Vol 8 No 2		February 2006

Katt & Company is a national fee-only life insurance advising firm. The June 2002 Forbes magazine, and a July 16, 2003 Wall Street Journal article, name Peter Katt as one of only four nationally recognized advisors. The Forbes article states that, "…advisers are well worth the money… These savants are working for no one but you…" For references please contact us.

Missed Fortune 101

We have been contacted about half-dozen times in the past several months by advisors regarding a can't-miss financial opportunity that involves stripping out home equity and qualified plans to move these funds into life insurance because of its tax-deferred advantages.

Using life insurance as an investment is the subject of a December 29, 2005 Salt Lake City Weekly (www.slweekly.com) article titled "Once Were Lost…But thanks to The St. Jude Project, some elderly investors have found their nest eggs." This article describes the work of Kelly Bills. "For years, older investors came to Bills with tales of being duped into retirement strategies, only to see their life savings squandered away in ill advised schemes." At first Mr. Bills sent these folks to attorneys but wasn't satisfied with this so he started what he refers to as the St. Jude Project, "…Bills' somewhat reluctant crusade to get the money back." Instead of filing lawsuits the article relates how Mr. Bills convinces various insurance agents and companies to refund money to buyers. Mr. Bills, "…a successful advisor in his own right, refuses a cut of the money he retrieves and won't allow those he helps to invest with his company. It's usually a slog against obstinate agents and insurance companies, but they've all eventually paid. With relatively little prodding, however, Bills said that Douglas R. Andrew, president of Paramount Financial Services and author of the best-selling book Missed Fortune 101: A Starter Kit to Becoming a Millionaire, has refunded about a million dollars to four former clients who summoned the St. Jude Project." The article goes on to say, "Andrew touts a novel retirement strategy, advising older investors to cash out their IRAs and 401(k)s, liberate 'idle' equity trapped in their homes, offset the investment account withdrawal penalties by deducting interest on the new mortgage, and sink the whole bundle into 'maximum-funded, investment grade life insurance contracts." The article continues, "Problem is, Bills said, 'The sun, moon and stars have got to line up in order to make the thing work.' What's more , the insurance agent, Andrew, earns the bulk of his commissions on premiums paid in the first year, Bills said, 'so there is a natural, unfortunate indifference to whether or not the people complete the plan.'"

Scott Burns, a fine financial columnist for the Dallas News (www.dallasnews.com), has also written about Mr. Andrew's concept in two September 2005 issues and has concluded that "…many could go from having highly taxable retirement assets to having no assets at all." Mr. Burns finds four major faults with Missed Fortune 101: 1) Mr. Andrew's sometimes ignores the time value of money; 2) he overstates the tax benefits; 3) he suggests unlikely returns on policy cash values; and 4) he offers zero consideration of the downside.

Interestingly, life insurance can and should be used prudently for the dual purposes of death benefit protection and tax-deferred (actually tax-free when used most appropriately) savings. But prudent planning means that clients take advantage of all qualified plan funding opportunities, college savings 529 plans, leaving their home equity in tact and only consider using life insurance for tax-deferred savings with funds they would otherwise be placing in medium- to long-term savings vehicles. The ratio of death benefits to premiums needs to be in favor of robust premiums relative to the smallest amount of death benefits to get the greatest bang out of the savings element. Finally, remember that the major portion of family protection from life insurance should come from term insurance.