Wow. The response to my posts on Douglas Andrew's Missed Fortune 101 continues to be lively. Just got a comment about it through e-mail today, in fact. This discussion has taken on a life of its own in some ways. On the main post people's opinions of my comments have been everything from being a “trashing fool” (comment 57) to being a “wise man” (comment 59). (I'll be sure to show these comments to my wife — she'd probably agree with both of them at times!)
Reading and re-reading the comments I've gotten about the posts, there appears to be great support both for following the advice in the book and for not following the advice. And though I still disagree with using the methods, I acknowledge that I don't know everything — maybe not even enough — about insurance vehicles to run the numbers beyond a worst-case what-if scenario, so I do admit that weakness.
In general terms, though, almost any financial instrument can work to your advantage if it's part of a comprehensive plan and if it's appropriate for your situation. (This does not constitute financial advice!) And any financial instrument — cash, gold, stocks, bonds, real estate, fine art — will have some risk associated with it. Cash can be inflated away. Gold can be stolen. Stocks can become worthless. Interest rates can go up and bonds can tank. Real estate can depreciate or burn down. Fine art can get ugly. You get the point.
Insurance as an investment also has risks. Its primary purpose is a hedge against the unknown. You buy auto insurance in case you wreck your car. You buy homeowners' insurance in case your house and possessions get ruined. You buy life insurance in case you die earlier than expected and still want to have your family's financial needs met in the absence of your earning power.
As such, you pay a premium to the insurance company, which compensates the company for assuming the underwriting risk. In the case of permanent insurance, the policy accrues a cash value based on the premiums you've paid in, the performance of the underlying investment that the insurance company uses to generate revenue from the premiums, and the cost of insurance. As such, the underlying investments, in order to generate a return for you, the policyholder, need to perform much better than that, because of the costs of insurance. And this is only fair: not only are you getting a positive rate of return, but you're also protected from whatever catastrophic event you got the insurance for in the first place.
When you borrow for an investment (which is what the book is suggesting that you do) you owe interest on that borrowed money regardless of whether the investment performs or not. So to come out ahead, the investment needs to perform better than the rate at which you borrowed the money, after taxes, mortgage interest deductions, and any other adjustments that could go into the mix.
If these interest rates are subject to change for whatever reason — market fluctuations, change in government regulations, company default — this fact still holds. If you're paying more to service the loan than you are making in the investment, your net worth goes down each month due to that transaction. And this isn't just for the strategies in Missed Fortune 101 — this goes for any situation where you're borrowing to invest.
So if you're interested in investigating this method, by all means check out the book. One commenter said that people should be able to judge for themselves whether the ideas are valid or not, and this is absolutely true. Also, please check out the lively discussions on the posts here. Many different points are brought up. The links to the posts are below:
Missed Fortune 101 — Horrible Advice!
Missed Fortune 101 — Horrible Advice part 2
Missed Fortune 101 — Financial Planners Speak
More stuff on Missed Fortune 101
The Missed Fortune 101 debate continues
I don't know who this is posting but he assumes to a lot about the subject. After reading some of these comments it is clear that this person is facilitating the constant confusion of the consumer by standing on a soap box talking about a financial strategy he or she does not fully understand. Making comments like "in order to generate a return for you, the policyholder, need to perform much better than that, because of the costs of insurance." You obviously have no idea how these contracts are constructed when using the Missed Fortune strategies. You have no idea what the cost of insurance is when done properly. If you are thinking about using these strategies you need to work with professionals that do this themselvs, not just talk about it online. When done properly the COI as well as other expenses should only cost a net of 1% (much less than typical mutual funds and other investments), the real power of these vehicles is the TAX FREE money. Again when used properly the "loans" on the policy never actually cost anything. These products were developed to be capital accumulation and retirement income vehicles. The insurance dealth benefit just comes along for the ride because the IRS says we need it to stay tax free. I don't mind some healthy discussion but when someone gets on a computer and gives investment adivice over the internet as if they are an authority on the subject it does nothing but confuse the consumer leaving them isolated becasue they don't know what to believe. The Missed Fortune strategies work. I do it myself and practice it with my clients. For many Americans it is hands down, the safest and fastest way to gain the elusive financial independance.
Nick, finally someone said what I've been screaming at my computer for the last 2 weeks in this mess. lol. Thank you!
When you borrow for an investment (which is what the book is suggesting that you do) you owe interest on that borrowed money regardless of whether the investment performs or not