Any experience with the "Mortgage Burner" concept?

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Services for Real Estate Pros with Farmers Insurance

I was just wondering if anyone has had any experience using a concept known by several names, but most commonly called "mortgage burner" ? Generally what happens is that the borrower (usually in the event of joint borrowers, each individual would have their own) applies for and owns a permanent life insurance policy on themselves, atleast equal to the outstanding balance of the loan.  Since it is a permanent plan, it builds a tax-deferred cash value (i.e. you can use Universal Life, Variable Universal Life, or even the good, old-fashioned Whole Life, although I personally have almost always used Universal Life exclusively namely because of the minimum guaranteed cash value) which can be used at any time, and for any reason, by the policy owner (i.e. they do not have to wait until age 59 1/2 or have a financial hardship, etc.).

What makes this plan special is that the Planner can take an Amoritization Schedule on the mortgage loan, and compare it to the anticipated cash value of the life insurance policy, and then see when they meet. Often times, on a 30 yr. fixed-rate mortgage, there will be enough cash value (remember, which has grown TAX-DEFERRED !) in the life policy to pay off the loan in year 17 or 18, thereby saving 12-13 years of payments to the bank!

Plus, since it is a personally owned policy, the owner has the right to name her/his own beneficiary.  Meaning, that in the event of a premature death, their spouse (presumably, but certainly not always!) has immediate access to funds, INCOME-TAX FREE, that can be used to either pay off the remaining mortgage balance in full, or invested in such a way to provide monthly income to cover the mortgage payments so as to preserve any tax benefits / deductions.

This concept works particularily well for younger couples who are already making extra principal payments, since they are used to the cash outlay.  However, this concept is far superior, as it provides more flexibility and more tax advantages.

Just curious if anyone else has ever used this.  And, yes, in case you're wondering...I do own a policy like this on myself, in addition to my other life insurance!  And, in fact, I personally use a Variable Universal Life policy since I am comfortable with the risks of investing in the Market, and I feel that in the long run, I can obtain a better overall yield than with a traditional, fixed-rate product...but, hey...that's just me!

 

Jeff Osborne, Mortgage Planner

1st Metropolitan Mortgage, serving Roanoke and Botetourt Counties

(540) 397-3120 cell ; (540) 904-0038 office ; jeff@1st-metropolitan.com

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