How is this for an idea?
Free the "Lazy" Dollars trapped in the Equity of your Home by financing it 100%. Start drawing money out of traditional IRAs and 401(k) Plans before minimum required distributions trigger a possibly heftier tax bill after age 70 1/2 .
Then put all that newfound money in the vehicle best suited, if structured properly, to provide a steady stream of Tax-Free Cash Flow: Investment-Grade Cash-Value Life Insurance.
No, I haven't gone bonkers. This is not my idea, and many Financial Planners I've talked to dismiss it as a ploy to sell Life Insurance (and collect commissions). I have problems with the way I've seen the idea presented in advertisements and Financial Seminars. But I don't want to reject out of hand some of the concepts underpinning the strategy, which is explained in the conventional-wisdom-challenging books "Missed Fortune" and "Missed Fortune 101" (Warner Books) by Douglas Andrew.
This admittedly counterintuitive strategy consists of paying the greatest possible premium to buy the least amount of death benefit and still have a contract qualify legally as life insurance. That way, the excess premium (the amount beyond what's needed for the actual insurance) grows tax-deferred, generating cash value.
Managed properly, this growing Cash Value can be accessed Tax-Free through withdrawals that don't exceed the premium paid and/or Policy Loans in which the interest charged is mostly if not totally offset by the interest credited on the Cash Value. The beneficiary gets a Tax-Free Death Benefit after the insured dies.
"I would say the reason (this strategy) gets a bad rap is that most people flat out don't understand it," said Andrew, president of Paramount Financial Services in Salt Lake City. "I would say 99 1/2 percent of Life Insurance Agents don't understand how to do it."
These policies require careful monitoring to make sure the size and timing of premiums, Withdrawals and/or Loans do not violate any rules, create a Big Tax Liability and/or cause the Policy to lapse. But the Strategy can indeed make sense, particularly for people in High Tax Brackets who don't want Stock Market risk and can afford to pay sizable Premiums and 
wait the several years needed for the Cash Value to overcome high Initial Costs, including Agent Commissions.
My problem is with the idea that people who can't afford these Policies otherwise take money from their Home Equity or Retirement Plans.
Some advertisements for this strategy imply there is some magic way to withdraw money Tax-Free from deductible IRAs and 401(k) plans. There isn't any. The strategy actually consists of offsetting the Taxes due on withdrawals with a higher tax deduction by taking out a bigger Home Loan, preferably an Interest-Only Home Loan. The false assumption is that the entire Home Loan Interest can always be deducted (for example, a Taxpayer in the 25% bracket paying $15,000 a year in Home Loan Interest would always save $3,750 in Taxes).
"That's just not true," said Martin Zickert, a Financial Adviser in Vero Beach, Fla. "They seem to forget the concept of Standard Deductions." You benefit only from the amount that itemized deductions exceed the Standard Deduction, which for 2005 is $10,000 for a couple filing a Joint Return, plus an additional $1,000 for each Spouse who is at least 65. Also, "the idea of an Interest-Only Home Loan makes me really nervous," Zickert said. "Someday you are going to have to pay the Principal back."
Andrew's argument is that the Life Insurance Cash Value would grow more than large enough over time to be able to repay the Home Loan. Illustrations used to support this argument typically are based on Interest Rate and/or return projections that are higher than any minimum Interest Rate guaranteed by the Insurance Company.
"In sales presentations you tend to put everything in the best light," Zickert said. "The idea of buying Life Insurance to gain Wealth can work very well, but you have to make sure (the money for the premiums) is excess money you don't really need."
My other concern is the implicit suggestion that this strategy is the only way to go. "Every strategy out there is going to work for somebody, but the question to ask is, 'Is it right for me?' " said Patrick Astre, a Certified Financial Planner in Shoreham, N.Y.
His piece of advice, and a good one: Don't buy into this strategy, which requires a thorough understanding of complex Tax and Insurance rules, without independent advice from a qualified professional.
Send questions or comments to Roger Perris at Roger@HomeLoanConsultant.NET or c/o Millennium Mortgage Company, 43-645 Monterey Avenue, Suite D, Palm Desert, CA 92260. Personal replies are not possible.
