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Guarding Your Wealth for Senior Citizens
Borrowing Against Home’s Equity – are There Better
Ways to Use that Wealth?
Those who make the most off of these ‘equity
stripping’ schemes are the advisors who sell them
By Jeffrey D. Voudrie, CFP
Sept. 18, 2007 - The value of a home today, even
with the current ‘housing bubble’ is considerably higher than it was 5
years ago. If you’ve owned your home that long, your equity (the
difference between what it’s worth and what you owe) may have become one
of your largest financial assets. Are there better ways to use that
asset than leave it in your home?
I can’t tell you how many questions I regularly
receive from readers about this subject. Invariably, they’ve been to a
seminar or read a book that encourages them to take the equity out of
their home and do something else with it. There is an entire marketing
complex that focuses on getting homeowners to borrow their equity and
invest it into long-term universal life insurance, or a similar product.
In the industry, it’s known as ‘equity stripping.’
The books and seminars make it sound like a
no-brainer. Wow! You can borrow the money from your home, invest that
money in the life insurance policy, have that money grow tax-free and be
able to access it without taxes any time you need it! What could be
better than that?
I believe that it is financially dangerous to do
such a thing. I’m embarrassed that someone thinking of themselves as a
‘financial professional’ would even recommend such a thing.
Let’s look at the most common pitch I get questions
about, which is investing your equity into a Universal Life policy. The
basic argument for doing so boils down to three things: one, your equity
isn’t really safe; two, your equity isn’t liquid; and three, your equity
isn’t growing.
They say your equity isn’t safe, because real
estate fluctuates in value. Home prices can drop, just like that have
recently. Some homeowners might have considerable equity and feel they
can’t insure their equity should their house be lost in a disaster.
So how safe is your equity? For the vast majority
of homeowners, equity values will increase over time. Certainly from one
month to the next values might drop some, but over the typical five
years or more someone owns a house, values are almost always higher at
the end than at the beginning. As for disaster risk, most homeowners can
insure adequately to mitigate any potential losses.
Besides, if your home equity isn’t safe, why is it
so easy to get a loan on it? So much for that argument.
The second argument says that equity isn’t liquid.
What if you become disabled and need the money out of your house to
cover living expenses? The bank wouldn’t give you a loan then because
your financial situation had changed. So why not take it out now and put
it into a Universal Life policy, where you can access it, tax-free?
The problem is that to access your money in a UL
policy, you have to pay. Typically, you are paying interest to access
the cash value you’ve built up. Technically, you are just borrowing
money from the insurance company, that’s why it’s not taxed. By the way,
if you ever surrender your policy that cash value may become taxable.
The third argument says your equity isn’t growing.
It’s just sitting there in your house, not doing a thing. And you can’t
see your equity, like it’s not even real. Why not put it into something
you can see grow, that’s guaranteed to grow? Use that lazy equity to
create a secure retirement!
It’s true that your home value will go up the same
whether you owe 50% on it or 90%. It’s called leverage. The hope is that
you will earn more where you invest it than you pay in interest. That’s
hard to do with mortgage rates at 6%.
Moreover, I don’t agree with taking that money and
locking it into a long-term investment where you will pay substantial
penalties should your situation change and you need that money.
The bottom line? In my opinion, the one who makes
the most money off of these ‘equity stripping’ schemes are the advisors
who sell them.
I can already predict a boat load of flaming emails
heading my way, but it’s the truth. I guarantee if the commissions on
Universal Life policies weren’t so huge, that advisors wouldn’t be
pushing it so strongly.
If you have a specific question or would like more
information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
I will answer your financial question FREE.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive that may not have appeared in
SeniorJournal.com.
Guarding Your Wealth for Seniors, on
SeniorJournal.com, is
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to select
private clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For bookings, email
jeff@guardingyourwealth.com.
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