I received an interesting e-mail from a client of mine yesterday. We’ve been implementing an insurance-based strategy for the last couple months, so he is constantly learning new things, finding new books, and reading new articles about the strategy. I’m glad he found this one. For those who haven’t read it, it’s an email newsletter about how the rich “clone” their money. One of the steps is to borrow from your insurance policy, and take advantage of the spread, or create and “arbitrage.”
It was alarming to read through that email, so I thought I would share the response I gave my client with you. Here it is:
Thanks for forwarding me this email. I’m always interested to hear what others are saying. Here are some of my thoughts.
To be honest, this makes me quite nervous if this is truly what they think will happen (Keep in mind I am referring to this as it relates to the insurance). This will have terrible repercussions as they get more people involved and it fails to perform. Look at it this way, they claim the ability to create an “arbitrage” inside the insurance policy. If indeed they are doing this as explained here, then why would they look outside of the mechanism that can “clone” their investment dollars over and over and over? Why not borrow against the policy, start a new policy, borrow out of the new one, and do it again and again. You could essentially repeat the cycle infinite times and only be limited by the time it takes to get the insurance, right? That would be the “black box secret of the wealthy,” in my opinion, if it were true. But where would this money come from? Thin air? It has to come from some where.
There’s no magic pill, and this, in my opinion, is where the elevation group is crossing over from good and intriguing marketing, to misrepresentation. This really worries me. If he really understood what he was implying here, he would think twice. The type of insurance they use is much more volatile (Indexed Universal Life). Though it may guarantee no losses (in the investment account, not taking into account the rising cost of insurance which will create future loss), it will certainly not guarantee the performance needed here. They may have a good year here and there, but that comes with the bad ones, or the one’s where the arbitrage plays against them. This type of insurance is also notorious for extremely high fees which eat away at actual performance, decreasing the ability to effectively create the needed growth the accomplish the arbitrage. If people follow his advice, and implement, thinking there will be a consistent arbitrage, then they will most likely pay dearly when this fails them. I can assure you of no consistency in this theory to make it sound.
I will be interested to see what is being said of them in 3 to 4 years.
That’s my 2 cents!
Jake
Brian June 8, 2012 at 11:29 am
“You could essentially repeat the cycle infinite times and only be limited by the time it takes to get the insurance, right?”
You would also be limited by how long it takes for sufficient cash value to accumulate to start a new policy as well as how much insurance one is allowed to purchase.
Ken Cauley June 12, 2012 at 10:22 pm
I started my 'bank of me' life insurance policy about 6 months ago (give or take). Specific to The Elevation Group (which I love, btw) I spoke deeply with both Paul Haarman and Walter Young. Coming from a position of ignorance on the topic, I learned as much as possible about all of this while at the same time, talking to both Paul and Walter.
Paul pushes Universal Equity Index and Walter pushes Whole Life. Paul shoot for massive wealth accumulation and as little life insurance as possible while Walter goes a more conservative route of slow and steady, with much less exciting results and the added benefit of life insurance for my beneficiary.
Both downplayed the others type of life insurance while touting the benefits of theirs. While neither felt like a salesman or stood to make a whole lot of money from me, it was obvious that they were bias for more than one reason.
I don't know if I made the right decision or not, but I ultimately ended up going with a smaller Whole Life policy compared to the massive Universal Equity Index policy that Walter suggested. My train of thought was to just go the more conservative route versus the unproven route that was tied to the stock market. Whole Life has 200 years of history while Universal Equity Index only has a fraction of that. I have both regrets and affirmations of my decision almost every day. While it is clear that my policy will never make me wealthy, it will definitely accomplish the 'bank of me' goal and accumulate a decent bit of wealth, especially if combined with other efforts that Pau and EVG taught in one of their lessons.
I don't doubt Paul's intelligence or wisdom, but I just know that at the end of the day, year or decade, if anything turns sour (or if I missed out), I'll be on my own and have to take accountability for my actions or lack of actions.
It doesn't look like this is exactly what the author of this article is talking about — the cloning or arbitrage aspect of ones policy seems to be something else. But some of the principles are the same and I still felt like sharing for anything that might read
Jake June 12, 2012 at 7:31 pm
@Ken. You may not understand all the intricacies of life insurance, and I don’t claim to either, but I fully believe you made the right decision. IUL policies look great on paper, but they struggle to perform as advertised.
Universal life was developed in the 80s when interest rates were high. You could almost accidentally make money by throwing money into those policies. The same is not true today. These policies still rely on those high growth years to make the policies work on paper. In addition to lack of performance, high fees make growth extremely difficult.
This Wikipedia entry is a good resource. Scroll down to “Misunderstood risk to policyholders.”
http://en.wikipedia.org/w/index.php?title=Universal_life_insurance
As you know, a universal life product is essentially a one-year renewable term policy combined with an investment account. It is my opinion that the rising cost of insurance will erode future cash value growth, leaving you in a very poor situation. I have clients that are experiencing this currently because of policies they purchased years ago. Everything seems to point to the lack of performance. I’ve yet to see solid evidence of these type of policies performing well.
I could go on and on, but reality is this- I will never use a universal life product of any kind, or sell one to a client. Too much risk. This, to me, is a place of safety that should not rely on the market. You’re whole life will outperform the IUL policies in the long run.
Those are a few of my thoughts…
Ken Cauley June 13, 2012 at 4:16 am
@Jake. I am maxing out the invest-able cash value of my policy each month. I might be saying that wrong, but in other words, I'm putting as much money as possible into it each month before it becomes a 'Mech'. Again, might be saying that wrong, but the point when government says it is no longer life insurance and is just an investment vehicle. What are your thoughts on this?
My plan is to continue doing this for as long as possible (hopefully forever) to help build up the cash value and larger compounding effect. Without doing this, my policy would take far too long (about 4x longer) to build up enough cash value where I can use it for significant purchases such as a vehicle… and especially a house.
Jake Thompson June 13, 2012 at 11:13 pm
Sounds like you're doing it right… as long as you are contributing to the MEC. You're welcome to shoot me an email if you want me to take a look.
jeanne June 13, 2012 at 7:25 pm
What is the MEC.
Ken, you first mentioned that Paul offered Universal Equity Index, but then mentioned Walter suggested a massive Universal Equity Index. It just may be the way it was written but can you confirm who offered the Whole life. Thank you
Matt June 13, 2012 at 11:32 pm
I just noticed that Walter Young has been removed from the suggested resource list on elevation group. I wonder why?
Jeanne June 14, 2012 at 6:07 pm
Because TEG is restructuring and bringing their key players like Sean and Paul onboard. Listing competitors is no longer good for business.
Brian June 14, 2012 at 11:15 am
Interesting article here:
The Top 10 Reasons NOT to BUY Equity Indexed Universal
http://truthconcepts.com/blog/2012/04/17/the-top-10-reasons-not-to-buy-equity-indexed-universal-life/
Brian June 14, 2012 at 11:18 am
Jeanne:
If premiums paid to the contract go beyond (i.e. are higher than) the the premium amount stipulated than the contract has failed the 7-Pay Test and is reclassified as a Modified Endowment Contract. The following new tax rules apply to Modified Endowment Contracts:
Distributions will switch from a First In First Out (FIFO) basis to a Last In First Out (LIFO) basis. This means that withdrawals will require the policy owner to withdraw taxable gain before withdrawing untaxable basis.
http://en.wikipedia.org/wiki/Endowment_policy
Jeanne June 14, 2012 at 6:08 pm
Good info Brian. Thank you!