Mortgage Burner concept using permanent life insurance

By
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

Comments (5)

Josh Perrington
Arkshire Financial - Marietta, GA

Wow - Are you kidding me?  This is freakin amazing - you're truly a professional superstar!!

Jun 26, 2008 07:06 AM
Gena Bolton
The Premier Property Group | GRI, CLHMS | SoWal 30A Your Beach Awaits | - Sandestin, FL
Sandestin, Destin and South Walton 30A Real Estate

Jeff  Why burn the mortgage? its horrible investment tool it you dont use it to your advantage

equity has no rate of return, its not safe and not liquid.....don't burn the mortgage, every time you pay it down take out more equity and invest it....the house will grow at the same rate of value with or with out the mtg but if you are letting your equity just set there you can lose a fortune

 

 

Jun 26, 2008 01:45 PM
Jeff Osborne
Farmers Insurance - Roanoke, VA

Ron,  That's a great point, and that's exactly what I am advocating for! It sounds like maybe you're a fan of "Missed Fortune" by Douglas Anderson ??  Me too! 

This strategy that I'm referring to will allow you to do the same thing by NOT applying extra payments to the mortgage...rather, creating a "side account" that can be used to either: 1) pay off the remaining balance for a widowed spouse (or atleast create a lump-sum pot of money that be annuitized to make monthly payments); or 2) have a liquid cash value that be tapped into in the event of a financial emergency.

So often, I hear about couples who want to use their current income to apply extra principal payments, and I just cringe !

Thanks again for the comments...I think that ultimately we're on the same page :) 

Jun 27, 2008 12:45 AM
Thomas Hargreaves
TriStar Financial Services - Eugene, OR

Ron,  Missed Fortune is a great Book.  I have met Douglas Andrew several times.. I generally give a copy of his books to my clients who get a Mortgage From me.  Those who read it usually come back to ask me how to put them into the Missed Fortune type of plan, As I am also an Insurance agent.. it is a great concept.. however with some caveats..

Not all permanent Life policies are created equal..  You really need to use the right type of policy from the right company..

You also need to be in the right type of mortgage with the right type of options.

and you need to be in a policy that gets the right type of returns..   a 3% Universal policy is not going to work.  And Whole life is much more expensive than most Universal Policies... Another great book to read on the subject is  "Stop sitting on your assets"  by  Marian Snow

Sep 13, 2008 07:29 PM
Jeff Osborne
Farmers Insurance - Roanoke, VA

Thomas, thanks for the heads-up!  I'll try to check out that book.

How are things going in your world now?

Jun 24, 2009 03:57 AM