the policy to pay for equity loan (it's *very* expensive to own a permanent life insurance policy for less than 10 years)? What if your minimum guaranteed ROI is lower than the equity interest rate for 1, 2 or 3 years (remember to subtract the costs of the policy from the minimum guaranteed ROI and that the costs increase every year).
There are some really good reasons to use a permanent life insurance policy as a supplemental retirement plan, but using equity from your home is too risky in my mine.
As I tell all my clients, my job is to learn about the client, educate the client and make recommendations - but it's their money. If I had a client who fit this strategy, I'd recommend it.
Think about this - if you could go to the bank and get an unsecured loan for $100,000 (which many of my clients can do easily), why not go borrow the money and invest it for more than the interest rate? The reason is that you can't generally do that. But if you had your own business and you were going to put it in your business, your experience and knowledge of the business mitigates the risks - but still doesn't eliminate it.
