A few months back, I wrote an article titled “Equity Harvesting & CV Life Insurance!” We discussed the most common questions regarding Equity Harvesting in the article. Questions such as “Does Equity Harvesting actually work?” Is Equity Harvesting really in your best interest? Is Equity Harvesting a scam to sell cash value life insurance and make higher commissions? What Happens when the Mortgage Interest Rates Go Up? In the article, I also said that equity harvesting is a great financial strategy for accumulating wealth.
Equity Harvesting is something I believe in wholeheartedly. It’s possible when it is done correctly! The concept has been in my hands for over 25 years. Problem is, planners, agents and advisors aren’t being taught how to use it properly. It’s coming back to bite them! Policy owners who have used the concept for at least three years are beginning to complain to insurance companies. To avoid lawsuits, many of these insurance companies have had to place severe restrictions on equity harvesting. Midland National will not accept business that involves ‘Equity Harvesting. Aviva will not accept any business that involves refinancing unless the client has certain financial strength.
How to Avoid Equity Harvesting Failures Agents are focused on the minimal payment for the Option ARM in order to maximize their client’s income. Their goal is to get as much equity out of their homes as possible to make cash value investments in life insurance. They are also neglecting to consider the future implications.
Many people who followed the advice of these agents are now in serious financial trouble. The ‘OptionARM’ loans have seen their minimum monthly mortgage payments increase each year. In addition, over the last year, home values have fallen in some cases and have remained flat. Due to the ‘OptionARM’ loan, the borrowers now owe more than the property is worth due to the accumulated ‘deferred interests’. The ‘Option ARM” loans require that the borrower refinance or begin paying a normal mortgage payment based upon the current loan balance. These ‘normal mortgage payments’ will often be double the amount they used to pay.
These people now have a serious problem. They owe more money on their home than the property is worth. They are unable to refinance their mortgage. They are paying more than they can afford because they were told to get rid of as much equity as possible. If refinancing is not possible, how can they raise the money needed to pay their ‘normal’ mortgage payments on a higher loan amount? They could lose their home!
They will have to dip into their cash value of the new life insurance policy if they want to maintain their home. Their policy is still new so they don’t have much cash to use in the first years. They’re now in a much worse place than when they started.
How do you use equity harvesting?
In all the 25 years I’ve been using the Equity Harvesting’ method, I’ve never recommended or used an ‘Option ARM loan’ with a client. For our own personal circumstances, my sons and myself do use the Option ARM loans. Although the ‘Option ARM allows you to have the highest equity and monthly income, there are some risks.
The ‘Option ARM Loan’ should only be used if you can afford the difference between the minimum and ‘normal’ monthly mortgage payments.
Why don’t we use the ‘Option Arm Loans’ with our clients?
We don’t use the ‘Option ARM’ loan with our clients because they are too risky for most Middle Income Market residents. We face many unexpected financial problems in our lives, including medical bills, new roofs, car accidents, floods and tornadoes, as well as layoffs.
The ‘Option ARM Loans’ are complex and uncomfortable. They can also be costly. (Refinancing costs, closing costs, etc.)
There are also questions regarding the deduction of mortgage interest when you refinance your home equity to purchase a life insurance policy.
You can achieve many of the same financial goals without using an ARM loan. It is possible to reduce or eliminate consumer debt, save money, build an emergency fund, and earn more.
You can use your Home Equity Line Of Credit (HELOC), to “Harvest Equity”, and pay off credit cards, car loans, and other debts. This can usually be done without any refinancing fees. You have now eliminated the monthly payments that they used to make for these loans.
Example: Clients are currently paying $800 per month to pay $30,000 in debt. At 8%, a HELOC will cost you $200 per month to borrow $30,000 and your client can use it to get $200 in savings. Your client now has $600 per month to put into savings. ($800-$200). If they average 7.0% savings over 20 years, they will have $306,244 and $705,639. In 30 years, they will have $705.639.
Your clients won’t be locked into a $800 monthly payment and can legally write off mortgage interest on their income taxes (up to $100,000).
It is also simple and easy to understand by clients.
Combine that with other concepts from ‘Found Money Management’ and you can help these people without making them take unnecessary risks. Smart money management is what it is.