I recently wrote about how whole life insurance is a crappy way to get a permanent death benefit or decent investment returns. In recent years, there has been a push to use a whole life insurance policy for a different reason- for “banking.” It has been popularized as the “Infinite Banking Concept” or “Bank On Yourself.” There is a great deal of marketing and hype involved, and even some scams, but the basic scheme itself is pretty interesting.
Bank On Yourself By Using Life Insurance Policy
Instead of borrowing money from a bank to buy your next car or other large expense, you borrow it from your life insurance policy. You can pay it back whenever you like. But you actually never have to pay it back if you don't want to. Even for those, like me, who say “I don't borrow to buy cars, I just save up the money,” advocates like to point out that you may be able to save up the money more profitably inside the life insurance policy than inside the bank account (especially given current interest rates.) They say it's like getting interest free loans with an added death benefit.
Non-Direct Recognition
The key to making this all work is to get a “non-direct recognition” whole life policy. With a “direct recognition” policy, when you borrow money from your policy the insurance company first subtracts the amount of the loan from the cash value, then calculates the dividend on the lesser amount. With an “indirect-recognition” policy, the insurance company doesn't. Cool huh. If you have $100K in there, they'll let you borrow about $90K, but still pay you dividends as though there were $100K in the policy.
Paid Up Additions
The problem with most whole life insurance policies is that it takes forever to get any decent cash value in there. For example, a policy provided to me by Larry Keller as the “best” $1 Million non-recognition policy he could find [MassMutual Whole Life Legacy 100] for a healthy 30 year old male in New York, demonstrates that the cash value doesn't equal the premiums paid until year 12. I'll need another car before then! That's a pretty lousy way to “bank.” So we have to figure out a way to get the cash into the policy sooner.The way you do this is with Paid Up Additions, meaning you dump more than you have to into the policy, ostensibly because you want a higher death benefit, but in reality because you want more cash growing in the policy so you can “bank” with it.
Borrowing Money From Life Insurance Policy
After 3 or 4 years of paying premiums and buying healthy paid up additions, you've got a tidy sum of money in the contract. Now you can borrow it tax-free at a certain interest rate, say 5%. Now that 5% doesn't go toward your cash value, it goes to the insurance company, but since this is a non-direct recognition policy, the insurance company is still paying dividends, say 5%, on the money you borrowed, so it's a wash to you. You've got yourself an interest free loan. Kind of cool huh. Of course, borrowing money from your bank account is also an interest free loan, but proponents of Bank on Yourself like to point out your bank account isn't paying 5% interest. If you kick the bucket during this process, your heirs still get the death benefit (minus the loan amount of course). The insurance company doesn't guarantee death benefit increases each year, but they generally do.
Tax and Asset Protection Benefits
Insurance policies have four main tax benefits. First, you can borrow from the policy tax-free. You have to pay interest on it, but you don't have to pay taxes on it. That's of course no different than “borrowing” from your bank account or from the bank itself, but it is different from cashing out of an investment with capital gains. Second, money compounds in a tax-free manner within the policy; there's no annual capital gains or dividend taxes on growth. Third, the death benefit is income tax-free to your heirs. Fourth, if you cash out, your basis is determined by the entire premiums paid, not just the portion that went to “the investment part.”
In many states ,cash value in your insurance policy is protected from creditors up to a certain amount. Those of us constantly concerned about being sued see that as a benefit. The money isn't FDIC insured like a bank account, but states generally guarantee up to a certain amount from insurance company insolvency.
The Downsides of Using Life Insurance to Bank On Yourself
You can understand why at this point people are often pretty excited about this whole concept. Higher banking returns and tax-free growth all combined with a “free” death benefit. There's got to be a catch, right? Of course there is. Let's talk about catches.
The “Load”
When you put $10K into your bank account, the next morning there's $10K there. When you pay a premium into a life insurance policy or buy a PUA, the whole premium doesn't go into the policy. Like with a loaded mutual fund, a small percentage of that money goes toward the costs of the policy and toward the commission of the salesman. If the policy is paying 5% a year, and the “load” is 10%, it'll take 2 years just to break even.
Loan Rate vs Interest Rate on Whole Life Insurance
In my scenario above, I used 5% for both the loan rate and the interest rate. It's quite possible that the dividend rate can be higher than the loan rate or vice versa. Obviously borrowing at 5% and earning 2% is a losing proposition. In the policy discussed above the loan rate is variable, currently set at 4%. The current dividend rate is 7%. It's easy to envision a scenario where those numbers reverse.
You Still Have To Pay The Life Insurance Premiums
MEC Calculations Are Complicated
The point at which the contract becomes an MEC is influenced by the amount borrowed and the current dividend rate. With all these moving parts, it's not that hard to accidentally make the proceeds of your policy taxable. The insurance company and agent are supposed to ensure this doesn't happen, but there may be times when you may be required to unexpectedly pay back a loan or contribute more money into the policy to prevent it.
Source of Funds
You have to take the money from somewhere in order to dump it into a life insurance policy. Proponents often recommend pulling it out of your 401K, IRA, house (via refinancing or a home equity loan) etc. When it's pointed out that there are serious opportunity costs, interest costs, or tax costs to doing this, they finally settle down to “put your emergency fund and/or short term savings in it.” But for a doctor, how much money is that really? $10-50K? Maybe $100K if you're doing really well? Making an extra 4% on $20K is only $800 a year. Not exactly the difference between poverty and financial bliss for a doctor. It especially bothers me to see people recommending you stop contributing to a retirement account that provides tax protection, asset protection, and solid returns in order to buy more life insurance, that has nowhere near the same tax benefits, asset protection, or estate planning benefits. Risking your house to invest in life insurance seems even more stupid.
Takes Time To Get Money From Life Insurance Policy
Loans from an insurance policy are a bit less liquid than what I think an emergency fund should be. I've never borrowed from one, but I understand it's a matter of days to weeks to get your money from the company. That's not the place for an emergency fund. Perhaps if you know a big purchase is coming a few weeks early it could work.
Additional Complexity Borrowing from Life Insurance Policy
Everywhere else in the financial world additional layers of complexity favor salesmen and the companies they represent. Why would this be any different? In fact, as you search the internet, you quickly realize that any discussion of these comments quickly breaks down into the proponents who suggest you need their expertise to understand it, and the detractors, who don't seem to completely understand it. I couldn't find anything anywhere that seemed to be a straightforward, unbiased analysis. The sales methods and opaque nature all screams “SCAM” to me. That doesn't necessarily mean it is, but as a general rule good financial products are bought, not sold. If an extensive sales process is required, or if I can't explain it to my wife in less than 2 minutes, I try not to have anything to do with it. There's a lot of people in this world smarter than the average insurance agent and it doesn't seem to me that very many of them are banking on themselves. I can't believe it's simply a matter of bias or the word simply “not getting out.” Good ideas don't stay hidden long.
Purpose
The books and websites that most push this concept like to talk about buying cars, as if saving up to buy a car vs taking out a car loan is the biggest financial concern in the world. Most doctors can buy a decent used car out of last month's paycheck. Maybe save up for 3 months if you want a new one. You've got to think about what you're actually going to borrow money for. If you're going to borrow it to pay off credit cards, don't you think it might be smarter to pay off credit cards at a guaranteed “investment” rate of 15-30% than to buy a whole life policy? When is the last time you went car shopping? All the signs and ads I see are advertising 0% APR car loans. Why bother dealing with an insurance policy when the car dealer will give you 0% right now? A mortgage? Why pay “myself” 5% when I can pay a bank a tax-deductible 2.75%? It just doesn't pass the sniff test. I don't really finance much anyway, why do I need a “new, innovative” way to do so?
Ongoing Interest Payments On Life Insurance Loan
Let's say you want to take some money out of the policy and NOT pay it back. You still have to make the interest payments each year. My goal is to minimize my fixed expenses, especially the closer I get to retirement. If you don't make enough payments, not only does the policy risk collapsing, but that death benefit starts decreasing too.
Conclusion
I'm obviously not running down to the local whole life salesman to start banking on myself. I don't think you'll benefit much from it either. In my opinion the downsides outweigh some significant positives. You're better off not mixing investing and insurance. What do you think? Do you have a whole life policy you use for “banking?” Do you still feel like it's a good idea? Comment below. Keep comments professional, avoid profanity, and avoid ad hominem attacks.
[Comment edited at the commenter’s request]
If you structure a policy correctly it will break even in year 6-8 depending on age and health. A typical life insurance agent won’t know how to do this, but you are right you use the pua to make this happen. However, you say the IRS limits the amount of money you can put in and you talk about MEC (Modified Endowment Contract) like it’s this enigma that just might happen to you if you aren’t watching your policy everyday. Let me address this.
1. The IRS does not limit the amount of money you can put into life insurance. The limit the amount of money you can put into a policy BASED ON THE DEATH BENEFIT. That’s the key here, if you want to put more money in then you increase the death benefit. You do this from the beginning so that number 2 doesn’t happen.
2. The MEC is nothing to be afraid of, it just takes a little planning. Most people are going to fund a policy, or put money into the life insurance, at a steady rate. So if someone decides they want to put 10k into a life insurance policy then you set it up so that 10k is your limit. This means that you set the MEC from the beginning. So if my policy is for 10k then the MEC line is 10,001. All this does is make the policy at it’s maximum efficiency. You want to be as close to the MEC line as possible without crossing it because the IRS said so. It’s nothing to worry about, even if you tried to MEC the policy most companies will send you a letter say “Are you sure you want to MEC your policy?” It’s not something that will just happen and you’ll be stuck with the rest of your life.
You say this as well…”In my scenario above, I used 5% for both the loan rate and the interest rate. It’s quite possible that the dividend rate can be higher than the loan rate or vice versa. Obviously borrowing at 5% and earning 2% is a losing proposition. In the policy discussed above the loan rate is variable, currently set at 4%. The current dividend rate is 7%.”
Well ya it’s easy to envision a world where pigs fly and where Hitler was a great world hero, but we also have past facts we can base this off of, maybe that’s a good place to start.
When it really boils down to it the numbers always move together. If the “loan rate” or rate you get when you borrow for the insurance company is 5, the dividend that you will get is going to be around 5. That’s the history of it, they always move together. There isn’t some magic place the money goes to, you are the owner of the insurance company and you get profits. If the company is profiting at 5 percent, then you will earn 5 percent, you are an owner. If the company is earning 8 percent, you are going to pay 8 percent on the loan and you will make 8 percent in your policy. This is how it has always been historically.
Now with your next comment. What if you “Lose your job? Disabled? Retired? Wanted to cut back? The policy doesn’t care. With this particular policy you pay until you’re 100.” Well I understand what you are trying to say but clearly you don’t understand this very much. First of all, once you break even, you know that year 6-8 thing we were talking about, the policy is basically going to generate enough revenue to pay your premiums. But let’s say that it didn’t. If you don’t know about life insurance, then I understand your debacle here. However, there are so many options with life insurance this is not a problem.
First – disability rider. Want money if you get disabled? Insurance company thought of that long before you did.
Second – Reduced paid up. What this means is that at any time after year 7 you can drop the death benefit down and not have to pay premiums ever anymore. The catch is you can’t put new money in, but you can still borrow from it and pay the loans back. So if anytime you get disable, lose your job, etc. (after year 7) there are very easy ways to eliminate the premiums you owe. That being said, if you made it to year 3 you would have enough money in your policy to borrow it out for a few years and make the policy last. Now if you never made money again then yes eventually it would die. So you’re real risk is if something really bad happened in the first few years and you couldn’t make the premiums, it could last for a bit on its own, but eventually it would die.
“With all these moving parts, it’s not that hard to accidentally make the proceeds of your policy taxable.” Actually it’s harder than hard, it’s impossible. With the majority of companies any of the bank on yourself of other type of agents use I will reiterate, there is 0 chance of you being able to MEC the policy without doing it on purpose. The insurance company is familiar with these regulations they do all this for you.
I’m with you 100 percent on being careful with your contributions. You shouldn’t kill yourself to try to pay a premium, I (yes obviously I am an agent I’m not trying to hide this) always have my clients start small and work their way up. However, that being said…you continue
“It especially bothers me to see people recommending you stop contributing to a retirement account that provides tax protection, asset protection, and solid returns in order to buy more life insurance.” Can I say lol?
I mean guy. You think a 401k gives you tax protection? Really? Putting off taxes for the future is protecting money from taxes? Opposite. Putting taxes off for the future is saying “hmmm I really hope the government is going to lower taxes in the future?” You are rolling the dice. And what do you think your odds are the government will lower taxes? My guess is less than 0. It’s in the negative.
And “solid returns.” Are you unaware of our current economic situation and thousands if not millions of people not being able to retire because they lost so much money in their 401k’s? Now they anticipate working till they are 70+ because they expected the 401k to help them, and it only shattered their lovely dreams.
A side note, had they invested in life insurance they wouldn’t have lost a dime. They may not have got the huge growths in the 90’s, but they wouldn’t have had the huge losses that followed. They would have had something that was predictable and never lost principle. If anything you have to admit they would have had a much better road map that of certainty and they would still be on the path they planned out for retirement instead of being at the whims of the market.
“That has nowhere near the same tax benefits, asset protection, or estate planning benefits.” I’m trying to be nice up until now. But you are making me bite my tongue very hard now that it’s bleeding. Tax benefits. We discussed this already but I’ll reiterate. If you could pay taxes now and never pay them again on growth, is that not the greatest tax benefit ever ever ever? No taxes? I don’t know what can compete with no taxes.
You already said, “In many states ,cash value in your insurance policy is protected from creditors up to a certain amount.” I mean please don’t contradict yourself. I think having this pretty much sums up all I could say about asset protection.
And estate planning? I mean really? You are going to say that a 401k or any other investment has better estate planning benefits? I would have to say having more money than you have contributed to your investment account (called the death benefit) transferring to your heirs with no taxes sounds like a pretty wise estate planning tool to me. But that’s just me maybe.
“I understand it’s a matter of days to weeks to get your money from the company.” It takes as long as it takes a check to get mailed to you. And I assume that in the future things will be a little more electronic.
“There’s a lot of people in this world smarter than the average insurance agent and it doesn’t seem to me that very many of them are banking on themselves. I can’t believe it’s simply a matter of bias or the word simply ‘not getting out.’ Good ideas don’t stay hidden long.” Yes there are smarter people. And they got the word out. Their called mutual fund companies, and they average less than 2 percent over the last few decades (you can search for dalbars study on mutual funds to find that). They take a profit from your money even if they are losing it, and they did a great job at getting the word out. Good ideas do stay hidden when mass marketing geniuses that are stealing your money continue to use your money to convince you to give it to them. It’s always going to be this way until people catch on. You want to talk about a scam? That’s a scam if I’ve ever heard of one.
Don’t worry we’re almost done here.
“All the signs and ads I see are advertising 0% APR car loans. Why bother dealing with an insurance policy when the car dealer will give you 0% right now?” Let me ask you this, would you rather have a 0 percent loan or a 5 percent loan? Umm… you really had to ask this question? Of course you take the 0 percent loan. If someone can convince you to take a 5 percent loan over a 0 percent loan then you may need to take some math, from a 1st grade teacher.
“I don’t really finance much anyway, why do I need a “new, innovative” way to do so?” Ok, this might sting a little bit, but you might actually have to learn something about finances here. So I am assuming you mean that you pay cash? You really don’t see that as financing? That is the major problem here we are trying to solve. You think that because you pay cash you aren’t financing and that is why you have a poor man’s mentality.
Coke did this exact same thing. They would take money from a bank and they would get charged interest, but then they would take money from themselves and not consider it a loan? Well they changed that pretty quickly and it made them extremely more efficient.
You are the exact same way. Why is the bank’s money more important than your own? If you buy a car with cash you are losing out on ALL of the interest you could be earning on that money for the rest of your life. Not financing? Yes you are. You are stealing from your future.
So, ok, bank on yourself or infinite banking isn’t a fix all. But it’s forcing you to see this obvious piece of the puzzle you are missing on. It’s forcing you to make your money compound and grow EVEN WHEN YOU USE IT. It’s not a magic pill, it’s showing you that your money has a cost. And if you can’t see that as a financial instructor then how can you expect to teach that to others online.
People out there in the internet. Your money is valuable, extremely valuable. And when you spend it, you lose interest, a lifetime of interest. Everything you buy, whether credit, or with cash, is financed. With your money you are always either paying, losing, or earning interest. But interest is always there, there is no way to avoid it. It either works for you or against you.
“Let’s say you want to take some money out of the policy and NOT pay it back. You still have to make the interest payments each year.” You can always liquidate money out of the policy, especially for retirement. You don’t have to pay money back that you liquidate. You can always take money out for retirement and up to a certain point not pay taxes.
Now I’m not trying to be rude here I hope you don’t take this that way. And if you are truly trying to understand this concept then more power to you. You will find in the end that it’s not a magic pill, there is no free money, but the concepts here are extremely sound and in my opinion it rivals anything out there besides a 401k match. Up to the 401k match is hard to beat, but above and beyond that I don’t see any other investment that can take the risk of your death and put it on the shoulders of the life insurance company, grow with no taxes, transfer with no taxes, be accessed and still grow, guarantee you will never lose money, and offer you a way to plan your future without the ups and downs of the stock market.
And last thing before I end this, and really the biggest thing here. Life insurance, it’s NOT your investment. It’s a savings vehicle. It’s meant for a place that is safe to save money. I pack as much money as I can into my own policies because of this one simple thing, and you are going to love this.
You can ALWAYS make a better investment. What do I mean? Life insurance is only a hub for you to do everything that you do. But it makes you think about money in a much more intelligent way. With life insurance you can say…”Ok, my money is growing at 5 percent right now.” And this line of thought opens up a world of possibilities, here is why.
If you have an opportunity to invest an investment earning 3 percent. Will you now take it? No, because you are earning 5.
If you have an opportunity to invest in an investment earning 10 percent. Will you take it? Yes, because that is greater than 5. But you have ACCESSIBILITY in a life insurance policy to make any investment you want. But when you don’t have an investment, you know your money is growing.
But if you have your money in a 401k and an investment comes along, you don’t even get to make that decision unless you have more capital. Mutual funds, stocks, bonds. All of these have to be liquidated in order to make this decision, or, you don’t even get to make that decision.
And if you use your life insurance loan for an investment or business use, you get to write that loan off as a business expense, while your money, as we said before, is still growing inside your policy.
So you have a policy growing at 5 percent. An investment growing at 10 percent, and you have a 5 percent loan you are paying on that is a write off as investment interest. Not a bad scenario.
That’s why so many business owners and real estate investors use this.
I’m not saying life insurance is a cure all or a magic pill once again. I’m just saying if you don’t see the benefits and don’t understand it properly you can’t make an educated decision. I will agree with you it is a bit complex, and because of its complexity it’s easy to make it look like a scam or like a magic pill.
But in the end it just boils down to sensible, intelligent rules of money that, when put into your life properly, can really put your future into your own hands, and that is a huge piece of this that we really need in our country today.
Great post, I came to debunk their nonsense and you did it for me. I use my policies to purchase all the things I want in life but it is not my only investment. It simply took over the financing function in my life.
Personally I charge myself 12% on anything borrowed. Like any other business I am involved in, I want it to be profitable. Underfunding it or paying the minimum interest back to the policy will not achieve my goals.
Wonderful post.
[Ad hominem attack removed.]
The real answer to what is the ‘best’ financial plan is that there is no ‘best’ financial plan. A professional adviser will not just feed you gimmicky advice that are universal fixes for everything. A professional adviser will learn about your situation and recommend you what is best for YOUR situation.
[Ad hominem attack removed.]
Great set of posts. Almost all of the information on the internet clearly does not understand this strategy. Thanks for the cogent discussion. (as an aside, I agree about the 401K/IRA…as if taxes are going down…this has never really worked well for me).
I have been using Infinite Banking for years and it has been great for me. But I do understand that the way these are sold can sometimes seem misleading or too good to be true. Saying Infinite Banking is a savings strategy is I think the best way to put it. It isn’t for everyone and it’s not going to make you massive amounts of interest, but it is predictable and safe which is what I think many average people need.
I think that’s fair. In the long run, it allows you to make 4% off your savings instead of 1%. There’s a price you pay early on for that, but if you stick with it that’s what you end up with. There’s no magic there, but it’s not insane.
The load on on my policy is 3.5% for paid up additions, and the policy is growing overall at 5%…so yes, I lose a bit of money when I first put the cash into the policy, I gain that back in less than a year. Seems worth it to me to get the insurance benefit.
Actually there is also an additional 2% charge for scheduled payments for the disability waiver of premium rider…so 2% disability insurance. Seems in-line or cheaper than other disability insurance.
No, there is no “price to pay” early on, other than LOSS OF USE OF a small percentage of your money for a couple years. But, it’s not all cash value you paid for, you also get LOTS of life insurance.
After year 10 in any play I’ve seen (and as early as year 3), adding money to the plan increases the cash value more than what you paid in. So, a few years in, you dump 10k into the plan and instantly have 12k worth of cash you can borrow and never repay. How is that not the best thing ever?
Also, you stated earlier “Obviously borrowing at 5% and earning 2% is a losing proposition.”
It may seem obvious, but have you done the math? I have, and it’s not as clear cut as you seem to think. Yes, it is better, but barely…
If you borrow 10k for 5 years at 5%, you will pay 11,323 in total.
If you invest 10k for 5 years at 2%, you will have 11,051 in total.
A difference of only $272!! And that’s with a 3% difference between what you pay and what you earn (which is never going to happen in a whole life policy.)
Wanna know what it looks like with 5% on both?
If you invest 10k for 5 years at 5%, you will have 12,834 in total. That’s a difference of $1511 MORE between saving 5% and paying 5% simultaneously. If you use IBC, this is what actually happens. The insurance company loans you their money at 5%, they pay you a guaranteed 5% return, and historically another percent or 2 in dividend, making it even better.
Please study more before telling people things that are simply not true.
[Ad hominem attack removed]
You people and your assumptions crack me up. Half accurate and half b#££$#t. 401ks don’t afford tax benefits.. nor do DB plans either I suppose, right? Stop making blanket statements of such ignorance. Do you advise your clients to stop funding their retirement plans so they can fund more into their heirs benefit at their demise. Helluva way to fund one’s retirement. Especially a DB invested in an insurance product: mind blown. Great advice. And ROTHs and ROTH conversions for tax free income. I’d love to hear your opinion on that. Popcorn ready. Get licensed to sell both and hopefully one day you’ll awaken to the fact that all you’ll ever be is a good or bad salesman. Open invitation to debate “on air” so all can hear why ppl like you taint our entire industry. Whenever you’re ready ?
Fun fact #1: Banks own billions in BOLI- Bank Owned Life Insurance, and corporations own millions in COLI- Corporate Owned Life Insurance.
Fun fact #2: Participating whole life insurance is considered a Tier 1 asset for banks.
Fun fact #3: The IRS had to change the tax code in the 80’s to address the plethora of rich investors who were opening policies with large lump sum payments.
Fun fact #4: Most reputable life insurance companies have paid a dividend every year for over one hundred years through the Great Depression, several world wars, and 17 recessions.
So if banks, corporations, and the truly wealthy think it’s a wise investment then it might be worth paying attention to- especially if the IRS had to change the tax code to make it less attractive.
I see the following disadvantages to qualified plans.
– They are tied to volatile markets with no guarantees.
– They are not liquid. You pay hefty penalties for early withdrawal because you essentially put your money in prison until age 59.5.
– Salesman typically quote average interest rates instead of actual interest rates. If you put $100k into a 401k, lose 25% in the first year and then gain 25% in the following year you have only a $93,750 balance- not your initial $100k. That results in a -6.25% actual rate of return. The average return is 0%.
– Salesman base your portfolio on assumptions about future tax rates, interest rates (that are not historically accurate), inflation, marriage and job status, etc. In your life, when has a financial assumption held true for 20- 40 years?
– 401k fees also multiply over time.
– You pay future taxes on the harvest instead of the seed.
– They cherry pick the best timeframes to calculate average rates of return. See comment above illustrating the fact that average rates of return do not equal actual rates of return.
– They charge you fees even if you are losing money.
I don’t see how locking your money up in qualified plans is the smarter play here. It puts your money in the control of other people in a volatile market. If someone were to have a major life event (permanent disability, terminal illness, loss of job, etc), having an IBC policy in place would offer immediate access to much needed cash. Good luck getting money out of your qualified plan without penalty or from a bank when you don’t have a job.
Thanks for leaving a lengthy comment on this six year old post.
Fun fact about America: You’re free to do whatever you want with your money so if you find whole life insurance attractive, go buy as much as you like and enjoy it. But your arguments about it being a good idea were all addressed in the Myths series on this site years ago:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
You’re welcome! =)
I would like to start by clarifying that I am not an insurance salesman, and I do not have a whole life insurance policy- yet. I am a 35-year-old trying to educate myself about finances and investing. I am remaining open-minded to all investments and financial strategies, and I am trying to sort through the abundance of the financial noise to find the truth. For me, numbers and logic are most appealing. I am not interested in projections. I want proof based on historical fact.
From my research the Infinite Banking Concept (IBC) discovered by Nelson Nash can best be described as an alternate cash flow management system, not an investment. It affords one the opportunity to have guaranteed access to financing (no credit checks, underwriting, etc) for items that we all need and typically finance through commercial banks. As Nelson Nash states, “You finance everything you buy.” You either pay interest to someone else or you give up the interest that money could have earned, aka opportunity cost. In other words, your need for finance is greater than your need for anything else. According to national averages, Americans give up 34.5% of their after-tax dollars to interest. I thought that was rather high, so I decided to see what that number was for me. Surprising (and depressingly) my number is 37%. Compounding that issue is the fact that Americans on average save only 5% of their income. Yet they focus on high rates of return on that 5%, completely ignoring the 34.5% spent on interest. You would need to get a 690% return on your savings to break even with the 34.5% spent on interest! Simply put, setting up a participating whole life insurance policy structured for IBC allows one to recapture that interest.
That said, I have an honest question for you. How do you finance your expenses (home mortgage, cars, college education for your kids, vacations, retirement, etc)? You have touted the benefits of 401ks and other qualified plans, but I feel like this is the microeconomic view of your personal economy (focusing on the 5% instead of the 34.5%). Would your opinions hold true when looking at your personal economy holistically (macroeconomically)? I am truly curious. Please point me to one of your past articles if you have already covered this.
You mention the low interest rate several times in your arguments against IBC policies. However, while 401ks and other market backed securities may have higher returns at times, they are not guaranteed, and they certainly are not uninterrupted. Some of my close friends lost 50% of their market-based retirement portfolios in the 2008 financial crisis. Personally, I am not comfortable with that much risk. I would rather keep my principal with low interest than risk losing half or more of it with higher returns. Please show me an investment that has consistent and uninterrupted returns over the last 100 years at the rates you quote. I am all ears.
Hey, if you understand how it works and like it, knock yourself out. I don’t think IBC/BOY is crazy. For me, the downsides outweigh the upsides. I do list it as one of my acceptable uses for whole life here:
https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/
But do your due diligence like you would for a marriage because the consequences are similar. It’s either til death do you part of it is likely to cost you a lot of money to get out.
I love that you think I finance anything. I don’t have a mortgage any longer. The one I did have was 2.75% from a bank. I’ve never borrowed for a car or vacation. My retirement savings is in tax-protected and non-qualified accounts invested primarily in stock and bond index funds, real estate, and small businesses that I have significant control over. My kids will pay for their college through their own work and scholarships along with a 529 plan invested in stock index funds and possibly some cash flow from our current earnings.
If you’re not comfortable with losing 50% of your money in a stock market downturn, I would recommend you don’t put 100% of your assets into the stock market. If you’re comfortable with a 25% loss (likely a temporary one) then perhaps you could put 50% into the stock market. The rest of your assets will need to be invested elsewhere such as real estate or low returning assets like bonds, CDs, or whole life insurance.
If you invest only in low returning assets, realize there are consequences to that, like needing to save 50% of your gross income to meet your goals.
https://www.whitecoatinvestor.com/the-reason-you-take-market-risk/
But it’s your money and your choice.
Good luck investing.
P.S. This article isn’t “against IBC.” This is what a neutral article from me on WL insurance looks like. Want to see something that is against whole life? Check this thread out: https://www.whitecoatinvestor.com/forums/topic/inappropriate-whole-life-policy-of-the-week/
His point was at one time or another you did indeed finance your purchases. Infact I would argue that paying cash instead of leveraging your money is a worse deal. You have to account for lost opportunity cost of that money. If you paid $50,000 up front for a vehicle you had to take it out of an investment right? What was that investment earning at the time? What had it earned the previous decade? What could it have earned over the next 40 years had you not taken it out? Even at a 5%, 50k over 40 years is substantial. Much worse than losing 50% of your premiums for the first 2 years of a WL policy.
No. I took it out of the money I just earned. I had a choice to put it into an investment or consume it. I chose to consume it. Do you invest every dime you make? I don’t either.
But as the post explains there’s no magic there to first buy a whole life policy then borrow against it to buy what you want.
Look, if you guys love the whole IBC thing, knock yourself out. But if your goal is to convince me to do it or to tell my readers I think it’s an awesome magic idea, you didn’t read the post above very well.
But either way you have to account for lost opportunity cost right? Whether you spent that 50k or invested it, you could have made money off it, and that’s the point here.
Look, I’ll happily sell someone an IBC policy so long as they truly understand it. I educate my customers instead of blindly selling them garbage.
If they prefer a qualified plan and truly understand it instead of buying it because that’s what everyone just does, I’ll happily sell them that as well.
Maybe they could make that magical 12% in the market. Almost no one does but for arguments sake let’s just say they do. If another 2008 hits and they lose 62% like I did, I get angry phone calls. They dont care that they earned 12% last year, they care that they just lost more than half their retirement. If the client is 30 they can make it up. If they are older hopefully we’ve moved assets into something safer but even then they still took a hit.
Know how many angry phone calls I’ve gotten for IBC policies in my 18 years of business? Not 1. I get plenty of calls from clients who previously bought UL policies from other agents. But I have yet to get anyone call and be upset that their policy only earned a nice safe guaranteed boring 5% + dividends. I do however get clients sending me their family, friends, neighbors, and now even their children.
We’ve all read all 6 years of posts and hundreds of comments from both sides. I post here today to make sure you’re not deceiving your clients promising that magical 12% number. Sure we could get into a discussion of average vs actual, about how the average American is saving just over 5%, how less than 1% of all term policies pay out, ups and downs in the stock market, etc etc etc, but were not trying to change you’re mind. Just making sure your readers are properly educated on both sides, not just your obviously biased one.
Oh, so you sell insurance and investment products for a living. Weird that you would think it was a good idea. 🙂
Not sure who claims expected market returns of 12% besides Dave Ramsey. They’ve never done that long term.
How’d you lose 62% in 2008? The overall market from peak to trough only lost 54%. Even if you were 100% stock, just by buying an index fund instead of whatever you owned would have limited your losses by 8%.
By the way, when people are mad about what they were sold, they don’t call the person who sold it to them. They call someone else or send me an email like all these folks:
https://www.whitecoatinvestor.com/forums/topic/inappropriate-whole-life-policy-of-the-week/
I love that you think I have clients. I don’t. That’s how my readers know that my opinion isn’t the “obviously biased one” in this discussion. Let’s see…some doc who doesn’t stand to gain or lose whether they buy or don’t buy a whole life policy or an insurance agent who stands to gain by selling them one. I just can’t figure out which one is likely to give less biased advice. This is so hard…./sarcasm.
You’re right, you make absolutely nothing from this site and do it all out of the good of your heart…. /DeeperSacrcasm
We’re both adults here. I’ve run the numbers myself thousands of times and seen the benefits first hand. I, like so many others before me here, think you haven’t sat down with a qualified IBC rep and done the actual numbers on a financial calculator. Regaining the interest you pay, as well as the lost opportunity cost is a no brainer. You really should come to a conference and get a qualified opinion.
Who’s going to sell me life insurance at a reasonable rate? Do you have any idea how I spend my vacations?
One of the silliest things about IBC is that it’s only an option for the healthy without dangerous hobbies. So no, I won’t be looking into it for me any time soon.
Josh Thompson can I say I love you? Love you soo much for your smart and clear response. Well explained
Josh Thompson can I say I love you? Love you soo much for your smart and clear response. Well explained can you please contact me on my email [email protected]?
Can you give a year by year example of money in, fees, etc based on a million dollar policy…this allows me to make better decisions than ‘you will break even at….‘ Also, how does this work with using a child as the insured? Appreciate it. Thank you.
Can’t you see that in your illustration? That’s what illustrations are for. The only thing someone else’s personal experience is good for is telling you where their actual returns fell between the guaranteed returns and the projected returns.
The interesting thing about policies bought on kids is that they don’t get the favorable medical category you would expect. They are put into a “standard” category, which is pretty ridiculous I think. Plus the fact that you are buying unneeded insurance in the first place by insuring someone with zero need for life insurance.
There is so much propaganda in that post im not sure i have the time to address it all but lets just knock out a little of it. First if you want to be mad about why whole life has a bad rap, be mad at your fellow agents and their insurance companies. They do not promote overfunding at all. They arent getting the word out like you pretend. Its probably less than 5% of policies that are overfunded and thats bc the industry time and time again has shown it cares more about itself then the clients. They just dont want to make less money and if most policies didnt fail then dividends would have to go further down since they use that money to prop dividends up. All independent stats from LIMRA and society of actuaries show that most policies lapse or fail. So your statements about people not losing a dime if invested in whole life instead of 401k is correct although its correct bc many (about 1/3) would have lost every dime if invested in whole life. Your statements on taxes and 401ks implies you dont understand taxes and the rates people pay from withdrawl of their 401ks. Almost all people have paid a lot less by using a 401k and in the end will have more money to spend. If you want to use a scare tactic about the future then why not look at the articles where it says the administration is considering taxing death benefits of insurance? I prefer neither scare tactic myself since i feel neither is likely to occur. These policies routinely break even longer than what you quoted. You need to be in excellent health and hope dividends dont go further down (which isnt likely). Its more like 8-10 years if being remotely realistic. Loans are not a guaranteed wash at all. Many policies crash bc of loans. In fact they make up a reasonable percent of the dividend other policy owners receive especially at this point with low interest rates making the return on these products lower and lower. The disability riders on these policies are horrible. They are total disability policies and almost never pay off which is also why they arent that expensive.
All of these banking ideas have one thing in common, reduce the amount of the horrible basic whole life part to as much as possible. If you make the horrible part as little as possible then maybe it wont be so bad.
There is only two reasons to get involved with with this junk. One is because you need a permanent death benefit and the other is because you want one and are willing to take the likey lower gain in order to have it and the security it provides you. If you dont have either need or desire then the rest is just a gimic. Since few people fall into the need category, the question is does one fall into the desire category. If so then definitely make sure its overfunded right up to the MEC limit. Make it a small policy that you easily pay yearly (to avoid the 7% fee that most people who put money into their 401k monthly would be forced into paying and thus probably never beat inflation in the long run), take your loans out late in life to reduce the risks of low dividends and questionable loan rates on the policy and leave the difference to your heirs. Keep in mind that at the moment policies are likely to under perform current illustrations and definitely under perform any historic numbers the agent gives you. A good guess is about 5% tax free return on the death benefit with the current direction of dividends but noboby will actually know unless you can predict interest rates over the next 40-50 years. The cash value will be substantially less of a return which is why you need to be sure you never have to surrender te darn thing and then to boot it would be taxed as income and not the better long term capital gains rate.
Surprised it took 6 days for the first Bank on yourself salesman to show up! There’ll be plenty more as the weeks and months go by, and that’s fine.
Regarding the MEC comments, there certainly are a few people who have been surprised to see their policies become MECs. I agree it should never happen, but sometimes (admittedly probably rarely) it does. A quick internet search reveals a handful of people.
Disability riders cost money, whether it is itemized out or not. If you have one, you earn less than you otherwise would. Plus it brings up all the issues with disability insurance- will the company agree with you and your doctor that you are disabled? I am glad to see you admit that the policy CAN FAIL if you are unable (or don’t want to) to continue to pay premiums. It’s a real risk that real people run into.
It’s clear to me you do not understand the difference between marginal tax rates and effective tax rates. I save money in my 401K at 38% and anticipate pulling it out in the 10-15% range. I’ve explained this elsewhere, but it’s surprisingly poorly understood. So LOL all you like about it, but do try to understand it. This link may help:
https://www.whitecoatinvestor.com/dont-be-a-tax-idiot/
What’s better than tax-free growth on money that’s already been taxed? How about tax-free growth on money that is taxed at less than it otherwise would be?
That is the reason you don’t want to do BOY instead of a 401K, despite all the hype.
The reason people are unable to retire is because they pay too much in investment expenses, buy high and sell low, and undersave. It has nothing to do with stock and bond returns. Sure, we had a couple of bear markets there, but you have to plan on those happening from time to time during your investment career. People who undersaved because they expected 1990s like returns to continue reap what they sow. The solution isn’t to buy whole life insurance instead.
You have money in a 401K and an “investment” comes along? You can invest in most investments through a 401K- stocks, bonds, CDs, gold, commodities, even real estate. That’s a silly argument. Yes, if you’re making a guaranteed 5% you don’t want to switch investments into a guaranteed 3%. It doesn’t take a life insurance policy to know that’s not a good move.
There’s a minimum on investment interest you can write off. I believe it’s 2% of income. That’s a lot of investment interest and most people don’t get to it, so they can’t write that off. Interest for your business is an expense, and can be deducted whether you borrow from your life insurance policy or from the bank. Still not a good reason to buy one of these policies.
You have a very creative definition of “finance.” I understand opportunity cost, but it still doesn’t make paying cash “financing.”
I realize it’s hard to understand something when your livelihood depends on you not understanding it, but if you look closely, you’ll see that most people won’t benefit from BOY.
I’ve read several comments thus far on this thread and there are valuable points mentioned on both sides.
The part that always bothers me is this idea that when I retire and start to draw funds from my RRSP(As i’m Canadian) similar to the 401K the only way a person pays 10-15% tax from my understanding is if they only withdrawal a some amount annually. I know for me personally my intention isn’t to live my whole life earning multipe six figures to retire one day and live off of 30K/yr so that my marginal tax bracket doesn’t get bumped up. I believe in diversification so I invest in long term buy and hold blue chip dividend paying stocks, I own several rental properties, I have a BOY system set up that I overfund that IMO is Bad ass because the cash available to me exceeded my premiums between year two and three and i’m using it move my mortgages over into my own banking system. For me its about creating generational wealth and ensuring my family is financially educated so they don’t have to live paycheck to paycheck like my parents/grandparent/extended family and friends. I agree that your BOY has to be funded correctly and I have a large policy so I’m able to leverage the overfunding PUA’s. I appreciate all the comments and at the end of the day its just knowledge sharing. Onwards & Upwards
Supersavers could run into issues where they actually have such huge tax-deferred accounts that they may be withdrawing a significant sum of money at higher rates than they saved when contributing it, but that will be a fairly unusual situation. I’m not as familiar with Canadian brackets, but for a US person I’m talking multiple millions in IRAs, not a few hundred thousand.
I agree that a break-even of 2-3 years is pretty darn good for a whole life policy. Glad you’re happy with yours.
On my very worst policy I have a break even point of 2 years and 8 months. For the last 7 years I have financed 4 vehicles through my own bank and have recently moved over the mortgage on my primary residence. For you to bash all of Infinite Banking because some aren’t doing it right is the same as profiling a race based on a few bad apples. Same concept. I made sure I did my homework and found a company that works very well for me. I’ll even plug it for him – Joe Pantozzi of Alpha Omega Financial in Las Vegas. Look him up, if you can find any bad reviews on anything he’s done, I’ll mail you a check.
4 vehicles in 7 years huh…Interesting way to pay for your transportation. I now see why this sort of thing is attractive to you.
I think I may write a bad review about Pantozzi. How big of a check will you send me?
I find it extremely disingenous for you to pretend you are not an insurance agent and recommend your firm to readers without mentioning that you are a VP at the company.
And people wonder why it is so difficult for people to trust insurance agents.
“Supersavers” can also fund ROTHs in addition to their WL policies, correct!?
A Roth caps at $5500 a year. If that’s all your average client is saving and they are some how “super savers” to you, I wish you luck. The rest of us will stick to higher net worth clients while you grind out those 20 cases a month to make rent.
Great point Jennifer and thanks for the luck {clapping ensues}
Wait… last I checked funding a ROTH 401k afforded my clients $61,500 contributions?
I must be mistaken. I should call my 20 clients and let them know limits have changed.
… hilarious that you actually think I was referring to a ROTH IRA. Can’t remember the last time I opened one of those. How many clients do you have whose income permits them to make ROTH IRA contributions.. lmao
And I’m not exactly sure what point you’re trying to prove here? Let me clarify mine – Supersavers can and will run into tax issues with RMDs. My suggestion was to either fund ROTHs (partially) or convert them in series as part of a financial plans design to help alleviate these issues. Not sure if you’re dismissing qualified plans and advocating for using a WL/UL for tax deferred growth and retirement income?! Love to hear you clear this up.. XD
FYI My practice is 90% fee based/planning and although I write insurance, I do so when insurance is necessary and I’m not a huge fan of insurance companies and their gimmicky strategies.
What’s so funny? Lots of high income earners fund a Roth IRA via the backdoor.
Jeff I would love to learn more about your BOY system and the type of policy that enabled your cash to exceed premiums paid between years two and three. Was this an IUL? WL? If so, would you share your agent’s information?
I was able to break even in just a few years on my policy.
it’s a WL with NYLife, 50k perm / 450k DOT rider. IIRC I could dump in about 10k per year for the first 7 years. So the ratio is 1:9 perm:term
I asked and It possible to set up an even smaller policy 25k perm for someone who wants to have even lower premiums, but still have somewhere to put aside a little cash.
Buy life insurance for life insurance. Fund retirement for retirement. This is not difficult folks. Unless you fit among the minority of our clients that benefit from these strategies and if you do – best bet is sit with somebody who can sell you either. Too bad so many forget their cash value dissipates upon their death and their retirement was grossly underfunded because they continually strove for that million dollar WL policy their agent convinced spouse they needed.. sound familiar? God bless all your propaganda LOL
[Ad hominem attack deleted.]
Or better yet, someone who sells only advice.
Amen!
I don’t work for or have any affiliation with Bank on Yourself.
I’ve done interviews with numerous accountants and though your tax strategy ideology works good in theory a majority of people retire in higher tax brackets than they are in when they are younger and working. Good luck with that though. But for a majority of American’s you would do better to pay taxes now and not later, even if taxes stay the same. You are most likely not going to have many of the deductions you have now, and how many people make less money as they get older? Most people are making more money and have less deductions in their older ages.
The reason people can’t or aren’t able to retire currently is because they lost money in the market and because they trusted their 401k to provide them with a retirement, that’s a huge portion of our society right now. They had the money saved. They had 100’s of thousands of dollars with only a few years to go and then all the sudden they get slapped in the face with huge losses that reduced their 401k’s by some even more than half of what they had.
Things were much more stable in the past because employees were getting pensions from their companies which were normally funded in an annuity. Surprise surprise, a life insurance company product.
It’s unfortunate that it takes major collapses and people losing massive amounts of money in the market in order to see the benefits of cash value life insurance. I’m not saying this is a cure all once again, but if you understand this concept you will see that it has some very good advantages.
If you are paying 5 percent on a loan, and you are making 5 percent on those same dollars, and you can only write off 1 percent, that’s still a benefit. So what if there is a limit up to a certain amount most people won’t max out this write off. And if there is no write off, then still who cares?
As far as Rex’s comments. Alot of whole life policies fail. This stems from talking heads telling everyone to get out of whole life (Dave Ramsey and others). People have been convinced that whole life is bad, and that will hurt them in the end.
And you are right, the 401k saved alot of people alot of tax burden. People from the late 70’s and 80’s when the 401k came into play, they are benefiting huge off this because taxes were so high and now they are much lower. But good luck with that argument in the future. Once again, I don’t think taxes will go down anytime in the near future and I don’t think many people would argue with me. If anything, most people are assuming taxes will go up.
Most people would find great benefits from using this system.
Dave Ramsey has nothing to do with it. Whole life has been around for what 200 years. The stats remain the same before Dave Ramsey and will remain the same after he leaves this Earth. In fact, even though whole life has been around forever, not one single independent study shows it to be a good investment. If you can point to one then please do. I guess Dave Ramsey pays off those academic folks not to publish any, yet there is evidence for some insurance products such as SPIAs. Additionally, if most policies didnt fail, in the current interest rate environment not only would dividends probably disappear but companies probably couldnt even make good on their guarantees given the comissions they pay off early on and their other associated costs (and those guarantees returns are darn weak returns which likely dont beat inflation). The best analogy for doctors when it comes to whole life is that if i were a drug rep who said i have this great drug that has been around forever but still the only evidence that its worth a darn is evidence back on file at the drug company or the word of the drug rep then all doctors would know what to think of it. Think the same with whole life. If you have a need for a permanent death benefit then it does that although no lapse gUL is typically going to be cheaper for the same death benefit. Whole life gives you the ability to take out loans which is typically not an option with no lapse gUL since it is typically designed to have little CSV. If you want a death benefit, just realize that this costs money and if you live a normal lifespan compared to how you were rated then likely you would have done better elsewhere. There just arent any magical investments in this world. Not for me and not for he insurance company. With whole life they invest in bonds/treasuries over a very long time period but take out large fees on your return. The good news is the investment is pretty safe but the bad news is that as an investment inflation you will make it such that you have a lot less money to spend.
“I don’t work for or have any affiliation with Bank on Yourself.”
Your name links to a webpage where the infinite banking concept is marketed. Do you really believe there is a significant difference between the two marketing strategies? If so, please illuminate us.
“I’ve done interviews with numerous accountants and though your tax strategy ideology works good in theory a majority of people retire in higher tax brackets than they are in when they are younger and working. Good luck with that though. But for a majority of American’s you would do better to pay taxes now and not later, even if taxes stay the same. You are most likely not going to have many of the deductions you have now, and how many people make less money as they get older? Most people are making more money and have less deductions in their older ages.”
You’re wrong on this point. Most people have income in retirement FAR less than their working income. I’ve calculated I need ~ 30% of my current income to retire quite comfortably. Even standard “financial planner theory” is that you need 60-70% of your current income to have the same lifestyle in retirement. Yes, you lose a few deductions (although there are a few you pick up), but that doesn’t make up for the significant decrease in income. The vast majority of Americans will do better getting a tax deduction during peak earnings years, then withdrawing that money during years in which they earn less NO MATTER WHAT HAPPENS TO TAX BRACKETS. Very few people will put money into 401Ks at 35% and then take a significant amount out at 39.6% (to use figures currently in Congressional discussion). But even if that was your concern, the investor can often use a Roth IRA or Roth 401K/403B. No taxes ever again and you don’t have to “borrow” from the policy to get your money.
“The reason people can’t or aren’t able to retire currently is because they lost money in the market and because they trusted their 401k to provide them with a retirement, that’s a huge portion of our society right now. They had the money saved. They had 100′s of thousands of dollars with only a few years to go and then all the sudden they get slapped in the face with huge losses that reduced their 401k’s by some even more than half of what they had.”
B.S. I lost 31% in 2008 and gained 33% in 2009. What did I have to do to achieve that 33%? Nothing. Just not sell out at the bottom. All those thousands of dollars I lost came right back. That was a fairly aggressive 75/25 portfolio. My parents 50/50 portfolio lost 18% then gained back 22%. To lose more than half your money in 2008 required an exceedingly risky portfolio. It’s not exactly intelligent to hold an exceedingly risky portfolio just a few years before retirement. If that’s your argument then I’ll concede that yes, financial idiots might do better in a whole life policy with 2-5% returns than they will buying high and selling low in the stock market.
“Things were much more stable in the past because employees were getting pensions from their companies which were normally funded in an annuity. Surprise surprise, a life insurance company product.”
Let’s not get too off-topic here. Pension funds are usually invested in stocks and bonds, although often times people get the choice to take a lump sum or annuitize it at retirement. I’m not saying there are no decent insurance products. SPIAs can be very helpful for many people. I plan to buy some myself at an appropriate time. It has little to do with our current discussion of whole life insurance/infinite banking.
“It’s unfortunate that it takes major collapses and people losing massive amounts of money in the market in order to see the benefits of cash value life insurance. I’m not saying this is a cure all once again, but if you understand this concept you will see that it has some very good advantages.”
Yes, it has good advantages. Unfortunately it also has significant disadvantages, which, most of the time, for the majority of people, outweigh the advantages.
“If you are paying 5 percent on a loan, and you are making 5 percent on those same dollars, and you can only write off 1 percent, that’s still a benefit. So what if there is a limit up to a certain amount most people won’t max out this write off. And if there is no write off, then still who cares?”
I’m not sure you understand how this works, which concerns me since you sell this stuff for a living. Let me walk you through it, because there are lots of others who don’t get it either. Go to Schedule A. Line 23 is where you deduct investment expenses like margin interest. On lines 26-28, you multiply your adjustable gross income by 2%. Any amount less than this is non-deductible. So for a doctor making $200K, you have to spend $4K on interest before you can deduct ANY of it. And even then, you can only deduct hte amount over $4K. So you can have a pretty big loan (at 5% that would be something like $80K borrowed for a year) before any of it becomes deductible. And if you’re taking the standard deduction, none of it will ever be deductible.
“As far as Rex’s comments. Alot of whole life policies fail. This stems from talking heads telling everyone to get out of whole life (Dave Ramsey and others). People have been convinced that whole life is bad, and that will hurt them in the end.”
Not necessarily. Some of them get out when they see their statements every year and realize that they still have less than they put into the policy after 5 or 10 years. That’s pretty depressing news as an investor who had a whole life policy marketed to them as some great investment. There are a lot of reasons for this, but I’m convinced that’s a big reason why people bail. The other big reason is they realize they have better opportunities for investments, and choose those instead with their limited investment funds.
“And you are right, the 401k saved alot of people alot of tax burden. People from the late 70′s and 80′s when the 401k came into play, they are benefiting huge off this because taxes were so high and now they are much lower. But good luck with that argument in the future. Once again, I don’t think taxes will go down anytime in the near future and I don’t think many people would argue with me. If anything, most people are assuming taxes will go up.”
Again, marginal vs effective tax rates is the key concept you’re missing. Yes, it’s nice to see lower marginal rates, but that isn’t the reason why putting money into tax-deferred retirement accounts during your peak earning years is such a good reason. It’s that you save money at 38%+ and then spend it at 0-25%. It’s the tax arbitrage that helps (plus the lack of tax drag on growth over the years.)
“Most people would find great benefits from using this system.”
I would say a few people would find marginal benefits from using this system. I doubt I’ll convince you, so we’ll have to agree to disagree/disagree without being disagreeable, but I think the discussion is beneficial to people who will read this later while trying to decide whether to do their own banking through a whole life policy.
I’d like to stick my toe in here for a second. I do so with significant hesitation, however, because I have followed this blog and enjoy the insightful content and I don’t want to demean the work Jim is doing here, I simply want to share the knowledge that I have on the subject.
Let me tell you about my experience with cash value life insurance. First of all I set out to determine whether or not life insurance could be an advantageous place to store extra money as opposed to a savings account, checking account, or other incredibly low yield vehicle. And quite frankly the stock market – no matter how you invest in it – is a huge gamble, one that I don’t have the stomach for so I wanted safe, risk free, moderate growth.
Now I did this for a reason, I didnt’ want to learn if it was good to use as a “banking” vehicle I just wanted to know at its core if it was a solid place to park money.
After hours and hours of my own research and then hours and hours on the phone with and in front of some very veteran and skilled insurance professionals I was introduced to something I never knew existed.
I was told for as long as I can remember that whole life was terrible and that anyone who sells it is an idiot and they’re trying to steal your money. As mentioned above I like to find out for myself, hence the time spent researching.
So what did I discover? Well, most of what I found has already been pointed out: it offers some incredibly favorable tax advantages, I can borrow against my cash value whenever I want and pay it back on my terms. (side note – I discovered that a policy loan is received in a matter of days, 2-3 to be exact. it’s a simple process of faxing the ins. company a form and them mailing the check). most everything else I discovered has been pointed out here.
some things I found out that aren’t very clear based on this thread: (keep in mind i’ve spent some serious time on the phone with ins. companies because I wanted to get it from the horse’s mouth).
1. a policy becoming a mec is much more difficult than stated….as soon as the ins. company receives money that will turn a policy into a mec they communicate that with the insured, and in many cases make them sign a form, stating that they still want to submit that money.
2. everyone keeps talking about this “break even” point – I’ve had illustrations drawn up for me that show my cash value equaling my out of pocket cost in 4-5 years. Not to mention that in year 1 I have about 90% of the premium I’ve put in available in cash value…guaranteed. When I saw that my jaw dropped.
One thing that I can’t understand is that many people compare a WL policy to a savings account….that savings account has no death benefit attached to it. So this whole ‘break even’ comparison is irrelevant to me….If I can have 90% of my cash value (again this was a guaranteed amount) available in year 1 AND I have X amount of dollars in death benefit – I’m okay with that.
3. I think it was mentioned previously but there is something called a reduced paid up policy. This method debunks the myth that premiums must be paid until age 100. From what I understand, and i could be wrong here, you can reduce pay up a policy anytime after year 7. That means that at anytime after year 7 I can eliminate my out of pocket premium expense and my cash value remains and continues to earn the same dividends it would have anyway. I can still borrow against my cash and I can also withdraw it at my will.
Anyway, this is getting long but I was just like most people who thought thought that any form of permanent ins. was expensive and not worth my time. Now after having spent a lot of time (probably way too much) researching I have come to understand it and see it as a viable option. Not to mention that the more I dove into it and spoke with others I found that the wealthier the person the more cash value life insurance plays a role in the their overall financial plan.
a quick note on the whole “banking” idea – this is how I simplify it: I have access to money at 5%, if I can find cheaper money elsewhere (which right now isn’t that tough) then I use the cheaper source. Back in the late 70s ans 80s it was cheaper to borrow from a policy than get a loan from a bank so it made sense to borrow from the policy.
I agree with the fact that you should be able to explain something in a couple minutes – so let me make an attempt in only a few sentences: Life insurance is the only place to offer all the advantages it does (taxes, creditor proof, easy transfer at death, no risk, control, etc.). If I used it, I would use it as a ‘storehouse’ for my money until I a)needed it for large purchase and couldn’t get cheaper money elsewhere or b) had an investment opportunity that I wanted to get involved in.
Again, i spent a lot of time looking into this and these are a few of the things I found out (i feel like I could talk for hours) but who knows maybe someone out there knows more than me.
Well thought out and well written comments. I happen to agree with what you said, and I am a big proponent of WL insurance. It is the “rock”, the foundation – in my opinion. I have everything else as well, but no matter what, I load my policies & PUA with cash monthly.
What do you do for a living Don?
woah! had comment come in while I was writing mine…good points by the author, but one thing to point out and many people make this same mistake…
“I lost 31% in 2008 and gained 33% in 2009. What did I have to do to achieve that 33%? Nothing”
let’s look: if I have 100k in an account and I lose 31% I’ve lost 31,000 dollars….so my account balance is $69,000. the next year you earned 33% but you only earned it on 69k so your balance at the end of year 2 is $91,770.
Granted that’s not losing half of your account but all the ups and downs of the market can have real effect on outcomes. thats why i learned to never rely on the percentages thrown at me in an annual statement. You have to look at what really happens….
just a thought…hope my math is right 🙂
Liz
Always glad when someone is happy with their purchase. Also typically a policy owned for as long as you have had yours is almost always better to keep then to surrender. You need to realize the returns on whole life were a lot different back then. Dividends have been decreasing since then. Like with all products there can be a good time to buy them if comparing to todays investments but none of us have a time machine. I would love to have purchased Apple when it was 20 bucks and then sold it when it was 700. Unfortunately that isnt a strategy. Hopefully you also understand that if one choses to convert a policy to paid up and takes out loans that the policy can still crash from the weight of those loans. While i didnt check your math, you are right that relying on percentages can be deceiving and it is why one needs to be careful about averages given by stock pickers or anyone else. As an easier example. I could invest 100k and have it lose half its value to 50k (50% loss) and then have the money double back to 100k (100% gain). If i average those numbers then i could pretend the 25% average gain was something more than breaking even. Thats not even factoring inflation into the equation. The only reason why wealthier could equate to more use of whole life is bc it isnt about investing or growing your money at that point. Its about just preserving what you got. There is risk in these products, it just isnt market risk. A guarantee is only as good as the company’s ability to make good on it. Fortunately the low risk investing of bonds/treasuries combined with huge lapse rates make it very safe. If it wasnt for the lapse rates, there would be a problem just like there now is with long term care insurance. If you have followed the other posts on whole life, you know i feel the creditor protection is very weak but state dependent. Again im glad you are happy with your purchase.
Your math is absolutely right Liz- a 33% gain does not completely wipe out a 31% loss.
I dislike the argument that “it’s a savings account with a death benefit” because you only get one or the other, not both, as I wrote about a week or so ago. And you’re probably paying too much for the death benefit. Mixing a need for permanent insurance (which you can get with a guaranteed universal life) with a saving/investing account almost guarantees you won’t get the best of both worlds.
The only way to get anywhere near 90% of your cash value after a year is to buy paid up additions right up front. A typical whole life policy (I have an illustration in front of me for a 30 year old male Metlife Promise Whole Life 120) isn’t anywhere near that. This one shows that you would pay $8230 per year and after one year would have $1000 in cash value. After 10 years ($82,300 in premiums) you have $69K in cash value. The only way to get that % up higher is to put more cash in. A smaller percentage of the paid up additions goes toward the policy costs, so it goes toward your cash value. As Rex mentioned above, this is how you minimize the bad parts of a whole life policy.
The reason the “very wealthy” are more likely to have these policies is three-fold: First, they can’t save as much as they’d like to save in tax-advantaged vehicles like Roth IRAs and 401Ks. Second they actually have enough that the estate tax becomes an issue ($10 Million for a couple under current law.) Third, they have less need to take risk than most Americans. They simply do not need a high return on their money because they already have “enough.” None of these apply to the vast majority of Americans, including physicians. Emulating the “very wealthy” in this regard is not particularly intelligent.
Just for the record, I’m not 100% against having a whole life policy. But you should have a realistic view of what it’s going to do for you (2-5% nominal returns over the very long term) and it should be a fairly small part of your portfolio. And you certainly shouldn’t be taking out a home equity loan or skipping 401K contributions to fund it.
[Ad hominem attack removed.]
“I dislike the argument that “it’s a savings account with a death benefit” because you only get one or the other, not both, as I wrote about a week or so ago.”
How do you get one or the other when it’s specifically and thoroughly explained that you do get both. Your payments build cash value AND you get a death benefit. The death benefit is the only reason this works. The death benefit is used to collateralize the loan from the insurance company. The amount they are willing to loan you is determined by the available cash balance in the account (savings).
You go on to state “The only way to get anywhere near 90% of your cash value after a year is to buy paid up additions right up front.”
Well, DUH!! That simple fact is exactly what makes it infinity banking. A regular whole life policy is normally a terrible idea, but this is absolutely NOT a regular policy.
Whole life build and used in this way is not an “investment” as you seem to think. You’re missing the whole point. It’s a tool to allow you to build wealth.
Imagine if you deposited your entire paycheck into a policy with a 92% cash availability to you on day one (not hard if you have a good agent), then you immediately withdraw 95% of that amount from the plan. You end up getting 90% of your paycheck in your hands in less than a week AND your entire paycheck ALSO earns 5%. You spend your 90% like you have before, invest it, blow it, loan it to someone else at a higher rate; whatever. Assuming you make a living wage; your paycheck will require a plan that has a death benefit in hundreds of thousands ON DAY ONE!!
Continue this for 2-3 years.
Deposit your entire paycheck into the policy. Borrow 110% of your paycheck from the policy to do whatever you want with AND 110% of your paycheck earns 5% tax free and you have increased your actual cash 10% for doing nothing.
By the way, your death benefit is required by law to be higher than your cash value, so after 10 or 15 years of doing this, the death benefit is growing at least as fast as your money, so you then have millions, maybe tens of millions in death benefit that passes tax free.
As long as you leave enough money in the plan (just don’t borrow it ALL), the policy costs and the (simple, not compound) interest costs are covered by the GUARANTEED rate the mutual company pays you. The plan cannot collapse this way.
You simply cannot do anything like this with your 401k or ANY other investment tool. It just cannot be done any other way.
If you were smart, you’d liquidate every asset you can and get it into a High Early Cash Value Whole Life insurance policy, then borrow 90% of it back to reinvest if you think you can still earn better than 5%.
If you were really smart, you’d take the loan personally, lend it to your business, and the business would pay you back with interest and would deduct that interest off its taxes.
You are clearly a true believer and I appreciate the enthusiasm. What I like most though is that you’ve bought something you understand and are happy with it. Unfortunately that is not the case for most who purchase a whole life policy.
But I’m not sure why you don’t understand my point that you don’t get the cash value and the death benefit. When you die with an outstanding loan, the amount of the loan is subtracted from the death benefit. Let’s say you have a cash value of $900K and a $1M death benefit. You cannot borrow out $900K and then expect your heirs to get $1M when you die. They get $100K. That’s not opinion and that’s not wrong; that’s the way it works.
Well, what you said was “I dislike the argument that “it’s a savings account with a death benefit” because you only get one or the other, not both, as I wrote about a week or so ago.”
To me, you’re saying you can’t have a savings account and a death benefit.
that’s incorrect. It is a savings account. Your money sits there and is available to you just like a savings account at a bank. ALSO, it provides a death benefit.
So, it seems that you were either unclear in your original statement, or you’re wrong, because it is both, at the same time.
Yes, any loans will be taken out of the death benefit, but that does not eliminate the savings or the death benefit, you will have both until you die.
[Ad hominem attack removed.]
No; this is not for everyone, but it can work for just about anyone, if you take the time to understand it, and find a good agent that can setup a policy correctly.
Good luck to you with your current investment strategy.
Be sure to update the site when the market crashes and you lose 20 to 50% of the value of your portfolio, and let everyone know what kind of returns you’ll need to just get back to before the crash. i.e. you’ll need to earn 25% to get back to even on a 20% loss and 100% to get back from a 50% loss. how long will it take you to re-earn 25% of your portfolio if you lose 20% overnight? 2 years, 3, 5? Just to get back to even.
What if your portfolio didn’t lose anything, but instead gained 5% tax free?
Just a thought
I’m sorry you misunderstood me. What I meant to say was that while the money can be used for EITHER a savings account OR a death benefit, there isn’t twice the money there. It doesn’t sound like you disagree with that.
I appreciate you wishing me luck on my investment strategy. And yes, it worked, is working, and there is no reason it shouldn’t continue to work throughout my investing career.
I disagree that “wildly misleading” information is being written here. If there are inaccuracies, I will correct them. You seem to think I’m incorrect about something, but when pinned down, all you can come up with is silly things like “you can use it for either but you said it’s not both. I think you should have stated that differently.” You have yet to tell me something about IB/BOY that is both factual and unknown to me prior to your comment. You just repeat the fluff I find in the books and other literature by the folks selling these policies “open your mind” etc.
I’ll be sure to update the site during future bear markets, just like I have in past bear markets. And yes, I fully understand the difference between annualized and average annual returns. I’m not willing to give up higher long term returns just to avoid occasional, temporary portfolio drawdowns. Seems foolish to worry about 3 year returns on money I’m investing for 30.
[Ad hominem attack removed.]
“I’m sorry you misunderstood me. What I meant to say was that while the money can be used for EITHER a savings account OR a death benefit, there isn’t twice the money there. It doesn’t sound like you disagree with that. ”
This is wrong.
The money you put into a policy like this mostly goes to a cash value account, which you can borrow against. This money is “saved” in the policy, whether or not you borrow against it. The entire value of what you’ve put into the plan that has been designated as “Actual Cash Value” (ACV) in the plan is the amount of money you can ‘borrow’ at any time. This is your savings portion of your policy. The entire ACV earns interest, currently at around 5% tax free, guaranteed, WHETHER OR NOT YOU BORROW AGAINST IT.
And no, there isn’t twice the money there, there’s closer to 10 TIMES the money there. A policy that lets you put 75k into ACV will have a death benefit at or over 1 MILLION dollars. for a $75,000 investment. You can access 92% of the 75k immediately AND have close to a million dollars for your heirs tax free AND the 75k will go to them ALSO if you haven’t already taken it out in the form of a loan. So, you get more than double the money. I guess that makes you kind of right, but not in the way you thought.
You can pay it back, or you can not pay it back. The choice is yours. Until it gets paid back, the amount you can borrow is reduced by the amount of the outstanding loans, but the WHOLE AMOUNT still earns interest. Does your 401k do that? Your savings account? NO! So, not only is it a savings account, but it’s a supercharged one which lets you take your money out and still pays you as though you haven’t.
Please ask questions about this if you don’t understand, but if you do understand; it’s clear this is a savings account.
If you do pay your loan(s) back, that money paid goes right back towards the ACV, making it available for your to borrow again. over and over it goes. In addition, any interest you choose to pay yourself ALSO gets credited to your ACV, so the money you would otherwise pay to a bank to borrow money, then pay them interest on, can instead be borrowed from your policy, without any application, underwriting, explanation of intended use, or possibility of being denied.
Does your 401k do that? Does your bank? NO!
IN ADDITION TO ALL OF THAT; AND SIMULTANEOUSLY
You have death benefit. When you fund your policy your ACV (savings account) is there for you immediately. If written correctly, depending on health and such, you can have access to over 92% of that money immediately. You also have a death benefit from day 1. The death benefit is what the insurance company uses to collateralize your loan. They know that if you don’t pay the loan back, when you die, you will get money, and they will just take the loan out of the death benefit, but your beneficiary will still get the death benefit, minus any loans (money you already got!). By law, the death benefit must be higher than the ACV, so there will always be some death benefit left over, by law.
So, I just can’t see how you can say you don’t get savings and death benefit in this plan. Hopefully, not that I’ve explained it, you can see that you do in fact have both.
If you still disagree, somehow, please explain your rational, because it’s quite clear it offers both simultaneously.
Furthermore, based on the above, I still consider you stating you don’t get both as “wildly misleading” because it’s 100% inaccurate. You clearly do get both, to state the exact opposite is even worse than wildly misleading, but I’ll just stick with that.
As far as being “pinned down”, I’m not sure what you’re referring to. I’m simply correcting your mistakes.
As far as telling you stuff you don’t know, let’s start with above. Clearly you don’t know you can use the policy for both savings and death benefit simultaneously. Not only can you; you HAVE to. You cannot have one without the other. That they work together, in this way, IS Infinity banking.
If you just buy some whole life policy with no high cash value, that’s NOT Infinity banking, it’s just a very poorly structured, bad investment. Your article was not about whole life in general, it was about the Infinity banking concept, but your arguments don’t apply to this concept, they apply to whole life in general; which I agree isn’t a great investment.
Infinity banking isn’t an “investment” in the sense you seem to understand. It’s a tool to allow you to invest smarter, safer, and with guarantees, AND a tax free growth component and death benefit.
Also, I’m happy for you that you “fully understand the difference between annualized and average annual returns” You absolutely should if you’re going to have an investment website, but I don’t think I’ve mentioned them at all, nor indicated that you didn’t understand. I fail to see the point of you having even mentioned, but again, good for you. I like strawberries.
As far as telling you something you don’t already know, this is from another post I made to another of your incorrect statements…
No, there is no “price to pay” early on, other than LOSS OF USE OF a small percentage of your money for a couple years. But, it’s not all cash value you paid for, you also get LOTS of life insurance.
After year 10 in any play I’ve seen (and as early as year 3), adding money to the plan increases the cash value more than what you paid in. So, a few years in, you dump 10k into the plan and instantly have 12k worth of cash you can borrow and never repay. How is that not the best thing ever?
Also, you stated earlier “Obviously borrowing at 5% and earning 2% is a losing proposition.”
It may seem obvious, but have you done the math? I have, and it’s not as clear cut as you seem to think. Yes, it is better, but barely…
If you borrow 10k for 5 years at 5%, you will pay 11,323 in total.
If you invest 10k for 5 years at 2%, you will have 11,051 in total.
A difference of only $272!! And that’s with a 3% difference between what you pay and what you earn (which is never going to happen in a whole life policy.)
Wanna know what it looks like with 5% on both?
If you invest 10k for 5 years at 5%, you will have 12,834 in total. That’s a difference of $1511 MORE between saving 5% and paying 5% simultaneously. If you use IBC, this is what actually happens. The insurance company loans you their money at 5%, they pay you a guaranteed 5% return, and historically another percent or 2 in dividend, making it even better.
[Ad hominem attack removed.]
Oh my goodness. You seriously don’t understand what I’m saying, no matter how many words you type. You have drank the Koolaid. You have taken the bait, hook, line, and sinker.
There is not twice the money there, much less 10 times the money there. It is not a savings account, it is a life insurance policy. Those who sell it aren’t even legally allowed to call it an investment, for a reason.
I don’t need help understanding. I completely understand how it works. I understand why some people like it and view the advantages as outweighing the disadvantages. But you sir, are a super fan which is causing you to gloss over the downsides and exaggerate the upsides in a ridiculous way.
I’m not going to convince you it is not as awesome as you think. You are not going to convince me it is as awesome as you think. So let’s just agree to disagree on how awesome it is.
Okay, please, explain to me how you can’t save money and get a death benefit at the same time.
I do not understand what you are saying, because you are saying you can’t have both at the same time, and to me, that means you cannot have it hold money and provide a death benefit.
It does, in fact do this exact thing, which I have spelled out in tremendous detail and can’t begin to imagine how anyone cannot follow what I’m saying.
So, PLEASE take what I’ve written, and explain to me; exactly; what is incorrect about anything I’ve typed.
don’t just say (for the fourth time) that I’m wrong and not give one single example or explanation of what exactly is wrong about what I’ve explained.
You just saying so is NOT a valid argument in your favor.
I really want to know what is incorrect or wrong or misleading about anything I’ve typed so far; specifically, with examples.
If you can’t explain why I’m wrong, or what about what I’ve said is incorrect, then at least try to tell me about the disadvantages, as you see them. I see one downside, and that is the loss of use of your money for a couple years, but not the actual loss of your money.
I cannot find any other downside. Please, tell me about them and what I should be watching out for.
PLEASE!!
I’m not going to waste my time with someone who literally cannot see a downside to buying a whole life policy. Let’s just agree to disagree. Trust me, it’s better that way than the alternative. But just to give you a flavor for one downside of a WL policy- you can’t buy it if you’re uninsurable. Surely you can understand how that would be a downside to using a WL policy as a savings account.
[Ad hominem comment removed and IP address blocked.]
Hey,
I came to your site to get the skinny on this BYOB or whatever that sounded appealing when I got sucked in on YouTube early this morning. But of course the people talking about it and even the production of their videos reeked of… convenient math and bad haircuts. (Wondering if that will make it through your ad hominem filter.)
I’m a 30-something upper middle class, self-employed married mother with a solo 401k who does save and tries to be frugal. I do my own financial planning and think I’ve done decently well. I’m going to tackle the back-door Roth this year.
Sometime in the future, I may need a loan to make payroll – I’ve always made member contributions in the past when needed and never talked to my accountant about returning them to myself as business loans with interest like some are saying you can do (couldn’t I do that already?) I had planned to simply ask wealthy people I know for a short term loan but I think anyone can understand why I wanted a finance person’s take on the infinity banking concept because it does sound compelling but with complicated terms and conditions one could explain.
I first read another post where you characterized anyone who is really considering “personal banking” as one who has a mistrust in banks and a fondness for gold. So basically, conspiracy theorists, is what I took from that. When I came to this post, though, you did show a thoughtful approach to discerning the considerations to make, none of which suit my situation or even what I thought were for the ideal customer.
It always seemed to me that the only person who should buy a permanent life insurance plan is someone who doesn’t think they will have enough cash to retire on, but who could live off a guaranteed interest of 6 or 8% of whatever amount they can afford to make payments on, plus SS & whatever else they could save up in the meantime, similar to an annuity but without giving up all that money.
I felt that you debunked the concept well enough for me in your post but now that I’ve read down through the comments for the last two hours by the actual insurance salesfolks, not really the happy campers, I had to take pause. I can’t help but notice that when they explain certain points, it’s actually you that gets “pinned down,” in your words, and I’m bothered by that. You shrug off added information as salesmanship and compare them to your unbiased opinion since you don’t broker any products, or with a “then I’m happy for you” kind of statement to the customers. Ad hominem attacks that you’ve removed are the bottom rung of logical fallacy, but discrediting (or appeal to) authority are also fallicies. Outright ignoring the information is just frustrating me as a reader, and obviously these other readers, who are all interested in your analytical perspective.
You did write your post several years ago and may have changed in your understanding to expand upon the categories of scenarios for which this type of plan works well.
I genuinely would like to hear you set this issue to rest as a finance guy with a bent for living debt-free, and saving enough such that you’re not worried about the “opportunity cost” of every hundred bucks you spend.
1. I think you should put your values up front and explain in black and white why the selling point of “Americans spend 34% of their income on interest every year” need not apply if folks would simply live below their means. You did address above that one “doctor’s” paycheck can buy a nice used car, and I agree that people buy cars too frequently. But you need to then address the reality that it’s already too late for most people – we’re already in debt and are choosing between paying it off and contributing to our retirement accounts even if we are living frugally. Personally, we have good credit so pay a 3% fee to transfer the debt onto a new 0% APR card every 12-18 months. And a car loan for the used SUV we traded a car we’d had for eight years when we had our child and needed to also be able to hold the dog and my sibling on long hauls. Our other car is now 13 years old but drives great. Maybe I’m just stupid, but we both do regret how much we spent in our 20s and simply can’t go back in time.
2. You are obviously right that a strategy for the very wealthy may come from the same tax avoidance mindset we all have, but can be wholly inapplicable to others – even the upper middle or upper class. But you haven’t made that point obviously clear as it relates to this issue: your point focuses on the wealthy’s use of life insurance is a “death tax” avoidance strategy. I think it’s important to make it clear that as-is, anyone with up to x assets upon death is not at risk for that. But things can change as they have in the past and we can’t know which way.
3. In line with the above, to be fair, as-is, the retirement account withdrawals are taxed at future income levels, and that can all change. Even if it’s an apples to oranges comparison (most people are sharing it is), from what I think understand, these policies do offer tax-free growth on your already-taxed money… as is. I think that it serves all of us to see a comparison of the numbers between average rate of return on an index-tracking 401k funded at $30k/year plus IRA at $5,500 vs what you would see as a guesstimated addition of a few of these permanent plans – like if the front loading to avoid fees for a few or several years would hurt their retirement savings and/or deductions and the magic of long-term compounding whether someone chose a $25k, $75k, or $125k plan or if not front-loading but simply making the payment then pulling it out, that it costs so much fees that you’re really paying $X for $Y interest gains, disability rider, and death benefit. If it comes out looking bad, you could offer that people can get disability and death benefit another way if that’s what they’re concerned about.
4. Policies folding with no FDIC protections. I do wonder if the products I can get from USAA, which is an outstanding insurance company, are as at real risk like these shadier companies personified by Omega Man Baker who referred one of his subordinates above as his broker without any disclosure of his own role as an officer in the company. Is it that the better insurance companies just don’t offer these types of products?
5. Lastly, I have no clue what your beef is with Chris above. This is where I had to stop reading and ask you to please just explain if you’re so exasperated. You said it’s not a savings account and a death benefit if you’ve liquidated it. Chris pointed out that this is true if you are talking about a specific policy where you have liquidated the account almost up to the entire death benefit. Then he offers that there are policies that provide 10-1 death benefit to what you put in.
6. Some people don’t seem to even care about the death benefit because they like this idea of the guaranteed growth, and you made it a point to refer to variable interest rates. But I’m pretty sure there are fixed interest rates out there, too. If trying to compare a fixed interest you can lock in right now at 6% vs CDs which are terrible (but that can change) and a market that does indeed fluctuate, though smoothed out over the long term does return at least that on the index, the benefit to these accounts sound to me that you can take your money out and still get paid as if it’s still in… And then keep funding your retirement account.
Honestly, this is a mess to me. It sounds good but costly because it will tie up my money and that does sound scary. But 27 year old me could and maybe should have done this if I had known and not thought insurance was a scam. I still can’t tell. Thank you for what you do here. I hope you can address these issues one by one.
It’s not clear to me exactly what you would like me to do.
I’m okay with someone doing IB or BOY just like I’m okay with someone buying a whole life policy so long as they understand how it works before they buy it.
The only “debunking” I’m doing here is explaining how the whole thing works and how it isn’t quite as awesome as those selling it make it sound.
gentlemen, thank you for your responses. Rex, just to be clear I am still on the fence and haven’t decided one way or the other. When you say there is risk involved, how do you figure? I know there is such thing as a guaranty association that is something of a safety net if an insurance company ever goes under….but with the companies we’re talking about that seems highly unlikely – all of which have been around for over 150 years.
white coat, I get where you’re coming from but I can’t determine whether or not your for or against UL – anyway, to me that seems like exactly what you’re saying not to do – it’s a savings/investment account mixed with life insurance. I spent a little time looking at UL and holy smokes! talk about confusing…..that is the most complex product I have every seen – not to mention that I haven’t seen too many illustrations that don’t show the guaranteed column lapsing at some point.
About the 90% cash in the first year – i’m looking at mass mutual HECV (high, early cash value) policy right now that shows me a little over 90% of the premium outlay available in the first year. Mass mutual is one of the oldest and most recognized companies I know of. I thought for sure it would be a MEC but it isn’t
last thing, I’m okay with your first two reasons that the wealthy have more whole life but the third reason pinpoints what I think is a fundamental flaw in America’s financial education. That flaw is that the average person needs to take risk in order to achieve their goals.
we are told by the media and talking heads that the only way to get wealthy is to invest in the mythical 12% mutual fund. Now, I haven’t run any numbers on this (may be worth your time for a post) but I would venture to guess that if you took two 25 year olds and sent them down two different paths – 1 did it the “traditional way” and threw money at the market via IRA/401k/etc. and the other put it in something that grew 5% year in and year out without losses the one who rode the roller coaster would come out the same or worse as the person who grew steadily without any losses. It goes back to my previous comment about the losses have much more of an affect on returns than anything else.
I’m a firm believer that by avoiding losses I will do much better than the person who ebbs and flows up and down. With that belief in mind, let me ask you both, where can I get what I’m looking for?
thanks again for a quality conversation
A few comments liz-
First, the truth is that most people need to take significant risk to reach their goals. 0-2% real returns simply aren’t going to be adequate (and that’s what you get long term with a typical whole life policy). Assume you want to live on 60% of your salary in retirement. Assume you make 1% real. Assume a 30 year career. What percentage of your salary do you have to save each year? 43%. That’s far more than most people are able/willing to save. Actually, if you continue to only get 1% real in retirement, you probably need more as you’re not going to be able to maintain a 4% adjusted to inflation safe withdrawal rate. Now if you can get 5% real during your career and 4% real in retirement, then you only need to save 21.5% of your salary each year. While still high, at least it’s doable. Returns matter and most people are going to have to take risk to meet their goals. It might be stock market risk, or real estate risk, or some other type of similar risk. But just stuffing 100% of your retirement money into CDs, bonds, or whole life insurance isn’t going to get you where you want to be unless you’re saving A LOT of money. Low returns can only be made up for in three ways- work longer, spend less in retirement, or save more.
Second, remember that 2-5% nominal returns on whole life are only over the long term. You don’t get those returns early on. You cannot compare exactly the dividend rate on an insurance policy to the return on an investment because not all the money you put in the policy goes to the cash value, especially if you’re paying monthly like most do.
Third, I’m not necessarily for or against UL or WL. If you want a guaranteed permanent death benefit and don’t care about cash value, guaranteed universal life (not complicated at all- you pay one price every year (just like level term) until you die (not like term.)) It costs more than term but less than whole life. Whole life is okay for a small portion of your portfolio if you’re okay holding it for a long, long time and are okay with nominal returns of 2-5%. What I am against is the marketing that causes people to buy them inappropriately or to buy an inappropriate amount of them. As Rex notes, only something like 8% of these things are held for the long-term. That’s totally unacceptable. If salesmen/advisers were doing their job appropriately that number ought to be above 75%.
Fourth, remember that a “high early cash value” policy doesn’t necessarily have the best long term returns. As I understand it (and I’m sure someone will correct me if I’m wrong) this is not the same as getting a more standard policy and buying the maximal paid up additions.
Last, and this bothers me a great deal, is that I continually have people show up here not understanding exactly what they bought with these policies. You’re far more educated about it than most, and you’re still learning about them. That level of complexity is NEVER good for the consumer. Much like a loaded mutual fund or a military “scholarship” for medical school, once people really understand the product, it turns out few of them actually want it. I don’t have to be anti-loads, anti-military, or anti-whole life…..I can be totally neutral and explain how they work, what can go wrong etc and most people choose not to “buy” them. That’s just the way it is. Most people who understand these things don’t perceive them to be a good deal.
Interesting how he mentions 5% annualized average returns and fluctuations of the stock market lowering your risk, but fails to note the historical 8% annualized returns. For anyone who doesn’t understand, annualized returns takes into account all losses and gains during the time period, hence the comment about stock market fluctuations lowering your overall returns to point that you’re better in a crappy personal bank is showing the commenters own ignorance regarding how a geometric mean is used to compute returns. Or it could be that the commenter is only interested in short-term gains
Stepping into it a few years later… I was noticing the same thing. WhiteCoatInvestor is saying 2-5% returns, but looking at several HUGE companies published returns from last year (MassMutual 6.7%, NewYorkLife 6.2%, PennMutual 6.34%), the RoR varies year by year. Between 2007 and 2016 MassMutual only had 1 year they barely failed to pay >7%. We are talking companies that are 150 years old or so and have been around decades longer than the IRS! LOL, Americans used to almost all have WL policies many years ago. My 79 yr old dad has talked to me about that used to be a big part of their savings because it was a safe way to save money. (I just got my Life producer’s license about 3 weeks ago and am in the process of contracting with a different company than the giants mentioned above, BTW, and my dad applauded my seeing the value in having insurance.)
I don’t want to comment on other’s intelligence or motives, but many of the folks commenting seem to only have a partial understanding of these type of policies. Mine isn’t perfect, but having taking the insurance exam and understanding that we are supposed to act as a fiduciary for the client, it’s not about earning the biggest commission… it’s about helping others and educating them to understand WHY the IBC is the best way for them to go, OR when learning about their needs being honest and steering them away from it if that doesn’t fit their long term goals. To dismiss IBC with a partial understanding of the concept and HOW and WHY it can benefit many people, is to do them a disservice. I don’t care for UL myself, but again it’s not about me, but serving the client. If I don’t honestly believe WL is best for them, I won’t recommend it… looking to help folks, not hurt them!
WCI already addressed your points. Typical insurance salesmen reasoning
1. “Every other agent except for me (and a few others I know) are incompetent and only sell the products earning the highest commissions”
2. Not understanding how marginal tax rates work (or being facetious)
3. Neglecting the entire truth. In your case, you are either ignorant about how WL was structured before the 1980’s tax reform, or you’re deliberately ignoring it to make a point (see #2)
4. I doubt those percentages include fees, and those rates are against the cash value, which, in the common scenario, are probably ridiculously low due to how WL is sold.
Wong, you obviously have no idea what you’re talking about as no WL policy in existence today has “fees”. Who’s beij g deceptive now? He’s a newly licensed agent and he seems to have 10x the knowledge of people who have done it for a decade.
You’re confusing the dividends with the returns. They are not the same thing. For example, if you bought a whole life policy a year ago, the dividend might have been 6% but your return was probably -30%.
It bothers met that you sell this and I have to explain that to you. You seem nice, but please learn as much as you can about this if you really want to help your clients. WL won’t be right for the vast majority, which can often make it difficult to make a living selling it in an honest manner.
Let me review the state guaranty assoc for you. These products are NOT backed by either the state or federal government. The state guaranty assoc is an organization that all insurance companies have to belong to if they want to sell in a particular state. Its is unfunded. Its an agreement that other insurance companies will do their best to make good on the guaranties of a policy if another company goes under up to the limits of 100k of cash value and 300k of death benefit (actual limits vary slightly state by state) but everything above this is not “protected”. The funny thing is that it actually helps people who pick small weak companies that offer better rates. In isolated small failures it seems to have worked well. For a failure of a really big company, it wouldnt work as well and for any systemic problems it probably wouldnt do much good at all since then nobody has the ability to bail you out. Agents are typically forbidden to talk about it since the weak companies could just say come get our better rates for a small policy and dont worry bc if we fail since then a bigger company will take over and they still have to meet our guaranties. Obviously the bigger and more powerful companies dont want that happening which is why agents arent allowed to talk much about it. Lets also review why the model so far has such a long track record. Insurance companies buy treasuires and bonds. So far those products have been pretty darn stable over a long time period and have had decent returns. Add in that most policies lapse or fail (i believe its more like 18% kept until death) and it would be practically criminal for them not to make tons of money and still make good on the guaranties. Fast forward to today with a low interest rate environment that appears will last at least a few years where they cant replenish their bonds/treasuries with new ones of the same yield and you can see why dividends continue to falll year after year. If the lapse rates also decrease (meaning that more people keep these policies in force) then this could be a real problem for these companies. Its the main reasons why long term care insurance is taking a huge hit with multiple companies leaving the business and most requiring huge increases on their clients. Now i dont personally think these companies will go under especially the strong ones. What could easily happen is that dividends continue to fall and this has a big impact on your return. At the moment i wouldnt even be surprised if lapse rates are improving but this actually is going to further hurt dividends. With time the issue will correct itself since people will see their policies perform worse than expected and they will get out at some point. A guaranty is only as good as the company’s word that they can make good on the promise. Nothing more. Early high cash value policies are definitely better than standard vanilla whole life. Most agents dont present them just like most dont present overfunded policies. High cash value policies typically perform similar to standard policies over the long run similar to what WCI has demonstrated.
WCI, I’m guaranteed to get 3% with life insurance and that’s just the guarantee – if the company performs like it has for the past 100+ years I’ll get between 5-7%. If I expected to get 0-2% this would not even be a conversation however performance has historically been better than that.
Now the argument can be made that past performance is no indicator of future results but I would make the same argument for mutual funds – and from what I understand bonds have outrun stocks over the last 30 years.
I couldn’t agree more than the bank on yourself folks are completely over the top when it comes to marketing – at least the gentleman earlier peeled back the layers and removed some fluff.
regarding the HECV policy to standard with paid up additions – I have had multiple companies send me their “best policies” and the HECV from mass mutual typically beats everything both short term and long term.
Rex, I knew the majority of what you said about the guaranty association, however I’m not ready and willing to put my full faith and trust with the FDIC – a quick bank run and I’m toast, right? I learned (and perhaps this is not true) that many of the banks were bailed out by insurance companies during the great depression – that speaks volumes to their safety and stability.
I appreciate you guys trying to talk me out of this 🙂 but I guess we’re back to the same question – I’m a firm believer that by avoiding losses I will do much better than the person who ebbs and flows up and down. With that belief in mind, let me ask you both, where can I get what I’m looking for?
I’ve never met or talked to someone that got rich from investing in mutual funds, the same holds true for life insurance. But I’ve talked to plenty of people that have lost hundreds of thousands of dollars in mutual funds – the same is not true for life insurance.
One last thing – only 1% of term insurance actually pays out a death claim. Talk about a cash cow for the insurance companies! I have a feeling that if more ins. agents were versed in whole life the lapse rate would decrease by a ton – the reduced paid up option completely eliminate premiums – it’s the perfect solution for job loss, retirement, financial hardship but I’m afraid many agents and their clients are unaware of the option.
You must not have talked to many people about permanent life insurance then. Almost 1/3 lose practically every dime. The stats pretty much show that people have lost more as a percent on permanent policies then any decent mutual fund plan. A low cost index approach has way better evidence for the long run period. Only people who lose a ton are ones who do things which arent wise like sell low or are excessively aggressive. Sadly they are the same folks who will make the mistake of buying whole life now only to surrender in a few years. Bottom line is a straw man argument isnt going to cut it.
You cant ask for magic. There is no magic in this world. If you want returns then you need the ebb and flow as you put it. You dont understand all the ramifications of paid up status. It is based on the current cash surrender value. Since few policies are setup with either high cash flow or PUAs, it wont work until much much later. Also if the lapse rates were zero then the company will go under. The model doesnt work without lapse rates being what they are and many policies having little CSV for them to give back. You wouldnt be able to even get the guarante which is 3% death benefit. When you factor inflation, that isnt much money for most people. For the people who just want to conserve what they got then its fine. You seem to forget what the insurance company needs to do with the money you give it. Its funny that you have little faith in FDIC since that is backed by the US govt. If the US govt cant back that then the treasuries arent worth much and in turn life insurance companies arent worth anything. You should have tons of faith in the US govt and bonds if you like life insurance.
By the way, SBLI has a policy with guaranteed csv greater than premiums paid after 1 year if you are in excellent health and it is NOT a MEC. No overfunding or PUAs are allowed. If current illustrations are near correct then over the long haul it doesnt perform any better than any other good policy in fact slightly worse.
I hear you rex, and trust I’m not here to get in a shouting match. It seems to me over the course of this conversation that the opposition has gone from “Run away as fast as you can!” to “if you want to protect what you have it’s a good option.”
I think I made that fairly clear – I want to protect what I have and what I will have. It sounds to me like the numbers you are telling me are based on traditional whole life insurance….which I don’t care about – I’m looking at a policy that is structured for cash value not for death benefit.
I understand your argument about reduced paid up status but you need to understand that I don’t care that “few policies are setup with either high cash flow or PUAs” because if I purchased a policy it would be set up with very high cash value. What that means to me is that I’m “breaking even” in year 5 or 6 which means that I can reduce pay up and let the thing sit and steadily grow for me without ever having another dime required from me for premium. 7 years is not a long time….for me at least…it may be for some but from an investment standpoint 7 years doens’t qualify as “much later.”
This is great! don’t get me wrong I’m really enjoying this because you both seem extremely knowledgeable and we’re getting way down to the nitty gritty.
so what’s left? the whole FDIC vs safety nets of life insurance policies is not the issue for me – I’m just as comfortable putting money with a life insurance company as I am with any bank if not more so. I can structure a policy “correctly” (in my eyes) and be breaking even very early and have the ability to reduce pay up anytime I want after year 7.
I’m not sure I agree 100% with your statement: “If you want returns then you need the ebb and flow.” I can get returns without that ebb and flow but they will be moderate – perhaps i’m fine with that because I loathe the thought of losing money and we’ve already looked at numbers showing how detrimental losses can be.
Maybe I’m the only person in existence that is looking for a better place to store my money…regardless the question remains, where can I get what I’m looking for?
No that isnt correct. The reason there is confusion is bc you keep changing between what you should do and what most should do. You seem to think that most people would do well with early high cash value whole life and everyone could get up to 7% return or could easily change to paid up and there would be little consequences. As i mentioned earlier i like it when someone is happy with their purchase. That doesnt mean most people should purchase any form of whole life. Most people should run away. They will either lose money flat out or lose purchasing power. The only good reason to purchase whole life in any form is if you need a permanent death benefit. An OK reason is if you want one but are willing to take the lower returns. Your return is the same as typical whole life over the long haul. It just changes how the commission is paid. Everyone wants a good place to store their money. I dont believe i can give you a realistic answer. You dont even have faith in FDIC but somehow have faith in insurance companies. Maybe you should look at equity indexed annuities. It might fit your desires but again not something id recommend to most.
woah there!! I already said I’m not trying to pick a fight here – just looking for some quality info. Let me ask you this – has you or anyone you know ever been burned by whole life? I’m assuming the answer is yes and I would like to hear a few details.
Here is my thought process – If i can do just as good as the average guy that throws money at mutual funds and I don’t have to worry about laying awake during down markets wondering if I’ll ever recover – I’m all for it.
I get the impression that that is an impossible task…..am I right?
I’m not trying to say that life insurance is the magic bullet for everyone, but for disciplined, conservative people like myself that don’t by into the mantra of “you’re young enough to take the risk” (my phrase goes like this – “i’m young enough to not have to take the risk”) I am still leaning toward the option.
What I can’t figure out is why, rex, you are so opposed to this logic – and that is the reason for my question at the begin of this post.
keepin it friendly 🙂 -Liz
Liz-
You’ve never met someone who’s gotten rich off mutual funds? Seriously? Trot on over to the Bogleheads forum. Per the anonymous polls, about half of them are millionaires and most of them invest in nothing but index mutual funds. It certainly does work and should be the default investing selection for most people.
Remember that dividends are not returns. Dividends apply only to the cash value already in the policy, not the new money you put in each year. So you can’t compare a 7% return on a mutual fund to a insurance policy paying 7% dividends. They’re not the same. The illustration I did a week or two ago shows that if you live to your life expectancy, you can expect returns of 2% guaranteed and 5% illustrated (that’s nominal-before inflation returns) out of a typical policy. Assuming 3% inflation over the long run and let’s give the company the benefit of the doubt and say you get 4% returns, that’s only 1% real. That means your money doubles once every 72 years. It takes a long time to get rich that way. I like the idea of “slow and steady” returns, but when your returns drop to a certain level, slow and steady just doesn’t cut it.
Also, where have you gotten the idea that bonds have outperformed stocks over the last 30 years? The S&P 500 Index Fund at Vanguard has a return since inception (36 years) of 10.51% per year. The Total Bond Index has returns since inception (24 years) of 6.76%. Even if you just look at the last 10 years (this famous lost decade for US large cap stocks), it’s 6.24% vs 5.31%. 30 years at 10.51% gives you 19X your original investment. 30 years at 6.76% gives you only 7X your investment.
I don’t see why you think term insurance is some cash cow. Yes, only 1% (or whatever it is) pay out. But when it pays out, it pays out big. Yes, they make profit, but it isn’t some ridiculous amount like 99%. Think about it. You don’t buy term insurance for a guaranteed payout anyway. You buy it for a just-in-case payout. If you’re that rare case, it pays out big. If you’re not, well, you had the peace of mind that if something bad had happened to you, your family would be taken care of. It certainly is no argument to buy a permanent policy.
Gotta run to work, I’ll address more later.
You must not be a physician. If you were, then you would have several if not tons of friends who are unhappy bc they were placed into a permanent policy. My details arent important to this post but one just needs to realize insurance agents dont have a fiducairy duty and the worst way to purchase permanent insurance is within a qualified plan regardless of what a financial advisor might say. I can list only 2 friends (out of many) who arent unhappy bc of permanent insurance. One has a need for a permanent death benefit so that was a good sale and that person isnt really in love with the product but still its a good sale. The other doesnt have any idea what they are doing and thats actually fine too.
Ill put it to you this way, why isnt there any academic evidence for whole life as an investment even though its been around for 200 years? That should answer your question about the logic behind your statements. There are also like 200 years of data on what happens to people who purchase whole life and it isnt pretty. There is also the fact that there are no magical investments in this world for either insurance companies or individuals. On the other hand there is good evidence for index funds and using a SPIA later in life.
I don’t disagree about the qualified plan portion – I never had any intention of purchasing whole life within a qualified plan. My details aren’t necessarily important either, just know that I have enough to worry money to want to do the best thing with it.
I may have mentioned this before – the thread is getting way too long 🙂 but I was shocked at a suze orman interview i read – she was asked what she does with her money and her reply was something like this “I have 1M in the stock market because if I lose it I don’t personally care the rest is in highly rated bonds”
this bothers me because she does exactly the opposite of what she tells her listeners to do. Now you’ll argue that she is rich so doesn’t need to be fully investing in the stock market – my argument is this: Her advice is sound for everyone – put at risk what you can afford to lose, that is age old advice. If I can’t afford to lose my retirement portfolio why is it invested in mutual funds?
anyway, somewhat of a tangent there, but back to your thoughts – I’ve talked with multiple people who bought whole life policies from an uncle, cousin, brother, etc. just because they felt bad and wanted to give them some business – 20,25,30 years later it turned out to be their best performing asset and these were regular plain vanilla policies. Very few people pay as much attention to their portfolios as they should and as a result end up suffering damaging losses that take years to make up for.
white collar, i’m assuming you’re just agreeing with rex here, hence the silence?
I think we’ve almost beaten this thing to death but I like to be thorough.
No i wont argue that. Her advice isnt for everyone. Its for people who are in debt. Same is true of dave ramsey. Thats what she is good at and same with him. The rest of their advice is not so good although her and dave ramsey are both correct when they say avoid permanent insurance. They may not even understand it based on their comments ive seen but their conclusions are correct. Im sure you and your family has a very close association with the insurance industry. No doubt in my mind. It takes 16-17 years to make up for the mistake of just purchasing a vanilla whole life (more if you count inflation) much more than the damages from index funds.
Thanks to everyone so far for a very cordial discussion. Unlike most threads on whole life I haven’t yet had to edit a single comment.
Liz- Don’t worry, I haven’t gone away, but all these pesky people keep coming in with appendicitis and want me to do something about it….. 🙂 There are some things more important than arguing about life insurance of course.
Remember that Suze Orman has little need to take risk. She can live the rest of her life off much less than she already has. Unlike Suze, I have significant need to take risk, as do most Americans, including docs. If you can reach your goals with 1% real returns, more power to you. But I think putting a large portion of your portfolio into permanent life insurance is probably a mistake, as that is what you are likely to get.
Reviving this very old thread, but I have a question White Coat. If I put money into a WL policy (optimized for IBC, with all the recommended features mentioned earlier in the thread), then take loans out of it and invest that money (I do real estate investments and I make excellent returns, 10-20%), am I not getting the best of both worlds? death benefit, 1% marginal growth within the policy, and whatever return I can get on the 90% I’m able to “borrow” from the cash value. Seems to me that the big no-no is to just put the money in the policy and forget about it. The whole point is to take it out and put it to work. As long at it’s a non-direct recognition company, the dividends are paid on the whole value regardless of loans taken out.
Yes, if you can make 20% on your investments, you should borrow all the money you can from every source you can find and invest it. You should reach financial independence VERY quickly. Do the math on it:
Since you can spend 15% of your portfolio every year, you really only need about 7 times your annual spending. If you save 20% of your income each year, your annual spending is 80% of your income. If we use $100K as your income for ease of use, then your FI number is a mere $560K.
=NPER(20%,-20000,0,560000) = 10 years
And that assumes you have nothing now. If you already have $200K, you’re only 4 years away.
My point is that if you can really grow your money at 20%, you have no need to monkey around with something like this. Just go do the 20% thing. And go get someone else to do it with you and take a fee from them and buy bigger projects together etc.
Also, if you can grow your money at 20%, then you can do whatever you want with your money. Even if you put some of it in a terrible whole life policy, as long as the rest of it grows at 20%, you’re going to be fine.
I guess we’ll all have to agree to disagree about the performance of cash value life insurance. I know for a fact that I will do better than 1% inside a life insurance policy. 4-6% return with a guaranteed death benefit as the cherry on top.
It’s back to what i think is fundamentally wrong with America – we think that we can save a few dollars here and few dollars there and grow it to make us rich. With savings rates as bad as they are (about 5%) it’s no surprise you’re out looking for risky ways to turn a few thousand dollars a year into a million. I would rather discipline myself to save more and earn a moderate 4-6% in place of barely saving anything and trying to make it grow abnormally fast, which ultimately sends my risk through the roof.
thanks again all!
Thank you for this comment!
I hope that works out for you Liz. But make sure you actually run the return on your policy. For example, the guaranteed return in the illustration on the whole life policy I have in front of me from age 30 until retirement time (let’s say age 60), is not as good as you are imagining, and that’s on a 30 year investment!
You pay $8230 per year and at age 60 you’re guaranteed to have $345K in cash value. What’s the return? 2.08%. That’s 1% less than historical inflation. If you only get the guaranteed return, you’re not actually making any money. You’re not even preserving what you have. You’re losing money! In fact, at age 50, when you’re guaranteed to have $190K, your guaranteed return is 1.35%. Even if you believe the insurance company’s illustrations (and in my experience returns nearly always lag the illustrations by a significant amount), you’re looking at 4.59% for 30 years and 3.55% for 20 years. Yes, 4-6% doesn’t sound too bad, and if you truly save enough, you can make up for it, but the fact remains that you are actually unlikely to have your money growing at that rate. If you expect 5% and save accordingly, you’re going to come up short. Take a look at your guarantees and the illustrations in your policy and you’ll find a similar result. If inflation is 3% a year, and your money grows at somewhere between 1.35% and 4.59%, in real (after-inflation) terms you’re going to have to save more than you ever spend in your entire life. Your portfolio will do none of the heavy lifting.
The dividend rate IS NOT the same as your long-term return. It is absolutely crucial to understand this.
“For example, the guaranteed return in the illustration on the whole life policy I have in front of me from age 30 until retirement time (let’s say age 60), is not as good as you are imagining, and that’s on a 30 year investment!”
Two things, based on the 100+ historical return many Life Insurance companies have paid a dividend every single year including 2 World Wars and the Great Depression and the Great Recession.
Secondly after the capitalization period using your policy as a bank account and paying yourself the “going rate” back you would increase your ROR by a wide margin.
Putting your policy to work can yield tremendous results, not only for purchases but for other investments that come along, like real estate, business ventures and even the stock market or precious metals.
The issue isn’t whether or not they pay a dividend. It’s the overall return on the policy. If you’re willing to accept a relatively low return on a long-term investment, then whole life may be for you. I’m not, so it’s not for me.
The issue isn’t after the “capitalization period.” The issue IS the capitalization period.
I don’t doubt that “putting your policy to work” is a good idea once you have the policy. I’m just very skeptical that buying the policy in the first place is a good idea. I’ve got a different way to buy investments that come along and don’t need an insurance policy to do that.