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First post and its a long one so please bear with me! OK, so my friend set me up with a meeting with a "financial advisor". This is what he outlined for me:
IRP = insured retirement plan, another name for universal life i guess.
I believe this package is in partnership with Canada Life who I guess is the one issuing the loan at such a low rate.
I already don't like the fact that he's trying to sell me a Universal life plan so lets leave that out. I outlined the following concerns/reasons I have:
a) I am not comfortable with the idea of taking on 100k worth of debt as it would impact me in the future say when I need a mortgage for a house ( I am in my mid twenties )
b) In my opinion, 10% ROR is unrealistic, anything lower will cause the B2I -> IRP plan to fail. "Canada Life Harbour growth and income" is the fund he used as an example to show the superior performance it has over its index with mid teen ROR each year, but it has a MER of 3% and has only been around for 10 years.
His reponse is:
And the rate of return debate, I believe this goes back to the active managed vs index argument. If the index is getting 10% on average, is it unrealistic to expect a actively managed fund with a high MER to outperform it for the same duration?
Basically, I am trying to get some opinions and arguments on if I should believe his points or not and if this actually a good strategy. Also, the commission is 5% on all deposits, so that $100,000 initial loan/investment is actually $95,000.
B2I = borrow to invest in a non-registered account$100,000 B2I investment loan @ Prime + 1 or 3.5% annually:
Payment would be 3500$ a year or about 291$ a month.
This B2I is expected to grow at 10% per year (as history shows).
I have also included an illustration on how IRP would work if we
follow the strategy I outlined last night.
I fast forwarded your age to 7 years later and then applied the
illustration, you will see that we take about 16,000$ a year from your
B2I policy to fund your IRP for 20 years. After that it will grow tax
free, and at age 65 you can either take out close to 100,000$ a year
as income, or you can borrow against it tax free for the remainder of
your life, guaranteeing you retirement income.
IRP = insured retirement plan, another name for universal life i guess.
I believe this package is in partnership with Canada Life who I guess is the one issuing the loan at such a low rate.
I already don't like the fact that he's trying to sell me a Universal life plan so lets leave that out. I outlined the following concerns/reasons I have:
a) I am not comfortable with the idea of taking on 100k worth of debt as it would impact me in the future say when I need a mortgage for a house ( I am in my mid twenties )
b) In my opinion, 10% ROR is unrealistic, anything lower will cause the B2I -> IRP plan to fail. "Canada Life Harbour growth and income" is the fund he used as an example to show the superior performance it has over its index with mid teen ROR each year, but it has a MER of 3% and has only been around for 10 years.
His reponse is:
Principle Guarantee? never have to pay it back even if my portfolio loses its value? Sounds incredible, but I am not familiar with these investment options insurance companies offer, so maybe someone with knowledge and experience can explain this to me.a) When it comes to debt, there is good debt and bad debt. Bad debt
is simply any loan you may take out to buy something that may go down
in value, e.g. Electronic items or a Car Loan.
Good debt is simply any debt taken out in order to buy something that
will increase in value, e.g. an investment or a property. This
concept is very basic in the financial industry and I believe you have
probably heard it many times before elsewhere.
The B2I loan is unique in that it is secured and backed by the
Principle Guarantee that is a feature of Segregated Funds. This
feature is required by law of any Seg Fund, thus it will protect your
borrowed principle up to 100%, insuring you that you will never have
to pay back the principle even in the worst case scenario that your
investment drops to 0.
That being said, the B2I loan is one of the most secure loans you can
get because of the Principle Guarantee (which by the way is guaranteed
on contract by the insurance company itself, e.g. Canada Life or
Manulife.) No other borrowing to invest strategy will guarantee your
principle, not even a mortgage, and certainly not mutual funds or
stocks.
b)I am curious to understand why you do not think that 10% rate of
return is not realistic. I showed you that for the past 58 years,
despite some of the worst financial situations in history (including
the huge market drop in 2008), the TSX, S&P, and world stock markets
still made 10-12% ROR average. I also showed you that if you left
your investment in for minimal 15 years, there has been no case in
history where you would've lost money. We are also picking funds that
out-perform the index, however I understand that you may not trust our
judgement in that matter. If that is the case, you always have the
option to pick index funds which at the least, should make the 10-12%
stated before.
Lastly, please be aware that any fund performance I show you is
recorded after MER has already been deducted. This is standard
practice in our industry, and there are multiple performance charts
that outline the different performance values based on the MER package
you have chosen.
And the rate of return debate, I believe this goes back to the active managed vs index argument. If the index is getting 10% on average, is it unrealistic to expect a actively managed fund with a high MER to outperform it for the same duration?
Basically, I am trying to get some opinions and arguments on if I should believe his points or not and if this actually a good strategy. Also, the commission is 5% on all deposits, so that $100,000 initial loan/investment is actually $95,000.