Reputable? Whole Life with Northwestern Mutual...
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This is very true, I can take a very overfunded blended policy paid up in one year if I want. I've run the illustrations and it doesn't MEC, I will not say that it is a good way to go as I don't think it is, but it definitely is possible.
kyoungster
New Member
- 1
Hello Guru and all,
My first time on this site and first post. A very nice, sharp, honest person is working for this company and showed me some insurance options including whole life. It may be academic because there is a medical screening I may not pass. But, my question is why are there such strong opinions against whole life? Is it prejudice? Ignorance? Bad actors selling this in the past? The illustration shown to me was plainly described as an illustration not a guarantee, but that the co has never paid less than the illustration of 5.8% in its long history. It was explained that for it to work best, it must be kept in force with prompt payments or I could take a hit. In the plan created for me, it is front loaded to be paid in full in less than 10 years. Then I have permanent insurance and within a couple of years of it being fully paid, it breaks even on cash value to that which I pay in. Then it grows at the illustrated rate or better or worse. What am I missing? Why do Suze Orman, Dave Ramsey and others state flatly that one should only buy term life insurance?
Thank you!
A potential consumer of whole life
I consider myself to be petty financially sophisticated. I have a brokerage account. I own stocks and mutual funds. I have traded options. I have been securities licensed. I was offered a job to be a stockbroker. I also own a large amount of WL. Mine is with Guardian but NWML is a good company.
Because there are a lot of agents out there who do dumb things regarding the sale of permanent life insurance.
There are a number of products that have a much more limited applicability than the company that manufactures them would like to admit. These products are often sold for bad reasons.
Neither side is correct (i.e. there is no 100% solution). There are a lot of really great things I can do with cash value life insurance if I design it correctly. There are also some nifty things I can do with REITs if you have the sophistication.
The problem with people like Dave and Suze is that there focus is too sharply dialed into rate of return. They assume incorrectly that just because you get to the end of the year and the change in price is 7% on one and 5% an another the 7% investment must be better.
The truth is we don't have enough facts to make that determination.
I've read the whole thread so don't get bent when I bump it to make a correction as some other people may do the same thing and there's a lot of valuable info that can be gleaned.
ACL goes to 121 years of age, not 90, just wanted to clarify.
jameslevenstein
New Member
11/23/2013
Hey everyone, sorry I am a bit late to the party. I am no expert, no insurance person, and certainly no adviser but I have done my research on this particular subject for a long, long time.
First off, full disclosure here, I am a huge fan of Dave Ramsey. I think he is correct on most all of what he says. He has a great ministry, great business, and has really good advice for most average people. Does he go too far sometimes? Yes. Why? I think human behavior, he knows if he tells you to save $1,000; you'll get to $950 and think, ah that's good enough. So he knows if he tells you that some debt is ok, it will come back to haunt him and you. After all, he is selling his advise and books.
I think he is absolutely right on paying off ALL your debt. Mortgage, student loans, all of it. No debt. Aside from the great security it gives you, why would you willingly give away your money to a bank? The average person in 2005 paid $13,500 in mortgage interest (US Dept of Comm). $13,500!! And the average total US consumer interest (mtg, cars, credit cards) was $16,900.00, that is 36.7% of the average US salary that year ($46,000). That said, what investment do you KNOW that will make you $16,900 year, guaranteed? Nothing. Instead of throwing away $16,900 a year, you keep it! You just had a 100% return because you now don't have a 100% loss on that money.
Keep in mind that your mortgage, if paid in full, at 4.5% is a -100% return, yes negative. At 6.5% it is a -200% return. And please don't spout the non-sense about a tax write off---you're paying a bank $13,500 a year to reduce your taxes by $2,025? That is a terrible trade! Keep your money. Instead of being out $13,500 in interest paid from cash you would have $11,475 in cash. I like that trade better. Moving on...
I said all that to say this: I think that Dave is wrong about investments for the average, retail person. NOTHING FITS EVERYBODY. But the buy term and invest the difference (BTID)? I have no idea where his average 12% mutual fund return number comes from. There is no magic fund. No magic market. A 100 year average is just that, a 100 year average. If you haven't been in the market for 100 years, you won't get that. In fact, I just read a Dalbar study that said the average 20 year return on a mutual fund is only 3.8%. 3.8%??!! All that risk for that tiny return. And that doesn't even account for taxes and inflation over time you have to pay. The markets have returned about 9.6% since 1928 BEFORE inflation, after, its only about 6.2% (USA Today).
I also found where an average joe stock trader only gets, on average, about 2% back in the equities when losses are accounted for (can't remember where I saw this right off). Remember that is average, half of yall did better, but half are thinking, I wish I had that return! What causes the 2%? My guess, again, human behavior. If the average guy has control, he is influenced by news and friends. Selling low and buying high.
I simply don't think the average normal guy can really beat the markets nor match them. The information he is supposedly legally entitled to, that the pros get, he gets late or never at all, the big wig fat cats that control the markets have already tanked the stock and your money is gone. I have tried the markets and most of my good gains eventually get (at least partially) wiped by losses. Do you realize a 15% gain one year is totally erased PLUS some of your principal with a 14% loss the next year? Do you realize a fund can have a positive return average and you can make $0 or even loose money?!?
Now, I don't know a lot about insurance and stocks but I know this: There are two things sure in life, death and taxes (Ben Franklin, 1817). I have knowledge of a tool that I can cash in on death and avoid some taxes. That is whole life, when used correctly (specifically I looked at NWML's Adjustable Complife). Everyone who has ever lived has died. So why would you not want to buy a policy that is SURE to PAYOUT? Term life bets you won't die, Whole life bets you will die. Yes it costs money but so do all investments. Lastly, there are few things in this life that carry guaranteed returns or guaranteed anything for that matter. Whole life is guaranteed; if you pay the premium, they pay the claim. I know no other investment that carries a guarantee. On top of that, if you have paid off all your debt, my attitude is that you don't need the risk of the markets. Take the guarantee and keep what you've got. Build guaranteed value slowly over 30 or 40 years. There is no way to get rich quick. Take it for what its worth, I have nothing to gain or loose in this.
That guaranteed value, guaranteed payout of my cash and the insurance amount and the ability of being able to know I will leave a legacy to my children is worth something, at least to me anyway. What's it worth? That is up to you.
Hey everyone, sorry I am a bit late to the party. I am no expert, no insurance person, and certainly no adviser but I have done my research on this particular subject for a long, long time.
First off, full disclosure here, I am a huge fan of Dave Ramsey. I think he is correct on most all of what he says. He has a great ministry, great business, and has really good advice for most average people. Does he go too far sometimes? Yes. Why? I think human behavior, he knows if he tells you to save $1,000; you'll get to $950 and think, ah that's good enough. So he knows if he tells you that some debt is ok, it will come back to haunt him and you. After all, he is selling his advise and books.
I think he is absolutely right on paying off ALL your debt. Mortgage, student loans, all of it. No debt. Aside from the great security it gives you, why would you willingly give away your money to a bank? The average person in 2005 paid $13,500 in mortgage interest (US Dept of Comm). $13,500!! And the average total US consumer interest (mtg, cars, credit cards) was $16,900.00, that is 36.7% of the average US salary that year ($46,000). That said, what investment do you KNOW that will make you $16,900 year, guaranteed? Nothing. Instead of throwing away $16,900 a year, you keep it! You just had a 100% return because you now don't have a 100% loss on that money.
Keep in mind that your mortgage, if paid in full, at 4.5% is a -100% return, yes negative. At 6.5% it is a -200% return. And please don't spout the non-sense about a tax write off---you're paying a bank $13,500 a year to reduce your taxes by $2,025? That is a terrible trade! Keep your money. Instead of being out $13,500 in interest paid from cash you would have $11,475 in cash. I like that trade better. Moving on...
I said all that to say this: I think that Dave is wrong about investments for the average, retail person. NOTHING FITS EVERYBODY. But the buy term and invest the difference (BTID)? I have no idea where his average 12% mutual fund return number comes from. There is no magic fund. No magic market. A 100 year average is just that, a 100 year average. If you haven't been in the market for 100 years, you won't get that. In fact, I just read a Dalbar study that said the average 20 year return on a mutual fund is only 3.8%. 3.8%??!! All that risk for that tiny return. And that doesn't even account for taxes and inflation over time you have to pay. The markets have returned about 9.6% since 1928 BEFORE inflation, after, its only about 6.2% (USA Today).
I also found where an average joe stock trader only gets, on average, about 2% back in the equities when losses are accounted for (can't remember where I saw this right off). Remember that is average, half of yall did better, but half are thinking, I wish I had that return! What causes the 2%? My guess, again, human behavior. If the average guy has control, he is influenced by news and friends. Selling low and buying high.
I simply don't think the average normal guy can really beat the markets nor match them. The information he is supposedly legally entitled to, that the pros get, he gets late or never at all, the big wig fat cats that control the markets have already tanked the stock and your money is gone. I have tried the markets and most of my good gains eventually get (at least partially) wiped by losses. Do you realize a 15% gain one year is totally erased PLUS some of your principal with a 14% loss the next year? Do you realize a fund can have a positive return average and you can make $0 or even loose money?!?
Now, I don't know a lot about insurance and stocks but I know this: There are two things sure in life, death and taxes (Ben Franklin, 1817). I have knowledge of a tool that I can cash in on death and avoid some taxes. That is whole life, when used correctly (specifically I looked at NWML's Adjustable Complife). Everyone who has ever lived has died. So why would you not want to buy a policy that is SURE to PAYOUT? Term life bets you won't die, Whole life bets you will die. Yes it costs money but so do all investments. Lastly, there are few things in this life that carry guaranteed returns or guaranteed anything for that matter. Whole life is guaranteed; if you pay the premium, they pay the claim. I know no other investment that carries a guarantee. On top of that, if you have paid off all your debt, my attitude is that you don't need the risk of the markets. Take the guarantee and keep what you've got. Build guaranteed value slowly over 30 or 40 years. There is no way to get rich quick. Take it for what its worth, I have nothing to gain or loose in this.
That guaranteed value, guaranteed payout of my cash and the insurance amount and the ability of being able to know I will leave a legacy to my children is worth something, at least to me anyway. What's it worth? That is up to you.
- 436
Fantastic 1st post sir.
I love it when I see consumers who have done their own real "due diligence", ignoring claims, and finding truth and logic. Regarding your life insurance statements above, a couple of my common lines that I share with clients:
"term is a gamble, permanent coverage is a guarantee"
"do you rent or own your life insurance coverage?"
"how long do you want your life insurance to last?"
Sometimes questions are better than statements as it allows people to draw their own conclusions.
In todays interest rate environment though I really would encourage you to re-examine your thoughts regarding "paying off ALL DEBT AT ALL COSTS". 95% of debt fits this statement, however for most people, not the mortgage.
Take a couple making 125k with a 250k mortgage paying 3.5% on a 30 year fixed mortgage. The 3.5% goes to the bank, and to your point the IRS gives back only about .75-1% in deduction/additional tax refund. However it does mean that the "effective cost" of borrowing the money is just over 2.5%. Many of my clients thanks to the current administration are paying close to 45% tax (federal, state combined)....so a 3.5% interest rate on a mortgage effectively gets them 1.5% back in the form of the IRS deduction....making their net cost 2% to borrow money on a home.
Let's say they received an inheritance and "could have" paid 250k cash for the home instead of taking out the mortgage. Do you know how to calculate that "lost opportunity cost"?
Even over the past decade, which we all know hasn't been stellar for the economy or the equities markets, through a mix of real estate, equities, and other investments that 250k could have easily averaged 5-7%
jameslevenstein
New Member
Thank you for the kind words! Happy Thanksgiving (I apologize in advance for the length)
While I have considered the “potential” lost opportunity cost, if any, of no debt and have looked at it too, there is also a lot of risk---as shown in 2008 and 2009---, I am simply (and totally for the sake of being able to post this) speaking in averages that we can look at. That said, and with all due respect, I see little lost opportunity for the “average” investor in the last 10 years (because I can't see 10 years into the future). Keep in mind average and that we don't know the future so I'll base this on a 2003 thru 2013 look-back. Now, full disclosure, I know people who make a lot of money in real estate, of course, I know people who have lost a lot also. Again, nothing fits everybody and no investment is guaranteed (except the whole life argument I made). Remember, if you would have invested in the markets in December of 1999 you would still be waiting to get your money back! (a -1.7% loss after inflation and BEFORE taxes-S&P500)
Based simply on what you said (get a $250,000 mortgage and invest the $250,000 cash inheritance) lets look at the numbers.
If we look at the S&P 500 returns and invested on December 1, 2003 (10 years ago), our average annualized return is 5.38% through today (11/29/2013). Now remember that we must base the interest rate on the 2003 rates (not today's 3.5%) which were about 6%. We have to account for taxes and inflation too. Basic math tells us that if you had invested that $250,000 in the markets and gotten the average return of 5.38%, you would have LOST money, a lot of money to me.
When you consider inflation, risk, and taxes, I (personally) can't see any lost opportunity.
The interest you would have paid would be $102,229 on that money for the last 10 years with an adjusted net rate of 4.5% (6.0% mtg rate minus 1.5% tax deduction yearly, makes the effective net mortgage rate 4.5% for this example). The 10 year gain at 5.38% downwardly adjusted for inflation (3.5%) makes our real rate of return only 1.88%. So, our net adjusted gain would have only been $49,841. Income taxes would take another $13,955 of our inflation adjusted gains (at 28% for that $125,000 tax bracket, more if you hit the 45% bracket) and we actually loose -$66,343. Again, all that risk and you still LOOSE money!
Now could this be different? Of course! Some investors could have done MUCH better but some did a lot worse too. Remember average is just that, 50% did WORSE and 50% did BETTER.
But! Even if we hypothesize in the future, our equation still isn't that great when we consider the risk. Remember cash into a good mutual company's whole life with dividends carries a guaranteed, no loss return...if we pay the premiums, which we have to assume we do, since we assume we paid all $250,000 into the market.
For our future equation, again based on what you said, assuming 3.5% interest over 30 years (but today's 30 year rate is actually about 4.25% with 20% down payment). Assuming the average market return (after inflation adjust) since 1928 of 6.2% minus our mortgage interest 3.5% = 2.7%, now add back in the mortgage interest tax write off of 1.5% = 4.2% average net rate of return but remember we now have to back out our taxes of 28%, makes our real rate of return 3%. BUT this hypothesizes things in a straight line with no deviations. Life and real investments don't run in a straight line and are never perfect. You could do a lot worse---or better. There are no guarantees with this method. If you do loose more money, you now owe for the mortgage and the losses in the investment. Even the averaged 3% doesn't beat the whole life method making say 4% of 5% because taxes, interest costs, and term costs eat all your gains. Maybe some people are smarter than me and can consistently get higher returns, I don't know any of them.
Again, I agree a person has to commit and stick with it, whichever method you choose. I invest over 30 years, not 30 days. That said, I still like a good whole life dividend mutual return with guarantees instead of the risk. Might I sacrifice some opportunity in exchange for the guarantee? Maybe yes, maybe no. If yes, that is the cost of something guaranteed, if no, it is the more sound method. Again, it is a gamble that you will make more money in the market. There are only 4 outcomes: 1. Life Ins. With guaranteed amount. 2. Market returns same amount as Life Ins. 3. Market returns less. 4. Market returns more.
If I go with the market, 2 of the 3 possible market outcomes don't beat the guaranteed Life Ins. method, that is a 66% failure rate and only a 33% chance of success in the market method but that 3% return is still less than the whole life average return NOT including our risk and the lack of insurance factors. 3 of 4 (75%) of my choices return the same or less. That is a 25% chance of success. Complicated? Yep. That is why I like my returns and dividends on the whole life.
Remember too, that using the mortgage method, you still have to buy term life insurance to get the equations closer in death risk which raises the mortgage method losses because you must expend capital on the insurance needed and, if you really want to get it seriously complicated, look at the tax advantages of the money building inside the policy compared to the taxes owed on the investments. At $250,000 that money would not invoke an estate tax problems and you would have taken that money owing no income tax to start.
Absolutely no offense meant but I prefer the no debt method because I can also draw back if I loose my income and have no risk of loosing my house to a debt taken on for risk (if I have a disability rider, which I do, I can even get disabled with the whole life method and come out better because I keep my income and keep paying into the policy so my investment still grows AND my house is paid for).
Here's a scenario to also consider, what about the opposite?: in both options, after 10 years, what if you loose your job AND the markets decline? If you took the mortgage method, you loose your house and your your investment looses money. If you paid off your house, you keep your house and the worst is the policy might not make as much if it has to self fund for a year or two.
And if there is anything I can tell you, if there is anything I have learned in this life, it is that you had better plan for things to go wrong in life. Always plan for the worst. If you do that, you will be fine. If you don't plan for the worst, life will punch you in the face and take your lunch money. Cancer happens. People die. Kids get sick. Houses burn. Car accidents will change your life. You can't control it all. You'd better be prepared. It is a lot easier to loose money than to make it. Something guaranteed? For me, it's a no brainer.
While I have considered the “potential” lost opportunity cost, if any, of no debt and have looked at it too, there is also a lot of risk---as shown in 2008 and 2009---, I am simply (and totally for the sake of being able to post this) speaking in averages that we can look at. That said, and with all due respect, I see little lost opportunity for the “average” investor in the last 10 years (because I can't see 10 years into the future). Keep in mind average and that we don't know the future so I'll base this on a 2003 thru 2013 look-back. Now, full disclosure, I know people who make a lot of money in real estate, of course, I know people who have lost a lot also. Again, nothing fits everybody and no investment is guaranteed (except the whole life argument I made). Remember, if you would have invested in the markets in December of 1999 you would still be waiting to get your money back! (a -1.7% loss after inflation and BEFORE taxes-S&P500)
Based simply on what you said (get a $250,000 mortgage and invest the $250,000 cash inheritance) lets look at the numbers.
If we look at the S&P 500 returns and invested on December 1, 2003 (10 years ago), our average annualized return is 5.38% through today (11/29/2013). Now remember that we must base the interest rate on the 2003 rates (not today's 3.5%) which were about 6%. We have to account for taxes and inflation too. Basic math tells us that if you had invested that $250,000 in the markets and gotten the average return of 5.38%, you would have LOST money, a lot of money to me.
When you consider inflation, risk, and taxes, I (personally) can't see any lost opportunity.
The interest you would have paid would be $102,229 on that money for the last 10 years with an adjusted net rate of 4.5% (6.0% mtg rate minus 1.5% tax deduction yearly, makes the effective net mortgage rate 4.5% for this example). The 10 year gain at 5.38% downwardly adjusted for inflation (3.5%) makes our real rate of return only 1.88%. So, our net adjusted gain would have only been $49,841. Income taxes would take another $13,955 of our inflation adjusted gains (at 28% for that $125,000 tax bracket, more if you hit the 45% bracket) and we actually loose -$66,343. Again, all that risk and you still LOOSE money!
Now could this be different? Of course! Some investors could have done MUCH better but some did a lot worse too. Remember average is just that, 50% did WORSE and 50% did BETTER.
But! Even if we hypothesize in the future, our equation still isn't that great when we consider the risk. Remember cash into a good mutual company's whole life with dividends carries a guaranteed, no loss return...if we pay the premiums, which we have to assume we do, since we assume we paid all $250,000 into the market.
For our future equation, again based on what you said, assuming 3.5% interest over 30 years (but today's 30 year rate is actually about 4.25% with 20% down payment). Assuming the average market return (after inflation adjust) since 1928 of 6.2% minus our mortgage interest 3.5% = 2.7%, now add back in the mortgage interest tax write off of 1.5% = 4.2% average net rate of return but remember we now have to back out our taxes of 28%, makes our real rate of return 3%. BUT this hypothesizes things in a straight line with no deviations. Life and real investments don't run in a straight line and are never perfect. You could do a lot worse---or better. There are no guarantees with this method. If you do loose more money, you now owe for the mortgage and the losses in the investment. Even the averaged 3% doesn't beat the whole life method making say 4% of 5% because taxes, interest costs, and term costs eat all your gains. Maybe some people are smarter than me and can consistently get higher returns, I don't know any of them.
Again, I agree a person has to commit and stick with it, whichever method you choose. I invest over 30 years, not 30 days. That said, I still like a good whole life dividend mutual return with guarantees instead of the risk. Might I sacrifice some opportunity in exchange for the guarantee? Maybe yes, maybe no. If yes, that is the cost of something guaranteed, if no, it is the more sound method. Again, it is a gamble that you will make more money in the market. There are only 4 outcomes: 1. Life Ins. With guaranteed amount. 2. Market returns same amount as Life Ins. 3. Market returns less. 4. Market returns more.
If I go with the market, 2 of the 3 possible market outcomes don't beat the guaranteed Life Ins. method, that is a 66% failure rate and only a 33% chance of success in the market method but that 3% return is still less than the whole life average return NOT including our risk and the lack of insurance factors. 3 of 4 (75%) of my choices return the same or less. That is a 25% chance of success. Complicated? Yep. That is why I like my returns and dividends on the whole life.
Remember too, that using the mortgage method, you still have to buy term life insurance to get the equations closer in death risk which raises the mortgage method losses because you must expend capital on the insurance needed and, if you really want to get it seriously complicated, look at the tax advantages of the money building inside the policy compared to the taxes owed on the investments. At $250,000 that money would not invoke an estate tax problems and you would have taken that money owing no income tax to start.
Absolutely no offense meant but I prefer the no debt method because I can also draw back if I loose my income and have no risk of loosing my house to a debt taken on for risk (if I have a disability rider, which I do, I can even get disabled with the whole life method and come out better because I keep my income and keep paying into the policy so my investment still grows AND my house is paid for).
Here's a scenario to also consider, what about the opposite?: in both options, after 10 years, what if you loose your job AND the markets decline? If you took the mortgage method, you loose your house and your your investment looses money. If you paid off your house, you keep your house and the worst is the policy might not make as much if it has to self fund for a year or two.
And if there is anything I can tell you, if there is anything I have learned in this life, it is that you had better plan for things to go wrong in life. Always plan for the worst. If you do that, you will be fine. If you don't plan for the worst, life will punch you in the face and take your lunch money. Cancer happens. People die. Kids get sick. Houses burn. Car accidents will change your life. You can't control it all. You'd better be prepared. It is a lot easier to loose money than to make it. Something guaranteed? For me, it's a no brainer.
jameslevenstein
New Member
Thank you for the kind words! Happy Thanksgiving (I apologize in advance for the length)
While I have considered the “potential” lost opportunity cost, if any, of no debt and have looked at it too, there is also a lot of risk---as shown in 2008 and 2009---, I am simply (and totally for the sake of being able to post this) speaking in averages that we can look at. That said, and with all due respect, I see little lost opportunity for the “average” investor in the last 10 years (because I can't see 10 years into the future). Keep in mind average and that we don't know the future so I'll base this on a 2003 thru 2013 look-back. Now, full disclosure, I know people who make a lot of money in real estate, of course, I know people who have lost a lot also. Again, nothing fits everybody and no investment is guaranteed (except the whole life argument I made). Remember, if you would have invested in the markets in December of 1999 you would still be waiting to get your money back! (a -1.7% loss after inflation and BEFORE taxes-S&P500)
Based simply on what you said (get a $250,000 mortgage and invest the $250,000 cash inheritance) lets look at the numbers.
If we look at the S&P 500 returns and invested on December 1, 2003 (10 years ago), our average annualized return is 5.38% through today (11/29/2013). Now remember that we must base the interest rate on the 2003 rates (not today's 3.5%) which were about 6%. We have to account for taxes and inflation too. Basic math tells us that if you had invested that $250,000 in the markets and gotten the average return of 5.38%, you would have LOST money, a lot of money to me.
When you consider inflation, risk, and taxes, I (personally) can't see any lost opportunity.
The interest you would have paid would be $102,229 on that money for the last 10 years with an adjusted net rate of 4.5% (6.0% mtg rate minus 1.5% tax deduction yearly, makes the effective net mortgage rate 4.5% for this example). The 10 year gain at 5.38% downwardly adjusted for inflation (3.5%) makes our real rate of return only 1.88%. So, our net adjusted gain would have only been $49,841. Income taxes would take another $13,955 of our inflation adjusted gains (at 28% for that $125,000 tax bracket, more if you hit the 45% bracket) and we actually loose -$66,343. Again, all that risk and you still LOOSE money!
Now could this be different? Of course! Some investors could have done MUCH better but some did a lot worse too. Remember average is just that, 50% did WORSE and 50% did BETTER.
But! Even if we hypothesize in the future, our equation still isn't that great when we consider the risk. Remember cash into a good mutual company's whole life with dividends carries a guaranteed, no loss return...if we pay the premiums, which we have to assume we do, since we assume we paid all $250,000 into the market.
For our future equation, again based on what you said, assuming 3.5% interest over 30 years (but today's 30 year rate is actually about 4.25% with 20% down payment). Assuming the average market return (after inflation adjust) since 1928 of 6.2% minus our mortgage interest 3.5% = 2.7%, now add back in the mortgage interest tax write off of 1.5% = 4.2% average net rate of return but remember we now have to back out our taxes of 28%, makes our real rate of return 3%. BUT this hypothesizes things in a straight line with no deviations. Life and real investments don't run in a straight line and are never perfect. You could do a lot worse---or better. There are no guarantees with this method. If you do loose more money, you now owe for the mortgage and the losses in the investment. Even the averaged 3% doesn't beat the whole life method making say 4% of 5% because taxes, interest costs, and term costs eat all your gains. Maybe some people are smarter than me and can consistently get higher returns, I don't know any of them.
Again, I agree a person has to commit and stick with it, whichever method you choose. I invest over 30 years, not 30 days. That said, I still like a good whole life dividend mutual return with guarantees instead of the risk. Might I sacrifice some opportunity in exchange for the guarantee? Maybe yes, maybe no. If yes, that is the cost of something guaranteed, if no, it is the more sound method. Again, it is a gamble that you will make more money in the market. There are only 4 outcomes: 1. Life Ins. With guaranteed amount. 2. Market returns same amount as Life Ins. 3. Market returns less. 4. Market returns more.
If I go with the market, 2 of the 3 possible market outcomes don't beat the guaranteed Life Ins. method, that is a 66% failure rate and only a 33% chance of success in the market method but that 3% return is still less than the whole life average return NOT including our risk and the lack of insurance factors. 3 of 4 (75%) of my choices return the same or less. That is a 25% chance of success. Complicated? Yep. That is why I like my returns and dividends on the whole life.
Remember too, that using the mortgage method, you still have to buy term life insurance to get the equations closer in death risk which raises the mortgage method losses because you must expend capital on the insurance needed and, if you really want to get it seriously complicated, look at the tax advantages of the money building inside the policy compared to the taxes owed on the investments. At $250,000 that money would not invoke an estate tax problems and you would have taken that money owing no income tax to start.
Absolutely no offense meant but I prefer the no debt method because I can also draw back if I loose my income and have no risk of loosing my house to a debt taken on for risk (if I have a disability rider, which I do, I can even get disabled with the whole life method and come out better because I keep my income and keep paying into the policy so my investment still grows AND my house is paid for).
Here's a scenario to also consider, what about the opposite?: in both options, after 10 years, what if you loose your job AND the markets decline? If you took the mortgage method, you loose your house and your your investment looses money. If you paid off your house, you keep your house and the worst is the policy might not make as much if it has to self fund for a year or two.
And if there is anything I can tell you, if there is anything I have learned in this life, it is that you had better plan for things to go wrong in life. Always plan for the worst. If you do that, you will be fine. If you don't plan for the worst, life will punch you in the face and take your lunch money. Cancer happens. People die. Kids get sick. Houses burn. Car accidents will change your life. You can't control it all. You'd better be prepared. It is a lot easier to loose money than to make it. Something guaranteed? For me, it's a no brainer.
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