One of the hottest life insurance sales strategies, being used today, is harvesting home equity to over-fund a life insurance policy up to the MEC guidelines. (The 7 Pay Test) The goal is to make the life insurance policy, what is called 'Investment Grade Life Insurance.' The over-funded life insurance policy can now be used as a college funding vehicle, a non-regulated retirement plan, or a family bank (The Infinite Banking Concept), while providing your family the valuable protection they need!

There are several major questions people have about using this concept. Does it really work? Is it truly in your best interest? Is it just a scam to sell cash value life insurance and make higher commissions? What happens when the mortgage interest rates rise?

Does Equity Harvesting Really Work?
Does harvesting home equity to over-fund a life insurance policy up to the MEC guidelines really work? There are two major parts to this question. The first part of the question is - Does removing the built up equity in a home and then investing it make sense? The simple answer is yes it makes perfect sense, as long as you can make more on the money than it's costing you. Example: If you can borrow out the equity at 6%, invest it and make over 6% on the money, then you are making money. And, we are not even considering any of the other very valid reasons 'Missed Fortune' and many other books give you for not leaving built up equity in your home.

Important Note: Contrary to what most of the books written on this subject will tell you… 'In many situations you will not be able to deduct the mortgage interest on the equity you borrow!' According to IRC Section 264a(3) "mortgage interest is not deductible on any amounts of equity you put into life insurance, where the plan is to take out tax-free withdrawals." IRS Publication 550 states that you cannot deduct interest, "on money you borrow to buy or carry a single premium life insurance, an endowment, or an annuity policy." In IRS Publication 936 there is a phase-out of the mortgage interest deduction depending on your income, and there are other limits to what you can deduct.

The second part of the question is - Does it make sense to invest that money into an investment grade life insurance policy?  Again, the simple answer is yes… If you need the life insurance protection for your family! Consider you are going to pay for the life insurance protection one way or another. The best way to get the protection you need for your family is with a permanent life insurance plan. The actual cost of the life insurance protection, inside of a cash value life insurance policy, is much cheaper than buying a separate term insurance policy. And, we are not even taking into account the numerous tax advantages, the flexibility and the safety of cash value life insurance.

Is Equity Harvesting Truly In Your Best Interest?
While there are many pros and cons and some debatable mathematics, the undeniable truth is that, when left to their own resources, most people are 'not' consistently saving for their future. And, in many cases people are using their home equity as a revolving charge account.  By taking the equity out of the home and putting that money to work for you today, you are forming the habit of saving. And, by tying the payments to your mortgage you are insuring that you will continue to make the payments in the future. Plus, you are creating a liquid safety net, (an emergency fund). When you have money working for you… You will feel better and more secure about your current situation and your financial future.

Is Equity Harvesting Just a Scam to Sell Cash Value Life Insurance and Make Higher Commissions?
There are many people, in and out of the financial services industry, that believe in the philosophy of "Buy Term and Invest the Difference" instead of purchasing a cash value policy. There are two major problems with that philosophy. The first problem is that it assumes that people will in fact buy the term life insurance they need and then invest the difference. When we consider that we have a 'negative saving rate' in the United States for 2005 and 2006, then it's very obvious that most people are not investing the difference.

The second problem with "Buy Term and Invest the Difference" is that it supposes that the investment where they "invest the difference' will out-perform the investment inside of the life insurance policy. Numerous studies over the years, by many independent consumer research firms, clearly show that the average stock market investor is only making a 2-4% return on their investments. (After Fees and Taxes) Whereas the average internal rate of return for most cash value life insurance policies are above 5%. And, we are not even considering the advantages of tax-deferred growth of life insurance and the ability to take tax-free withdrawals.

What Happens When The Mortgage Interest Rates Rise?
If you decide to use an adjustable rate mortgage, there are two concerns relating to rising mortgage interest rates. The first concern is whether you will still be able to make more on the amount you borrowed, than it's costing you for the loan. Consider, mortgage interest rates are a function of the financial economy and do not rise independently. As mortgage interest rates rise, so does the internal rate of return of cash value life insurance. Mortgage interest rates are generally tied to an index and have yearly caps as to the amount of mortgage interest that can be charged, so they tend to rise slowly. Over time, the spread between the mortgage rates and the internal rate of return of cash value life insurance may be less and, in a few cases, may even go negative for a time. However, the considerable tax advantages cash value life insurance will generally allow you to keep a 'Net' positive spread, even as interest rates rise.

The second concern is whether you can find the money out of current income for your increasing mortgage payments. One of the many advantages of using cash value life insurance is that it is liquid. Unlike most other investments, you can access your money tax free, and without federal early withdrawal penalties. So, if you need additional money for the increasing mortgage payments, the cash value in the life insurance is available for you to use.

Summary
Harvesting home equity and investing it into a conservative, safe investment vehicle isn't a new concept. It's a time tested, proven concept the wealthy have used for generations to keep their money liquid, so they can take advantage of investment opportunities as they come along. It's what has enabled the wealthy to accumulate vast fortunes even during the stock market crashes, recessions and the 'Great Depression!'

The key to making 'Equity Harvesting' work for you, is selecting the right type of home mortgage for your situation and your comfort zone. You want a mortgage with the lowest interest rates and fees you can find and you are comfortable with. Then it's selecting a competitive cash value life insurance policy. You don't choose a life insurance policy based solely on current company illustrations. You'll want to find a company that has solid financial rating and a proven, documented long-term history of above average product performance.

'Equity Harvesting', when done properly, is truly an invaluable financial concept when it comes to accumulating wealth. However, it doesn't stop there. Use your home equity to reduce and eliminate your debt. You'll free up your current income, so you are able to put even more money away. And, you'll be on the way to securing the financial future you have always dreamed of for you and your family!

I've been using this concept personally for over 25 years. And, it works!