discussion about missed fortune 101 copyright, 2006 · is missed fortune 101 evil? • absolutely...

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Discussion AboutMissed Fortune 101

Copyright, 2006

The Wealth Preservation Institute378 River Run Dr.

St. Joseph, MI 49085269-408-1841

www.thewpi.org

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All the rage

• The Missed Fortune sales approach seems to be all the rage these days in the financial planning community.

• IMOs/FMOs/GAs are feeding the fire by bringing in Missed Fortune Gurus to educate/indoctrinate their licensed insurance agents.

• Why? • Sell product, sell product, sell product.

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Caution

• As you’ve read in my newsletters, I preach caution with this topic.

• There is nothing wrong with selling product, but it is better to provide proper solutions to clients and when product is needed or helpful, then sell the product.

• Advisors pitching this approach are getting sued and I hear through the grapevine that some class action lawsuits are in the wind.

• Don’t be a typical insurance agent and say: Life insurance is the answer, now what’s the question.

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Grief

• I’ve caught a lot of grief over some of my newsletters on this topic.

• Everyone needs to understand that my newsletters are short and narrow and I can’t deal with all aspects of any topic in one or two e-mails (that’s why I have the CWPP™and CAPP™) courses.

• I’ve chosen to hit on the things I do not like about Missed Fortune.

• Why?• Because I want to get everyone to think critically about

these issues instead of taking a book or someone’s word that every aspect of any sales approach works.

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What doesn’t work

• Investing in life insurance instead of qualified plans.• The math just does not work.• I did a spreadsheet on this and posted it. I’ve had several

hundred agents look at it and only one told me my math had issues (although he refused to point out my math “errors”).

• The only way this sale’s approach will work is if you add specific variable like:– The client will be in a higher tax bracket in retirement– The client was paying a bunch of money for a current life policy

which they can get rid of– The client’s 401(k) plan has huge annual expenses– The client will earn what most investors earned during our

biggest bull market (less than 2.7%).

This is why advisors should NOT be telling clients to invest in life insurance instead of deferring money through a company's 401(k) plan.

The WPI is tired of people quoting the numbers from Doug Andrew's book Missed Fortune 101

Missed Fortune advocates telling clients not to contribute to their 401(k) plans and instead fund life insurance as a retirement vehicle.

The WPI thinks this is a recipe for disaster that will get agents sued.

I've run the numbers below and I recommend you look at and study them.

If you have issues with my math, please feel free to contact me at [email protected]

$5,000 invested by a 45 year old into a 401k plan every year until age 65 no match by ERWithdrawals each year (AFTER TAX) when the client turns 65 for 20 years spending account down to zero

Annual rate of return 4% 5% 6% 7% 8%Client in the 10% tax bracket $10,586 $12,898 $15,690 $19,057 $22,671Client in the 15% tax bracket $9,997 $12,181 $14,819 $17,999 $21,411Client in the 40% tax bracket $7,057 $8,599 $10,460 $12,705 $15,114$5,000 invested a cash building life policy (EIUL) each year from age 45-65 (minimum death benefit)*Wash loans

Watch out. If a clients do not contirbute to their 401(k) plan they will NOT be able to defer the income taxes.Therefore, when a client takes money home after tax they have the following to invest in a life policy.

10% tax bracket 15% tax bracket 40% tax bracketClient pre-tax $5,000 $5,000 $5,000Client after-tax to invest $4,500 $4,250 $3,000

Amount client could borrow income tax free from the life policy each year from ages 65-85Rate of return in the life policy 4% 5% 6% 7% 8%

Client in the 10% tax bracket $6,826 $8,770 $10,854 $13,344 $15,963Client in the 15% tax bracket $6,432 $8,269 $10,234 $12,586 $15,060Client in the 40% tax bracket $4,460 $5,758 $7,143 $8,795 $10,532How much worse a client does each year by using a life policy instead of a 401(k) plan

4% 5% 6% 7% 8%Client in the 10% tax bracket $3,760 $4,128 $4,836 $5,713 $6,708Client in the 15% tax bracket $3,565 $3,912 $4,585 $5,413 $6,351Client in the 40% tax bracket $2,597 $2,841 $3,317 $3,910 $4,582

The numbers state that a life policy NEVER does better as retirement vehicle for the client.

Those who know The WPI know that it is pro-insurance (but only when it is good for the client)

Copyright, The WPI 2006 (www.thewpi.org)

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Higher Tax Bracket

• This is an interesting sale’s pitch.• Hey client, tax rates are very low right now and IF

we assume they will go up, the numbers dictate that you fund life insurance over a qualified plan.

• Part of the problem with Missed Fortune is that much of the math is based on a 33% tax bracket and many of the examples in the book are for clients in a much lower tax bracket.

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Continued

• I have a few problems with the “you’ll be in a higher tax bracket” approach. – 1) We have no idea what tax rates will do.– 2) Most clients have their income decrease in retirement.

• Earned income down• They do not make as much from SS and retirement plans as they did

when they worked full time.

• It is interesting to note that we do not tell clients that the IRS would like to get congress change the laws to tax the cash buildup in a life policy.

• Giving advice based on guessing what tax law changes will take place is NOT a good idea.

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Continued

• What about the client who makes $200,000+ a year?• Won’t they always be in the top tax bracket?• Probably if they did a decent job saving.• Isn’t it fair to say that in retirement they will have a higher

tax bracket? Mabye.• The reason I do not tell high income clients to not fund

their qualified plan even though rates might be higher and even though there may be a double tax is because high income clients should have multiple buckets of investment and they have the money to fund both the qualified plan and a life insurance policy.

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Clients will earn low rates of return in their 401(k) plans

• If you’ve seen my presentation on the Maximizer you’ll know that I believe that the American public are pros at buying high and selling low.

• The average investor did earn a return of less than 2.7% from 1984-2000.

• The rationale is that if we can get the clients into an indexed life or whole life policy we will get the client a better rate of return.

• That’s true, but if the client simply purchased an S&P 500 spider fund in their 401(k) plan, from 1984-2000 the client would have returned over 12%.

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But there is no guarantee in a 401(k) plan

• One sale’s approach is to illustrate that there is no protection in the market so it is better to fund a life insurance policy with minimum guarantees.

• Can’t a client buy indexed annuities which have no load in a qualified plan?

• Also a life policy has a guaranteed rate of return, but if the policy only does the minimum guarantee, the client might not be able to borrow any money out of the policy or in some cases the client might actually get a call for premium.

• DO NOT tell clients the investment growth is guaranteed, tell them that there is a guarantee on whatever cash is in the policy.

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Misc. note

• Do make sure you tell your clients that they can only deduct the interest on the first $100,000 of equity they suck out of their homes.

• Many don’t even deal with this issue and let the client who sucks out $100,000+ think they can write off the interest.

• While their CPA will write it off for them, the client needs to know what is technically correct.

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Is Missed Fortune 101 Evil?

• Absolutely not.• I like the concept of equity harvesting.• The “concept” of equity harvesting has been

around for a long time and is a terrific tool when done correctly for the “right” client.

• What I beef about the Missed Fortune approach is that it is pitched to EVERYONE as a cure all to fix the client’s financial problems.

• I totally disagree.

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Who should use Equity Harvesting?

• This is the 1000 dollar question.• Is it for everyone? • Not in my opinion.• Who should it be sold to? • In my opinion this topic should be sold to clients

who make a good income or have a good net worth.

• Why? Because clients who make good money or have money have OPTIONS.

• If you make this concept the one or biggest investment for a low income client, it could be a disaster.

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What disaster?

• Everyone likes to play the what if game to make this sale. Let’s play the what if game to throw some reality into the sale.

• Let’s assume we’ve sold equity harvesting to a client who is a w-2 employee who makes $50,000-$100,000 a year and is married to a homemaker with three kids ages 5, 7 and 10.

• The pitch is to take out $70,000 of equity out of the house and put it into a life policy.

• The client will use an interest only loan with a floating interest rate.

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Continued

• What if– The client loses his/her job?– The client becomes disabled?– What if his kids or spouse have significant health

issues causing thousands of dollars in health care costs

– What if interest rates start to go through the roof– What if the life policy performs poorly

• With any of the above, the client will have significant financial problems that you helped make worse by funding a life policy as an investment.

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Continued

• But the client can borrow from the policy income tax free if they need money.

• Good luck getting much money from life policy the first five years (unless you use a high cash value WL policy which long term does not perform well).

• If you borrow from a policy early, the client runs the risk of the policy lapsing.

• You have significantly limited the client’s options by sucking out their equity and putting into an illiquid life policy.

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But that won’t happen….

• But those things won’t happen to your clients.• Ok, if that’s the case, then equity harvesting will

work out well for your clients.• If you sell equity harvesting to lower income

clients, have a huge disclaimer letter telling them about all the potential problems.

• This is why I only pitch this topic to those clients who have a high income or high net worth.

• Their ability to deal with a financial crisis is significantly better.

• This will help you avoid getting sued.

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Infinite Banking

• I do not have time to go into all the details of the infinite banking approach.

• I have posted to the web-site a very long sale’s presentation on the Banking on Yourself approach.

• The basics are that the client funds a whole life policy over a period of years, accumulate cash and then use that cash as your bank.

• I’m actually not that offended by this approach if the client wants to pay the interest on the loan.

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continued

• What struck me when looking over the powerpoint is that the concept is a low income client topic all the way.

• It talks about using your own bank/life policy to pay for buying automobiles.

• What I didn’t like about the approach is the same old B.S. where the pitch is that life insurance is better than funding a qualified plan.

• The marketing material I’ve seen also shows clients taking loans in year six of the policy and for a whole host of reasons I don’t have time to go into in this powerpoint, I think that is crazy.

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Life, Annuities andEquity Harvesting

Copyright, The WPI 2006

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1% CFA

• If your clients are going to buy into the concept that equity in their house is bad and that it is good to have the most money on hand to invest in a life policy, then those clients almost universally should use the 1% CFA mortgage.

• Why?• Because the client’s pay rate is based on 1% and

the actual rate charged is being deferred so the client can have the most money to invest.

• Most people pitching EH use interest only loans (and the client can pay the interest only payment with the 1% CFA mortgage).

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The Sale’s Pitch

• 1% CFA.• If your could borrow money at 1% and invest it into

life insurance which should earn 5-8% would they do it?

• Would it help if you knew the money in your life policy had a guaranteed growth rate (no matter if the market is negative)?

• Would it help if you knew money in a life insurance policy grows tax free and can be taken out of the policy tax free?

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(400k loan) investing just the money saved by lowering payments

$73,395 $70,497 $143,892 5 Year Totals$12,570 $16,209 $28,778 Year 5

$13,701 $15,078 $28,778 Year 4$14,753 $14,026 $28,778 Year 3$15,731 $13,047 $28,778 Year 2$16,641 $12,137 $28,778 Year 1

Over Other1.000%6.000%Cash Flow AnalysisCash Flow@@Cash flowCash flowCash flow30 Year

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Cash flow

• If the client took the money saved from the first five years and invested it into an equity indexed life insurance policy earning 7.9% a year, the client could take out of his life insurance policy $22,000a year income tax free from age 63-82.

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What did the client do different to fund an investment?

• Nothing really.• We simply converted a 30 year mortgage into a

1% CFA mortgage.• We did not complicate the client’s life or have

him/her take more money out of pocket to invest.

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Equity Harvesting

• Would you refinance a property if you could have payments on a 1% loan and invest the borrowed money in a tax favorable environment*?

• Many would say YES.• EH is all about the numbers. If you are adverse to debt

you will not like EH.• However, if you want to maximize your assets to create

the largest retirement nest egg, then you will love EH.• You are simply taking dead equity out of an asset and

investing it somewhere where the money can grow tax free and potentially come out tax free.

• Subject to IRS Publication 936.

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Example

• Example: assume a client has a $1,000,000 home with no debt or very little debt.

• Assume the client decides to sell the home and buy a new home.

• In that process, assume that he removed $600,000of equity from the sale of the home and invest it for retirement income later.

• Assume the client used the 1% option arm and is in the 40% tax bracket.

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Out of Pocket Interest

$63,447 $105,745 5 Year Totals$14,588 $24,313 Year 5$13,570 $22,617 Year 4$12,623 $21,039 Year 3$11,743 $19,571 Year 2$10,923 $18,206 Year 1

After Tax1.000%Cash Flow AnalysisOut of Pocket@Option Arm

Cost Option Arm

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Question

• If someone would give you $600,000 to invest where the payment on the loan is based on1% and where you could invest the money in something tax favorable that should return 6-9%, would you do it?

• The answer should be all day long.• This concept works for anyone who has $50,000+

in equity in their homes.

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Investing in life insurance.

• If the client invested the $600,000 into an equity indexed life insurance policy earning 7.9% a year, the client could take out of the life insurance policy $191,000 income tax free for 20 years starting at age 63 (plus the client would have a sizable death benefit to protect the family).

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Summary on Equity Harvesting

• Equity harvesting is a very powerful tool and is one of the only tax advantageous plans the IRS allows for clients.

• This concept is especially when coupled with the 1% option arm.

• This is a tool that you can use rapidly grow your wealth in a tax favorable manner.

• If you would like to talk with someone to determine if Equity Harvesting and/or the 1% CFA is a good fit for your situation, please contact our office.

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MortgagesCopyright 2006

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Mortgages

• Why should you incorporate mortgages into your practice?

• You can benefit your clients (by giving better advice).

• You can make significant money from the mortgage business.

• You can “find” money for clients to invest in life insurance or annuities (even in the face of rising interest rates).

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Aren’t loans a pain?

• They can be, but…• Would it help if you could take applications from

clients in less than 30 minutes and have them submitted all through the internet.

• Would it help if you had your own loan coordinator who really does all the work to get your loan coordinated and through the system?

• Would you be interested in a model where all you had to do is to turn a client over to a loan professional who will take care of all the paperwork and the closing (this model pays you less).

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Step 1

CustomerLoan Originator

Meeting

Elapsed Time30 Minutes

Step 2

Submits dataVia online LOS

Step 3

Data file Automatically sent to

Loan Coordinator

Step 4Coordinator Pulls Credit

Enters into VLOSelects Programs

Selects Rates & TermsSends file for processing

Elapsed TimeSeconds

ElapsedTime

Seconds

Step 5

Disclosures, Program Options & Conditions

Sent toCustomer by PC

Elapsed Time10 Minutes

Elapsed Time

Overnight

Customer Driven

Step 6

Customer sends signedCopies of disclosures and

Conditions to PC for Final processing & closing

Work Flow Process

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The Advantage…working with The WPI

• Access to a national correspondent base of over 250 lenders, banks and investors including:

• Citibank• Washington Mutual• Chevy Chase Bank• Countrywide• Indy-Mac Bank• Flagstar Bank• Wells Fargo Bank• World Savings Bank

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The Typical Compensation ModelAssumes: $4,000 Net Commission

Minimum $10,000/Month

$2,000InfinityOverrides

50%Minimum

$20,000/Month$2,400Infinity Overrides

Generation Overrides60%

Minimum$1,500/Month

$800InfinityOverrides

20%



40%

Minimum$2,500/Month


30%

PromotionGuidelines

CompensationAdditionalOverrides

Contract Level

Minimum $50,000/Month5 Qualified RM’s

$3,200Infinity OverridesGenerational Overrides

All-Company Override Pool

80%

Minimum $100,000/Month10 Qualified RM’s


All-Company Override Pool

90%



70%

PromotionGuidelines

CompensationAdditional OverridesContract Level

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How much is available on each loan?

• With the 1% CFA usually the total available is 3% of the loan balance (which is cut up to pay everyone).

• One a typical 30 year conventional, the amount is typically 1.5-2%.

• So on a $500,000 loan the amount on the table is $15,000 for a typical 1% CFA.

• How many clients of yours have $500,000 homes with debt that could re-finance into the 1% CFA?

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$216,000 $18,000 90%$20,0005

$192,000 $16,000

80%$20,0005

$168,000 $14,000 70%$20,0005

$144,000 $12,000

60%$20,0005

$120,000 $10,000 50%$20,0005

Annual EarningsNet Mo. Earnings

Contract Level

Gross Revenue/File$4,000

Personal Loans Monthly

Can I Make Money If I Just Write Loans?

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Recruiting a team

• Many advisors will recruit other local advisors to sell mortgages.

• If you do that you can make overrides on that business.

• JV business with local real estate firms and local contractors.

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The bottom line

• You should be dealing with mortgages in your business.

• It is easy, good for the client and you can make a nice ancillary income.

• How do you start selling?• You can do your own research or if you would like

a referral to the educational board members from the WPI, please e-mail me at [email protected].

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Summary

• The 1% CFA is a great program and a great door opener.

• Equity Harvesting is a viable tool to help your clients build wealth (but sell it with full disclosure and sell it to the “right” client).

• Selling mortgages in your business is a nice simple non-confrontational way to make more money in your practice and give better service to your clients.

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[email protected]

discussion about missed fortune 101 copyright, 2006 · is missed fortune 101 evil? • absolutely...

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