Reverse mortgages and CV life insurance -- A lawsuit in waitingArticle added by Roccy DeFrancesco on September 16, 2009
Roccy Defrancesco

Roccy DeFrancesco


Joined: May 24, 2006

Last week I had an advisor forward me what seems to be a sales presentation created by two advisors. I was so outraged by what I saw that I'm devoting this article to the subject so I can illustrate to readers what's wrong with the sales pitch and why I think you should stay away from such marketing.

Reverse mortgages (RMs) to fund CVL for retirement income

I thought the time had come and gone for most of the abuses with advisors using RMs to "find" money to fund cash value life (CVL) insurance. Apparently not. In an effort to keep this article short, let me tell you that I've run the numbers many times on using an RM to raise money to fund life insurance and annuities.

The theory is that the client should take out a big RM, fund an indexed UL policy and then borrow from the policy income-tax-free. The client is told that this is better than "doing nothing" or simply taking the monthly payment option on an RM to raise tax-free
The example

What I have in my possession is an RM illustration and a life illustration that will blow your mind. It did mine. The client is a 70-year-old lady who has a $280,000 home. The RM illustration raised $100,000 that was used to fund the EIUL policy. The life illustration showed premiums of $18,721 for five years and $6,395 for year six. The initial death benefit was approximately $201,000. The illustration then showed borrowing from the policy from ages 79-100, with an annual amount of $10,712. At age 90, the death benefit was approximately $78,500.

What's wrong with this sale?

Where do I start? If the client simply chose to take the tax-free monthly pay option from day one -- versus waiting until age 79 to borrow from the policy -- the annual amount that could be received from the RM is $10,244.

In order to crank out a tax-free retirement income from the life policy, the assumed crediting rate appears to be 8.68 percent and the policy would need to have a variable loan with a 6.5 percent interest rate. The assumption is that the policy in the borrowing phase always had a positive loan spread in excess of 2 percent a year. The illustration says it was run at 8 percent, but I ran the numbers using the same illustration software and I had to use an 8.68 percent crediting rate to generate the same returns.

What if I used a 7 percent crediting rate and wash loans for the illustration? The insured would only be able to remove $6,228 a year from the life policy.

What do you think the chances are that the client was told that the policy has a positive 2+ percent loan spread to drive the numbers? What do you think the chances are that the 70-year-old client understands 50 percent of the pros and cons of the transaction?
What insurance policy was used?

Good question. I'm not going to name the company used. What I can tell you is that I contacted the company and told them what I had in my possession and this is their official response:

"(Name omitted) Life, along with most if not all of our industry peers, does not condone the sales technique you describe. We will take action, and have done so consistently, with any agent or general agent who utilizes an abusive sales technique."

I have not been this upset after seeing a sales pitch in a long time. I have not yet decided what to do about it. I can tell you that I sent two e-mails to my contact at the company's home office and received no response. I wanted to know if Doug Andrew condoned this and if he was going to seek out the agents who apparently pitched this to a client and throw them off the MF 101 "team" (I think I know better than to expect that).

Would you like to see the illustration and RM info for yourself?

I have PDF copies that are not great because they are copies of a fax. I've blacked out the agent's names; but if you don't believe me or just want to see it for your own eyes, please contact me using the forum below. Also, when I initially ran the life insurance illustration using the same company's software, I couldn't generate any tax-free borrowing (there was not enough cash to make it work). I played it with it for about 20 minutes until I figured it out.

What's the moral of the story?

1) Don't sell your soul -- and your clients who don't know any better -- down the river just because you need to make a couple of bucks. It's not worth it, and it can get you sued and potentially thrown out of the business.

2) Assume that someone else is going to review your recommendations and, therefore, they better be in the client's best interest.

3) Make sure you work with an IMO/FMO that actually cares about your clients. Any marketing organization that would allow agents to pitch a RM sale to a 70-year-old so that money can be funded into a life policy for retirement income, in my opinion, is not looking out for your best interest, or that of your clients.

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