In yet another way to mix insurance and investing (rarely if ever a good idea), I was recently mailed a copy of the book Lifetime Economic Acceleration Process by Robert Castiglione which introduces the reader to the “LEAP” system. I recommend you don't buy it and I certainly recommend avoiding any adviser using this system. I'm able to see the good in a lot of “financial systems,” but this one is so bad it's difficult to find any redeeming value in it at all.
An Introduction To The System
The book really serves as nothing more than an introduction to the LEAP system, effectively described to me by a former agent/salesman as “All Roads Lead To Whole Life.” After getting a grip on what LEAP is, I found it pretty funny the word “insurance” doesn't appear until page 44/142, where the book attempts to get the reader to think of permanent life insurance as similar to a Roth IRA. What could the author possibly be trying to hide? Oh, perhaps it's the fact that the whole LEAP system is designed to get people to buy whole life insurance inappropriately. (Actually, they don't care if you buy it appropriately or inappropriately, as long as you buy it.) Here's a couple of quotes to give you a flavor for the book:
“Whole life is the king of all policies providing the most benefits.”
“When you take into account all the benefits of growth in guaranteed cash value, declared dividends, income tax savings, avoiding costly term-insurance premiums, and the high overall rate of return over a period of time, it is very difficult to find a savings or investment vehicle that has consistently returned more money than whole life insurance.”
“Have whole-life insurance death benefits equal to your net worth at retirement.”
It's All About “Acceleration”
The LEAP system's big point is that you need to “accelerate” your money. That sounds pretty good, right? Who wants their money to be moving slowly, especially when it's supposed to be growing. I want my money going 100 mph! What do they mean by accelerate though? The book explains “each dollar must be used for multiple purposes” and that you should “use the cash-flow-of-money system that moves your money from one asset to another to gain a greater rate of return, more benefits, and tax savings.” If it were written in plain English, it would clearly state (probably before page 44) that to accelerate means to leverage. The author advocates that you invest in whole life insurance, then borrow back the proceeds to use for other purposes. He also advocates that you use home equity money to buy life insurance. Then you keep the money moving as fast as you can in and out of whole life insurance policies and mortgages until it is properly accelerated. Why does this sound familiar? Because you just read about it in February in my 5-day review of Missed Fortune. It's the same old crap in a different form. Just like Bank on Yourself or Infinite Banking, it's mostly a “financial system” that enables its proponents to sell more whole life insurance.
LEAP In A Nutshell
If the author really wanted the reader to understand what LEAP is, he would print this on the first page of a one page book: 1) Don't pre-pay your mortgage because you can probably get a higher rate of return elsewhere, especially when you consider the benefits of tax-deductible mortgage interest. 2) Buy lots and lots of insurance. Insure your life to “full economic value” (rather than doing some kind of analysis to figure out how much your family might need if you die) using whole life insurance. Keep buying more and more throughout your life. 3) Don't invest in tax-deferred retirement vehicles because it's possible you'll pay more taxes later (and might even pay at a higher tax rate.) Instead, you can use this money to buy whole life insurance.
Why Compound Interest Sucks
A really interesting chapter is the one where the author explains how compound interest isn't all it is cracked up to be. He goes into a bizarre theory about the disadvantages and dangers of compounding. You didn't realize there were disadvantages, did you? He separates the infamous compound-interest-demonstrating “mountain chart” into 3 phases- accumulation, growth and “take-off” and attempts to get the reader to believe that compound interest somehow works differently the first 10 years than in years 20-30 and complains that this is somehow a dangerous situation and compound interest is only helpful after decades. Then he contradicts himself to say you should only use “compounding accounts” for 3-5 years.
Next he points out that with a tax-deferred retirement account you'll owe more tax later after years of compounding than you would owe if you just paid the taxes now. This is true, but irrelevant. For example, if you contribute $10K now to a 401K, saving $3K in taxes, and then that $10K grows to $100K in retirement, even if you end up paying taxes at a lower rate in retirement (say 20% overall), you'll owe $20K. See! More taxes! The goal isn't to pay the least amount of tax, of course, but to have the most money after-tax. The other disadvantage of compound interest according to the author is that it doesn't provide health benefits, disability benefits, death benefits, or asset protection. Seriously. And no, I can't follow his extraordinary leap to believing that whole life insurance provides “health benefits” either.
The Worst Chapter In The Book
There is no better demonstration of the LEAP philosophy (“All Roads Lead To Whole Life”) than the chapter in the book about paying for college. I couldn't believe someone had the gall to put this insanity into print. The author cautions against using tax-advantaged college savings plans like 529s and ESAs because they have “the same drawbacks as other tax-advantaged plans,” like, you know, compound interest, tax-free growth, and tax-free withdrawals. He then goes on to say that these plans “have only one use” and that tying your money up to pay for your kid's college leads to many unspecified “lost opportunities and costs.” Then he suggests that instead of asking how you can pay for college, you should be asking how you can pay for college, get all your money back, and guarantee your children's education even if you “become disabled or die, the market declines, interest rates drop, [you] get sued, or college costs skyrocket?…the money you pay for college is lost to you and you will never see it again for other uses….what is the point of having the earnings [grow] tax-free and then giving all the money to the college?” Eventually, he gives you the solution to your college savings woes, which is…..wait for it……WHOLE LIFE INSURANCE!
He then mentions all the benefits of using whole life insurance to pay for college (or better yet, taking out loans with the insurance policy as collateral), while failing to mention a single downside of this approach. It gets even better. He finally admits that buying whole life insurance to pay for college might not be a good idea if your kid is already a teenager. Actually, he doesn't admit that, he just says that you might have to combine it with some other options like a home equity loan or a 529. Let's look at his 13 benefits of using whole life insurance to pay for college:
1) Tax-deferral – Where's the tax deferral? There is none other than the very minor effect of the cash value not being taxed as it grows. It pales in comparison to the fact that most whole life policies don't break even for a decade. If there are no gains (premiums paid minus surrender value), there are no taxes due anyway no matter how much the cash value “grows.”
2) Disability protection – The assumption here, of course, is that you buy a disability rider on your whole life policy that pays the premiums if you cannot. Of course, once you borrow the money out of the policy (or take out another loan with the policy as collateral) the disability rider doesn't pay that loan back. He also fails to mention the obvious alternative strategy – buying disability insurance.
3) Pre-mature death protection – Again, the obvious alternative (buying an inexpensive term life insurance policy) isn't mentioned.
4) Possible creditor protection – If you want college funds protected from your creditors, 529s offer significant protection, although it varies by state (just like whole life insurance.) One alternative, of course, being that you can actually use a UGMA 529, so the money isn't yours anyway. Irrevocable trusts or just a standard UGMA accounts are also options if credit protection of your 529 is a big concern for you.
5) Qualify for financial aid – There are lots of strategies to minimize the assets that count against you on a FAFSA, but the truth is that most financial aid isn't free money, it's loans. 529s and ESAs obviously do count against you in a way that life insurance does not, but if you have enough money to save a significant amount for college in a 529 or a whole life policy, your kid isn't going to get any need-based grants or scholarships anyway, at least in a way that gives whole life insurance a significant benefit over more typical college savings accounts.
6) Convert term-life insurance costs – Uhhh….yes, if you have a huge whole life policy you don't need a huge term life policy so you can save those costs. Never mind that the insurance component of a whole life policy is more expensive than a term policy due to less transparency and competition in the market.
7) Liquidity without penalty – What exactly is the penalty of liquidating a 529, ESA, savings bonds etc for college costs? There is none. It's a straw man argument. How about liquidity without paying interest? That's something you get out of a 529 that you don't get out of a whole life policy unless you cancel the policy, which comes with its own tax consequences not found in a 529.
8) No stock-market losses – No stock market gains either. When the expected long-term return (and I'm talking 3 decades plus) for a whole life policy is 2-5% a year perhaps one ought to be more concerned about not getting stock market gains than enduring stock market losses.
9) No income taxes – Again, what income taxes do you pay on 529, ESA, and savings bond withdrawals used for college? None. It's another straw man.
10) Peace of mind – Against what? Knowing you won't have enough to pay for college due to the high costs of the whole life policy and the low returns available through it, especially over periods of time that most people use to save for college (for instance, 18 years?) If you're so scared of the market that you don't want your college savings in it, buy savings bonds or just get the bond fund in your 529. If you're scared you'll die or become disabled, buy a term life or a disability policy to cover those costs.
11) Elimination of lost-opportunity cost – There are lost opportunity costs no matter what you spend your money on. If you buy a whole life policy, you can't fund a 529. If you save for college, you can't buy a boat. There's always lost opportunity cost and you don't get it back by using whole life instead of a more traditional instrument. A whole life salesman likes to say that the policy cash value is still growing even though you borrowed money out of the policy. The truth is it is growing slower if you borrow the money out in a direct recognition policy, but even if you get a non-direct recognition policy you still have to pay the loan back with interest (or the interest will be taken out of your return.)
12) Enhanced retirement income – While it is true that you can borrow from your whole life policy to fund your retirement, there are far better ways to pay for retirement. Permanent life insurance is best used to cover a need for a permanent death benefit.
13) Estate planning. Unless you have a very illiquid (think family farm or small business) or very large ($5M single, $10M married, indexed to inflation) estate there are no estate planning benefits with permanent life insurance.
What a contrived list of benefits! Using whole life insurance as a college savings vehicle just isn't very smart no matter how much spin you put on it.
LEAP is a system designed to help agents sell you whole life insurance, not a way for you to reach greater wealth. It exists to sell software ($2500 a pop) and training courses ($750 each) to financial planners so they in turn can get you to buy whole life policies. It is heavily used by Guardian insurance agents you may be meeting with to buy disability insurance. If you're already involved in the LEAP System or considering getting involved, do yourself a favor and spend a few bucks to get insurance expert Joseph Belth's articles about it. It'll be $20 well spent. The LEAP System, like most others that mix insurance and investing, is a product to steer clear of.