I received an interesting e-mail from a client of mine yesterday. We’ve been implementing an insurance-based strategy for the last couple months, so he is constantly learning new things, finding new books, and reading new articles about the strategy. I’m glad he found this one. For those who haven’t read it, it’s an email newsletter about how the rich “clone” their money. One of the steps is to borrow from your insurance policy, and take advantage of the spread, or create and “arbitrage.”
It was alarming to read through that email, so I thought I would share the response I gave my client with you. Here it is:
Thanks for forwarding me this email. I’m always interested to hear what others are saying. Here are some of my thoughts.
To be honest, this makes me quite nervous if this is truly what they think will happen (Keep in mind I am referring to this as it relates to the insurance). This will have terrible repercussions as they get more people involved and it fails to perform. Look at it this way, they claim the ability to create an “arbitrage” inside the insurance policy. If indeed they are doing this as explained here, then why would they look outside of the mechanism that can “clone” their investment dollars over and over and over? Why not borrow against the policy, start a new policy, borrow out of the new one, and do it again and again. You could essentially repeat the cycle infinite times and only be limited by the time it takes to get the insurance, right? That would be the “black box secret of the wealthy,” in my opinion, if it were true. But where would this money come from? Thin air? It has to come from some where.
There’s no magic pill, and this, in my opinion, is where the elevation group is crossing over from good and intriguing marketing, to misrepresentation. This really worries me. If he really understood what he was implying here, he would think twice. The type of insurance they use is much more volatile (Indexed Universal Life). Though it may guarantee no losses (in the investment account, not taking into account the rising cost of insurance which will create future loss), it will certainly not guarantee the performance needed here. They may have a good year here and there, but that comes with the bad ones, or the one’s where the arbitrage plays against them. This type of insurance is also notorious for extremely high fees which eat away at actual performance, decreasing the ability to effectively create the needed growth the accomplish the arbitrage. If people follow his advice, and implement, thinking there will be a consistent arbitrage, then they will most likely pay dearly when this fails them. I can assure you of no consistency in this theory to make it sound.
I will be interested to see what is being said of them in 3 to 4 years.
That’s my 2 cents!