In my practice, I’ve seen far too many clients lose their life savings because they were persuaded to borrow money to “supercharge” their investments or insurance strategies. It sounds sophisticated, even smart, when presented by a financial advisor or insurance agent. But, the truth is, these strategies are often dangerous, conflicted, and sometimes outright fraudulent.
Let’s break down some of the most common ways investors are encouraged to borrow and why these strategies so often end in financial ruin.
Borrowing Against Your Home: HELOCs and Cash-Out Refinances
Some advisors tell clients to take out a home equity line of credit (HELOC) or refinance their mortgage to “unlock the value” of their home and invest it elsewhere — perhaps in stocks, annuities, or insurance policies.
The sales pitch usually goes like this: “Why let your equity sit idle when it could be working for you?”
But what they don’t say is that you’re putting your home on the line. If the investment fails or the market turns, you’re still on the hook for that loan. You can’t walk away like you could from a bad stock — you could lose your house.
Borrowing Against Your Investments: Margin Accounts
Margin accounts let you borrow money from your brokerage to buy more securities. It’s leverage, pure and simple. Margin can magnify gains, but also magnify losses. If the market dips, you might face a margin call, forcing you to sell at a loss or deposit more cash just to keep your positions open.
Brokers have sometimes recommend margin trading to conservative or retired investors, in clear violation of FINRA’s suitability rules. When the market corrects, these investors are wiped out and left with debt they never fully understood.
Borrowing Against Retirement Funds: 401(k) Loans
Borrowing from your own retirement account may sound harmless, after all, it’s “your” money, after all. But if you can’t pay it back, or if you leave your job, the outstanding balance becomes a taxable distribution, with penalties if you’re under 59½.
Worse, during the repayment period, that money isn’t invested. So, you miss out on market growth.
Sometimes investors borrow from their 401(k)s to invest in private placement investments, insurance schemes, or “can’t miss” deals — only to lose both the investment and their retirement security.
Borrowing Against Life Insurance: Indexed Universal Life (IUL) Loans
Some agents promote IULs as “self-financing retirement plans”, promising you can borrow from your policy later and let it “pay for itself.” In reality, IULs are complex products with moving parts: illustrated returns, loan interest rates, cap rates, and cost of insurance charges that can all change over time.
When the assumptions fail, and they often do, the loan balance can balloon, and the policy can lapse. When that happens, you could owe taxes on the entire gain as if you’d cashed out, even though the cash is gone.
Reverse Mortgages and “Retirement Income” Schemes
Reverse mortgages are sometimes marketed as a way to “unlock” retirement income, often to fund life insurance or annuity purchases. But this is double-risk: you’re eroding your home equity while taking on a commission-driven insurance product that may not perform as promised.
Often times seniors are persuaded to use reverse mortgages to buy life insurance they don’t need, often by agents who earned tens of thousands in commissions.
Premium Financing: The Illusion of “Free Insurance”
“Premium financing” is one of the most seductive and dangerous strategies out there. The pitch is that a bank will lend you money to pay insurance premiums, and the policy’s cash value will eventually repay the loan.
In practice, these arrangements depend on the rosiest of projections of policy performance and low interest rates, neither of which rarely last. When things go south, clients are left with huge loan balances, collapsing policies, and tax consequences they never anticipated.
Many of these deals involve misrepresentation or omission of key risks, and are now the subject of numerous lawsuits and FINRA arbitrations.
The Bottom Line
If an advisor tells you to borrow to invest, leverage your home, or use debt to “turbocharge” your investments or insurance, stop and ask yourself — who really benefits? Chances are, it’s the person earning a fat commission, not you.
If you’ve been sold a leveraged investment or insurance strategy that went wrong or if you’re worried you’ve been misled, you may have legal recourse. Advisors and firms have a duty to recommend suitable, fully explained strategies, not ones that enrich them at your expense.
About the Author
Jason Albin is an attorney representing investors and policyholders in cases involving unsuitable investments, misleading insurance sales, and financial fraud. He has represented hundreds of investors who have been misled by insurance agents, financial advisors, and stockbrokers in FINRA arbitration, AAA arbitration, and court nationwide.
For a free consultation, contact Jason Albin by phone at 1-877-410-8172, by email at [email protected] or visit our website at www.chapmanalbin.com.
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