By Dr. Jim Dahle, WCI Founder
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 a WCI life insurance agent 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 below 6%. 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.
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.
WCI and Rex:
I found this thread because a mother of a physician mentioned your website. I really enjoyed the conversation you have had. I have included a link to my 5 part article on the topic and as I was prepared for most people to bash it, yet some did find it enlightening. If you want to skip to Part 5 to see my final thoughts you can, but for me it boiled down to savings vs investing, as Liz was trying to get at before. Being a dentist, I would not recommend ANY of my assistants do this because there are other more cost effective avenues they need to pursue first. Once you get to a point in your income where you just don’t want to skew everything to the stock market, I believe WL insurance can become a valuable tool. And that is all it is, a tool with a few interesting advantages, but not a tool for the masses once you get past the marketing shenanigans this is wrapped around.
First, it is life insurance, or mortality insurance or whatever semantics you want to use. Getting past that, if you going to look around the curtain and see what rate of return I get (which is what everyone begins to look at), 4-4.5% per year is not bad for a fixed income that has the leverage of a death benefit, something that the traditional bond fund does not have or savings bonds do not have.
You mention insurance companies invest in the same space we do. That is similar to saying Warren Buffett invests like we do. He doesn’t. He has clout and with clout gets juicier returns and greater access to investments that the average person cannot access. But staying on track, if the insurance companies had to invest like us, their investment returns would be low now and then begin to increase again as nominal rates increase again. The returns would lag by, my wild guess, 2-4 years.
WCI, if you think you are going to live on 30% of what you currently make, kudos to you. I don’t think most people would choose that austere of a lifestyle change. And people always say you don’t know what new expenses or the cost of expenses will come up, particularly healthcare, college (and the questionable investment that has become), and the squeeze from having to take care of the aging and the young at the same time. It will be nice, for me and me alone, to have that side fund that I can access with just a signature and pay back at my discretion.
I look forward to your comments about my articles and for continuity’s sake, please comment here to keep the dialogue going.
Doctor Dividend
P.S. Rex, What is your occupation as you seem to be the 2nd most contributor to the message boards? I could not find that answer in my perusal.
1) I didn’t see the link. Did you forget it?
2) I agree that WL is a tool. It may make sense for a few people. But it marketed to far more people than it makes sense for, thus the marketing shenanigans you describe.
3) 4-4.5% may look good now that we’re in a historically low interest rate environment. If interest rates stay like this going forward, the whole life policy will probably perform much closer to the guaranteed scales, which for a policy bought now are ~ 2% (nominal, not real.) Anyone who thinks that is “not a bad return” for any long-term investment is nuts. It’s likely to underperform inflation long-term if that’s all you get out of it. You also cannot necessarily directly compare investing in a whole life policy (which requires you to hold it for 30-50 years to get that return) with a bond or bond fund where you can get your 4-5% for 5 years or 10 years and then move on to something else if you wish. An investment requiring you to stick with it for your entire lifetime to get a decent return ought to return far more than a 5 or 10 year bond IMHO.
4) Do insurance companies have access to investments that individual investors do not? Yes. But so do lots of pension funds, mutual funds, and endowment funds, and their returns, on average, can be pretty disappointing, often times underperforming simple index funds available to all of us through Fidelity, Vanguard, Schwab etc. The vast majority of investments held in the accounts of insurance companies are no different from what can be purchased for less than 10 basis points a year at a low cost mutual fund provider. Take a look if you don’t believe me: https://media.nmfn.com/pdf/2012_midyear_update.pdf
82% bonds, 7% high-yield bonds, 4% private equities (the kind not usually available to the mom and pop investor), 3% public stocks, 4% REITs. 96% of that you can buy at Vanguard for less than 10 basis points a year. I find it interesting that all they report is the asset allocation, and don’t mention the returns. But it isn’t that hard to figure out about what the returns should be once you know the asset allocation.
5) The reason I can live on 30% in retirement of what I make now is because my expenses will go down dramatically, not because I plan on living an austere lifestyle. Take away most of the taxes, some of the charitable contributions, the mortgage interest, the college cost, the costs of raising kids, the commuting expenses, etc etc etc and you may discover the reason why many people retire quite comfortably on an income much less than their peak salary.
6) Yes, it’s always nice to have a “side-fund” you can access at your will and pay back at your discretion. The question isn’t whether it’s nice to have a side-fund, it’s whether it’s better to have a large side fund not in a life insurance policy or a somewhat smaller side fund that is in a life insurance policy.
7) As I recall Rex is a dermatologist.
Thanks for your comments.
WCI:
If you scroll over my name on the first text, it links to the first article I wrote. One other thing, which I am inferring from your posts, but don’t know if it has been explicitly stated. Looking strictly at non-direct recognition policies, as one overfunds the WL policy, minimizing the death benefit, it will actually increase the death benefit over time. When the person who is insured dies, then any loans will directly decrease the death benefit, but the increasing cash value will continue to support sn ever rising death benefit. And in this day and age, we just don’t know why we might need a permanent death benefit. It’s hard to know in my mid 30s what the next 50 years will bring that it may be wise or may not, but I am comfortable with decision and most importantly. know I can fund it without changing my lifestyle.
Hope to just continue the conversation.
I absolutely agree that if you’re going to have a WL policy you should overfund it.
I skimmed through most of your articles. I’ve written other posts on infinite banking; I don’t know if you saw them or not. It seems like we have similar views about the concept. For some reason you’ve concluded it is a good idea for you, which is fine. I don’t think it’s the worst thing someone can do financially. I disagree with you when you say “you just don’t know why we might need a permanent death benefit.” The premiums of a whole life policy are awfully high for something that it seems to me I have a very low probability of needing. If someone wants to do this with a portion of their fixed income portfolio, they can knock themselves out. But putting 50% or more of your portfolio into whole life insurance is a mistake IMHO. My main issue isn’t people like you who seem to get the concept who decide to go ahead and buy a policy. My problem is with these policies being sold to residents and other poor people who can’t even max out their available retirement accounts. I also object when the policies are sold as some kind of financial panacea or alternative financial system. You’re investing $100K a year toward retirement and your policy costs $10-15K a year for 7 years? Fine. I don’t see a problem. You’re investing $6K a year toward retirement and your policy costs $5K a year? I think that’s a problem.
WCI:
I agree with everything you said. I chuckled at the low probability of needing the permanent death benefit. Well, of course, YOU won’t need it – you will be dead!!
I think we are both on the same road in terms of do everything else first that is within the tax system, and then ONLY look at this, as part of the overall asset plan if it even fits for the individual. For me, I think there is a benefit. For you, there is not and I respect both sides of the argument.
But I will get off on a little tangent on why I am using this in my overall plan. I looked at your basic portfolio. It is the Suze Orman stuff. Diversify with broad based categories and ride it out. But when I have dinnner with my grandmother every Monday night, she never mentions how much she has in assets. She always mentions CASH FLOW. How much are expenses and how much do I have coming via SS and dividends and interest? And that is when it hit me. I have been investing all wrong for nearly 20 years.
So I switched to investing in things that have an income stream. Mainly stocks that have dividends and have grown their dividends over time (DGI). Companies we have all heard of: 3M, Coke, Proctor and Gamble, Johnson and Johnson, etc. The dividends can get reinvested in more shares to get more dividends and, if it all works, out, never having to touch the principal even if the market swans dive again, and it will at some point.
Which gets me back to this. Overfunded WL can be another income stream to tap, if and when I need it. If I don’t then my heirs get a nice estate tax-free bonus, if and when I give them ownership over my policy. If I do need it, it is there as a back up. And when i have access to other investment opportunities, I don’t have to go crawling to a bank, waiting for the bean counters to say yes (eventually), when I can get a check in 7-10 days from the cash value built up and pay back the loan on my own time.
It’s just a different philosophy, and if you would want me to write some articles about DGI, I would be happy to. Thanks for the dialogue.
I think a lot of investors, particularly those in retirement living on their cash flow make this mistake. The truth is you shouldn’t be a “capital gains” investor or a “dividend” investor. You should be a total return investor. Consider one of my partners who is always really excited to tell me about the 10% yield on one of his investments. I point out to him that yes, he got 10% in dividends this year, but the value of his investment declined by 8%. So his return is 2%. If he continues to spend 10% a year of an investment that only has a return of 2%, it isn’t going to last very long.
The truth is that dividends and capital gains are completely exchangeable. Want more yield? Sell a few shares. Want a higher net worth? Reinvest the dividends. It’s all fungible.
Yes, overfunded WL can be another income stream to tap. But you can tap it in multiple different ways. You can take the dividend and spend it. You can take the dividend and reinvest it. You can take some loans out on it. You can also surrender it. You can let the dividend pay the premiums. There are lots of options. I’m not sure why you seem to think you have this overwhelming need to crawl to a bank. I’ve “crawled to a bank” 3 times in my life- each time to buy a house. After this one is paid off, I don’t anticipate ever crawling to a bank again. If I need money, I’ll take it from my savings and investments. I prefer to earn interest rather than pay it, whether to a life insurance policy or a bank.
Feel free to submit a guest post about dividend investing if you like. Directions can be found here: https://www.whitecoatinvestor.com/contact/guest-post-policy/
WCI:
This is starting to go way off topic from the initial post, but I don’t know where else to post and I love the discussion, but it goes back to what is your focus for investing? For me, and only me, it is to provide an income stream that grows each passing year faster than inflation in companies that have sustainable advantages or those promising companies that I think will build their “moat.” If you find the strong companies, the total return, the capital gain is secondary to what I invest for now.
Using KO as an example, it’s historical dividend range is between 1 and 3% for the last 50 years. And every year for the last 50 years they have increased the dividend but the yield never seems to get outside of this range. Why? Because if KO was suddenly yielding 4-5%, everyone would buy it boosting the share price back to its historical range. The dividend becomes the tangible proof that the model works and the increased dividend lets the investor know we, the board of directors, are confident about the model for the next 12 months.
When you say you can sell a few shares, once you sell it, it is gone and can never work in your investing army again. And if you sell at the wrong time, you just put more strain on the rest of the dollars. With dividends, they are not part of the irrational world of Mr. Market. They are not subject to the whims of what Stock X is priced at this second but to the fundamentals of the company irregardless of stock price. On seeking alpha, there is an author by the name of David Van Knapp. He is a big proponent of DGI investing, as am I. Between July and August 2011, he wrote a series of 4 articles stress testing the 4% Retirement Rule (which is in the 4 titles). I would recommend reading those and seeing your comments. Besides, newer research is saying you should only withdraw 2.5 – 2.8% if you want a better chance of having at least $1 to your name when you die. Even 4% is starting to bend the limits.
Thanks for the intellectual debate. It’s getting harder these days to have these.
DD
A 2.5% withdrawal rate doesn’t pass the sniff test. Remember the Trinity Study said that a 50/50 portfolio with a 4% withdrawal rate has a 100% chance of lasting 30 years and an 85% chance of lasting 40 years. All of a sudden now you think you should cut that by 38% “just to be sure?” Are you so sure that the next 50-80 years will be so much different than the past? Bernstein makes a pretty good argument that there is only an 80% chance that the United States won’t implode during your lifetime or some other catastrophic scenario (nuclear war etc) so trying to get any higher than that is silly anyway. If I were retiring today in my 60s I sure wouldn’t be only withdrawing 2.5%. 3.5%? Okay, I’ll buy it. 3%….sounding paranoid. 2.5%..silly IMHO. If the SWR over the next 50 years is 2.5% we’re all screwed anyway.
But that is my point. You can have big stable companies that have paid dividends for years, that have raised their dividends for years at a rate equal to or faster than inflation, that has an overall portfolio yield between 3.5-4.5%, and never touch the principal.
Back on point. Let’s make the numbers easy and say you had the ability to get a highly overfunded WL policy at $10,000 per year, after Year 1, what is the guaranteed minimum you would want as cash value to say this may be an “OK investment”? A dollar amount if fine.
Lastly, the one big advantage of the BOY, and this is the “process” that people keep referring to, is that it acts similar to fractional reserve banking. $1 has the ability to do 3 things. Provide a death benefit, compound cash, and borrow against the cash as if you did not (for non-direct recognition policies only). Granted, you pay for this ability but I don’t know of another tool (and again, it is just a tool) that lets you do multiple functions with $1.
DD
Yes, that’s the benefit and 100% of the attraction to the “product”. Nobody is denying that. You have to weigh it against the downsides, of course.
You’re asking me what I would like out of a BOY policy? I’d like it to return 20% a year, be completely guaranteed to never lose principal, to be completely tax-free and completely liquid. We don’t need to discuss what we’d like, we just need to discuss what’s possible and decide if it is something we want. Buying a whole life policy, whether you buy it for the benefit or to Bank On Yourself, is a lifelong commitment. Add on the expenses that drag on returns and that’s your downside.
I love it!!!! I was referred to look at this thread by a dental student who is looking into Infinite Banking. Great comments on both sides. Good investements are definitely something that need to be sought after and people need to be educated. Unfortuntely very few people understand where their money is and what it is doing for them. Infinite Banking is a process and everyone needs to understand its message. It has nothing to do with WL insurance, WL insurance is just a byproduct. One last comment, but its not short. If life insurance was such a terrible place to put money, explain why every major bank keeps about 25% of its most liquid reserves in it? For example Wells Fargo has about 18 Billion dollars in life insurance. Don’t take my word for it go to FDIC.gov, search Bank Data & Statistics, Institution Directory, and enter the bank you want to see under Find Institution. You can generate a report for their Assets & Liabilities and see it for yourself. Keep up the good work, the more you talk about it the more it educates people!
I see this argument in the books and pro-IB sites. I don’t buy it. Just because a bank does something doesn’t mean I should or can. I also disagree that it has “nothing to do with whole life insurance.” That’s just marketing, and dishonest marketing at that. Let the idea stand and fall on its own merits. You don’t need to dress it up.
I’m sorry you have had such an awful experience in the financial industry. Being a doctor you might agree that prescribing solutions before analyzing the problem isn’t a good idea. This is true in finance so I’d refrain from making broad statements. You cannot treat every patient the same way and expect to get the same results. Infinite Banking is about understanding how money works and who controls the banking function in your life. I say again, WL is a byproduct of this process. If Luke Donald hits a bad golf shot I don’t expect him to say it was Taylor Made’s fault. The process that he uses is what makes him a World class golfer not the club. I’m sure when you read through BYOB you saw this clearly, right? Remind us again, how many times you studied this book and attended workshops to learn the process so you can accurately state what is fact and not fact? By the way how much money is spent everyday in marketing MF’s? Try watching John Hancock’s latest series of commercials. Now that’s SPIN.
By the way I’m a CFP, which means I have a code of ethics that I adhere too.
Don’t be afraid to learn new ideas, I did. ‘The dumbest people I know are those who Know It All’ Malcolm Forbes
I’m glad you adhere to a code of ethics. “The Banking Function” in my life consists mostly of depositing checks and transferring money to investing accounts. There are some automatic bill pays too.
If you’re referring to loans, I have two, both of which are at rates lower than those available from whole life insurance policies. I don’t plan on taking any others out.
Which banking function do you think I should use whole life insurance for? It doesn’t seem possible to use it for the first, and it isn’t as good as what I’m doing for the second. That leaves the only thing worth considering it for is investing. In my opinion, it’s an inferior investment. If you want to use it as one of your investments, knock yourself out. It truly doesn’t bother me at all.
As long as we’re ending with quotes designed to be a vague insult, I’ll leave you with this one:
“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” –Upton Sinclair
As I said I don’t advise prescribing solutions without understanding all the problems. It’s easy to give broad brush examples without ever having to sit in front of someone and answer to the results. I also apologize for my quotes being interpreted as insulting. My passion for truth got the better of me. Thanks for your quote. Having a role model like Upton Sinclair shines light (or dark) on perhaps the basis of why this blog was started.
Matthew 7
As a dentist now, I think he would be an idiot to look at this as a student. This is not the first, second, or third option to use for retirement. He needs to get out of the nearly I am guessing $200K in debt and that’s just for dental school. There is a basic game plan and this is way down the list.
WCI and Rex, maybe you can comment on this because I don’t have a good rational answer on why it is ok for banks to have so much life insurance and be considered Tier 1? My guess is they like it just as I am fond of it – a mini version of fractional banking.
I agree. Students (and residents) have no business buying whole life policies. As mentioned above, I’m not a bank and don’t need to impersonate one. I could care less why they feel a need to hold life insurance. The WSJ says they do it to fund bonuses. I don’t need to fund bonuses….
https://online.wsj.com/article/SB124277653430137033.html Google “Banks Use Life Insurance to Fund Bonuses” if the link doesn’t work.
Controlling money shouldn’t be any concern to you…..Really? Read ‘The Creature from Jekyll Island’ and you will understand why it might be in your interest to “impersonate” a bank.
‘If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.’ – Thomas Jefferson
Thanks for stopping by. The Creature from Jekyll Island sounds interesting. Seems like reading it and similar books would lead me to buy gold, not whole life insurance though.
Seriously though, I can’t yet figure out a reason I would want to buy a whole life insurance policy in order to bank on myself. The only banking functions it is good for is saving/investing and borrowing. I suppose if I could borrow at a low rate and then invest in some fairly guaranteed way at a higher rate, that would be a good deal. But the loan interest rates are 2-3% higher than the going rates on guaranteed investments. The loan interest rates are also higher than the rates at which I can borrow elsewhere. Could that relationship change in the future? I suppose it’s possible, but it seems unlikely.
Now, for someone who borrows money all the time, might it be better for that person to borrow from a whole life insurance policy than from a bank? I suppose it’s possible. But those aren’t usually the type of people who can afford a whole life insurance policy above and beyond wiser investments, much less overfund it as is necessary for this to work out.
I think it would be helpful to hear from advocates of BOY/IB/LEAP to hear what they actually do with their policy- I.E. I borrowed $50K out of it to buy a rental property that returns 8% when I’m paying 5% for the loan, or I borrowed $20K to buy a car because the best loan I could get was 8% or whatever. Or I put $10K a year in for 7 years. I broke even in year 5. The cash value now grows at 4.5% a year and I can borrow from it if I like at 6%.
Then the reader can judge for himself if it would be a good idea for him to bank on himself. There’s just so much marketing and spin and hype involved it’s hard to see how someone in decent financial shape would actually benefit from it. Vague ideas like “banks buy life insurance” and “don’t you think controlling money would be important to you” aren’t helpful.
An adage from early modern economic thought regarding borrowing:
‘The man who borrows in order to spend will soon be ruined; if he borrows and uses it as capital to employ productive labor he will be rewarded’.
So if you can borrow cheaply from life insurance policies to fund a business venture or positive NPV project, it might be cheaper funding than other sources for an individual.
It might be.
I recently sat through the Infinite Banking sales pitch. I was hoping that it would be a great financing vehicle for certain loans that I’d like to pay down. Most of the pitch consisted of an effort to prove that WL is a better investment that traditional 401k, even without the paid up addition. The salesman made a number of assumptions that “proved” that I would need to get my 401k to return 12% in order to truly match the 4% returns provided by the WL policy. Needless to say, I disagreed with the assumptions and concluded that I just need to be more prudent and pay down my debt. Much of the sales pitch involves rhetoric similar to what Russ is peddling, but a WL policy cannot replace the world monetary and banking system.
When examining evidence relevant to a given belief, people are inclined to see what they expect to see, and conclude what they expect to conclude. Information that is consistent with our pre-existing beliefs is often accepted at face value, whereas evidence that contradicts them is critically scrutinized and discounted. Our beliefs may thus be less responsive than they should to the implications of new information.”
R. Nelson Nash
In a transaction there is a certain set of assumptions that are used to explain possible future results. All deals have these assumptions and they are an essential aspect of financial planning and analysis. The thing is, those assumptions make critical changes to the information. If the parties involved in a deal disagree on those assumptions then the deal is dead because they are effectively saying that they cannot agree on the information that a model produces.
I agree that if the parties involved disagree nothing happens. Don’t mistaken me by thinking that you or anyone else should do IBC, I just believe that you should understand it. To do that, you must 1. Read Becoming Your Own Banker 2. Attend one of his workshops. After that you can be as critical as you want to, until then you are making assumptions.
Is the concept really that complicated that it can’t be explained in a simple manner? It really requires you to read an entire book and take a weekend course?
No it’s not that complicated at all. It’s the detoxicing from all the garabage we have been taught that takes so long. IBC is a concept that has to be caught, it cannot be taught. How long does it take to learn? I hope a lifetime for me….no response needed.
Re-read what you wrote- sounds a bit cultish, no?
Do any of you have cash and bonds in your investment portfolio?
Ok. Replace a portion of that with WL. Guaranteed, safe returns plus a death benefit. The death benefit will allow you to spend down your nest egg whereas without this, you should not be depleting your nest egg, you should be living off its returns.
Only do this if you are maxing out all other tax deferment options (401k, mortgage int, etc).
Wow Awesome awesome discussions on this post. I learned so much from reading the back and forth between the folks on both sides of the party line. This was so valuable for me to spend my time reading. And thank you for that White Coat Investor. (and if you are wondering, I am leaning towards the in favor of using Whole Life camp as a solid foundational investment platform)
Just read a blog post by one of the most published Austrian Economist on this exact subject. Thought I’d pass it along. https://consultingbyrpm.com/blog/2013/06/my-history-with-the-infinite-banking-concept-ibc.html
“I’m making the article autobiographical because part of the story involves the newly launched IBC Practitioner’s Program, and I can’t fully explain the rationale of the program without describing the situation that I (and the other founders)”
Minor conflict of interest there. 🙂
He says this:
“Part of the problem was that I knew absolutely nothing about whole life insurance; I thought all life insurance was term insurance”
This guy is an expert in Austrian economics? And he hadn’t even heard of cash value life insurance?
Not a lot of new information there. He’s just explaining how the concept works as I did above. I always find it interesting that they compare buy whole life and bank with it to banking with bank. They never seem to compare it to not “banking” i.e. taking out loans at all. I know, at least virtually, lots of millionaires. I don’t know any who became that way by “banking on themselves.” They did it by generating a high income, saving a good chunk of it, and investing wisely in standard investments like stocks, bonds, mutual funds, and real estate.
You are right you probably know more about economics than he does (https://consultingbyrpm.com/resumecv) b/c you took a class in undergrad and eventually became a doctor who writes a blog.
Thought a unbiased third party who only became involved after spending 2 years of research would give others insight to this concept.
By the way there is NO such thing as ‘not “banking”‘. Your money has to reside somewhere. Every time you make a purchase it is financed through cash you stored or money someone else did. Try not accounting for it and you will end up borrowing from someone in the future.
Imagine a ballon that is being inflated one breath at a time. Eventually what will happen to that ballon? Do you ever get the gut feeling that there is just something not right in our financial world today? QE, QE 1, QE 2, etc, etc. For those not as wise as WhiteCoatInvestor the Federal Reserve is pumping money into the economy at record rates (ballon example). People are investing in “standard investments like stocks, bonds, mutual funds, and real estate” with fake money that doesn’t exist from banks who have used fractional reserve banking (see ponzi scheme) to produce it. What do you think is going to happen? It doesn’t take a rocket scientist, or a MD to figure it out.
I think this discussion was had somewhere above in the comments section. Yea, I use a bank for a checking account. Guess what? You can’t do that with an insurance policy. Bank on yourself types like to get out into the weeds on the Federal Reserve etc, and I agree there are concerns there (just as there were concerns when we were on the gold standard), but that’s hardly a good reason to trying to turn a whole life policy into a savings account.
I’m not saying I know more about economics. I’m surprised that such as brilliant economist somehow never came into contact with whole life insurance. I’ve got people knocking down my door trying to sell it to me. It’s hardly a “secret product.”
I’m new to the forum but good info from all sides about WLI. Thanks White Coat for hosting.
Question: Is there a way to see the actual records of someone who successfully stayed with a WLI for lets say 20 years? I want to see his/her statements over a prolonged time horizon to verify dividends, cash value, etc. I have Nash’s books and he gives illustrations from his own portfolio, but I want to see a real person’s WLI statement (s) . This should be that hard should it? For example, is there a Insurance rep who is willing to share their own life insurnace statements. I’m interested in buy WLI but exercising due diligence.
Thanks
p.s. I’m a sleep physician and do not have any ties to any financial sector.
Yes. Take a look at the links in this post:
https://www.whitecoatinvestor.com/8-reasons-to-avoid-whole-life-insurance-and-4-reasons-to-consider-it/
and take a look at this post:
https://www.whitecoatinvestor.com/a-whole-life-insurance-success-story-the-friday-qa-series/
I happened upon this blog as I was researching WL policies. I have a friend whose husband passed and left $400K in WL insurance. The salesman who sold her husband (income <40K/year) the policy has advised her to purchase a single premium WL policy with a death benefit of $1,000,000 (her income is $70K/year and, again, replacing an income of less than 40). I am a nurse with little if any financial expertise (but enough to know Liz is an insurance agent). I owned a $150K UL insurance policy for 25 years. Doing the math: I paid 102.00 per month for a total premium payment of about $30,000. Nothing lost, nothing gained and if I had died my kids would have $150,000. I have about $30,000 in actual cash value so I feel like I got free permanent insurance which was important for me to leave my kids. HOWEVER, this is clearly, to someone with NO financial knowledge – NOT an investment. It has a guaranteed 5% return – again, do the math. All of this having been said, two take away points for everyone:
– a real life illustration of what actually occurred with a permanent policy as requested earlier which showed nothing lost (except the $3000 I would likely have made in an index fund)but certainly NOTHING gained.
– what is happening in the insurance industry selling these products – $400,000 for a guy making less than $40K???? A widow being "advised" to dump the entire amount into a WL policy by the same insurance agent???
Although I appreciate the expertise and research provided – real life speaks louder to those of us just trying to make prudent decisions.
Thanks for sharing your experience. Regarding your own policy, it might feel like nothing lost, but when you consider the time value of money and inflation, and the cost of an equivalent term policy, that certainly was pretty expensive insurance. I don’t know how you can possibly believe it has a guaranteed 5% return. Perhaps going forward it does, but perhaps its only a 5% guaranteed dividend, which is very different. If you’d been getting a 5% return, then your cash value would now be $61K.
Regarding the $400K WL policy for the guy with a $40K income, I agree that it was probably an inappropriate sale. That said, it sure worked out well didn’t it? Anytime someone dies early, life insurance, whether term or permanent, is a great investment!
There are many ways of calculating insurance needs. Income replacement, needs analysis, and human life value are common methods. Let’s say someone earns $40K a year and is 42 years of age and was killed on a fair ground ride due to a defective design. How much would the courts award as compensation? Probably human life value, calculated by assuming increasing income over the remaining working years, so 65 minus 42 is 23 times $40K equals $920K without taking into account rising income. Yes, you can argue the net income would be less but, my point, $400,000 was hardly over insured. And I wouldn’t call the life insurance an investment when, in this case, it worked properly as protection (although, certainly, the death benefit has an IRR). Missing in many of these postings in the fact that, yes, people do die early.
Guardian used to have a single premium policy but has dropped it due to popularity. Yep, people realized they could drop money in and realize a 3% annual gain in cash value and a leveraged death benefit. A single premium policy automatically becomes a MEC unless it was a 1035 exchange, but a MEC is not necessarily a bad thing. All the growth in a MEC contract is tax-deferred until distributions are taken and if not distributions are taken, the death benefit is still tax-free.
I don’t know that I would have suggested dumping the entire proceeds of her husband’s death benefit into a single pay, but if she wishes to provide for her heirs (children), then using some of the proceeds to purchase permanent life insurance is a good idea
I recently was introduced to the Infinite Banking/BOY concept by my insurance agent when I went to purchase some term life for myself and my wife and an individual disability policy for myself. (I’m 32 years old, second year attending). He briefly brought up WL policies, only to promote this IB/BOY concept. He wasn’t pushy at all, but said he felt “honor bound” to make me aware of this possibility. He loaned me a copy of Nelson Nash’s “Becoming Your Own Banker,” asked me to read it and let him know if I was interested, before moving on to sell me the exact term policies I had asked about at the exact same rates seen on term4sale.com.
The Nash book is disappointing frankly, and there is so much fluff: meaningless analogies, Bible verses, and other nonsense in this already very short, large print book, that it is hard for me to believe on the face of it that there is anything of real value here. Nevertheless, the underlying concept was intriguing enough that I am interested in trying to understand it better, and judge it on its own merits, not the superficial qualities of the book. I have since done some additional reading on the internet (here and elsewhere) and basically come to the conclusion that it is probably a poor choice for long term investments such as retirement, for which there are numerous other good options which I have available to me. I have yet to see anyone present a direct comparison of BOY method vs a buy term and invest in a Boglehead-style portfolio of low-cost index funds, appropriate asset allocation over time, healthy combination of Roth and non-Roth, in tax-sheltered accounts. Some would argue that such a comparison is apples to oranges because of the different risk profiles of the 2 investments, but if you’re considering the long-term nature of retirement savings, there is an enormous amount of historical data to suggest that the market is predictably cyclic and over the time spans of 20+ years, you can reasonably reliably count on pretty excellent returns. I don’t consider it particularly risky, at least at this stage in my life.
However, I remain somewhat allured by the prospect of using such a vehicle for shorter term savings that I might otherwise just have to use a savings account. First of all, I want to challenge you on what seems to be a common misconception in arguments against IB/BOY which your provide above (if this was addressed in the comments above and I missed it, I apologize):
“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.”
This is simply not true, it is not a wash. Please run the amortization calculations and compound interest calculations for yourself. If I take a $5,000/60month loan at 5% interest, the total interest I would pay is $661.60. However, 5% rate of return on $5000 of cash-value compounding annually would earn me $1381.41; a net gain of $719.81. This is obviously because the principal in the loan goes down each year (and thus the amount of interest paid), but the principal in the account goes up (with more earnings each year).
Now as you point out, it’s conceivable that the rates may not be equal to each other, and might even be upside down at times (though how the insurance company could justify paying me a dividend that is less than the prevailing base interest rate is a bit mysterious to me), the point is that even if they are numerically equal interest rates, you still come out ahead. In fact, the interest rate can even be higher than the return rate, and you could conceivably come out ahead or break even.
Lastly, while I do fundamentally agree with you that paying cash and financing almost nothing is the way to go in life, I think you are underplaying the opportunity costs of saving for items that generally cannot be purchased out of just 1 or 2 months’ paychecks (at least not by me, if you’re trying to save for retirement, pay back student loans, save for kids’ college, etc). There are a few relatively large, recurring or perpetual expenses that recur every few years and no matter how frugally you live, you will certainly have to face. These include automobile purchases, major home repairs or renovations, or things that you want including perhaps a very long vacation. If I want to do a home remodel, there seems to be a real opportunity cost to gradually over a few years accumulating $20,000 in my savings account earning 1% if I could have that money in a (nearly) 100% liquid account earning 4-5%, and would continue to earn that even after I spent the money on what I was saving for. Where am I going wrong here?
I don’t think you’re going wrong. I don’t see this as some scam or stupid thing to do with your money, it just isn’t anywhere near as good as it’s promoters and marketers would like you to believe. Yes, it’s better to earn 5% than 1%, but you’ve still got to buy an insurance contract and hold it your whole life. That puts a certain amount of drag on returns.
Matt:
I will suggest going to my 5 part series on seeking alpha.
https://seekingalpha.com/article/964141-could-whole-life-insurance-be-your-fixed-income-allocation
It is unbiased and gives the downsides in Part 5. I am in healthcare – I don’t sell insurance and yes, it is a sell job. But it can be useful. If you have other commitments that stresses you financially, BOY is not for you. Period. If you have excess cash, then it may be for you. It works for my needs and my goals of what I am looking for in my excess cash.
Best of luck.
I just decided to purchase a WL policy. I’ve maxed out my 401K so with the residucal income I’m going to see where this WL leads me.
Will keep everyone updated if WL turns out to be a scam. I’m hoping it doesn’t.
The best investment advice is to pick wisely when getting married and stay married. The next best thing is investing in yourself and the businesses you own and control. In my 10 years in the financial world I have yet to meet someone who has made a fortune investing in the market. The Infinite Banking Concept is not an investment it’s a personal monetary process. Those I have met and seen personally make fortunes have done so by taking advantage of opportunities. Opportunities can only be taken advantage of when one possesses money and the access to it. This is the true benefit for those looking to invest money. That is they create a Warehouse for their capital prior to deploying it into a worthwhile venture. Those investing in the market will recieve whatever profits are left but will have to pass on all other opportunities due to their lack of access to real capital. Any arguments to the contrary are bogus. I have seen the markets go up and go down and people do not sell on either side and cannot sell if their money is locked up in Qualified Plans. I have 9 WL policies and I’m perfectly ok earning the 3-4% return within them which by the way is is net of taxes, fees, is creditor proof, liquid, and they will through a death benefit in down the road when I die so my heirs want have to reinvent the wheel. Which by the way we all will die and 99% of us long after we have let our Cheap term policies go. There is a Seen to everything we do financially but the Unseen is often much greater! To see what I’m talking about go to http://www.fireyourbankertoday.com
You NEVER met someone who has made “a fortune” investing in the market? I know hundreds. Although perhaps you have a different version of “fortune” than I do. I certainly know plenty of millionaires who never invested in anything but boring old stocks and bonds.
Thanks for the details about that 100% mortality rate on life. Wasn’t sure about that. 🙂
I disagree that money is “locked up” in qualified plans. Most worthwhile investments can be invested in with qualified money and it certainly isn’t difficult to liquidate a typical mutual fund portfolio in order to “take advantage of an opportunity.” I’m surprised that 10 years in the financial world didn’t teach you how to do that.
I’m glad you’re happy with your nine whole life policies. I sincerely hope your financial/investing strategy works out great for you.
WCI, I am a physician, 52 with stock, bonds, mutual funds investing and derivative trading experience of 30 years. I had taken a small WL with NWM 20 years ago when I was a resident 250K with a separate term 1:2 ratio and dropped term as my assets built up. I kept the WL as the dividend were able to reduce premium without increasing death benefit. I could have kept the level term instead but being fully invested in equity, and not having to pay further WL premiums in future and fully optimized for tax deferred accounts, decided to continue WL. After a long 15 years, finally WL is paying the premium from dividend and extra amounts are funding paid up additions.
I agree with the fact that WL is not optimal for investment, IBD/BOY for short term or for long term due to limited returns as you have beautifully outlined and cash value build up in form of saving vehicle could be better done short term in other forms of saving with pretty much similar risk and less cost/better return and safety of principle. In fact, as NWM (my WL company) outlines, Dividends on WL is basically, % return currently 5%, on (cash value-administrative cost including commissions-mortality expense-cash value increase for the year+premium paid), basically accounted as return of excess premium paid over the similar cost of term and administrative expenses+cash value and due to slow build of cash value from initial years, overall reduces the returns. However, if you want to carry the death benefit even later in the years, when term becomes prohibitively costly or unable to be underwritten/uninsurable risk due to medical condition, is a welcome choice and based on the value of diversification is a choice that I am making for my college bound children also starting this year. Asset diversification even with a small percentage of your assets in fixed income category (WL is basically that with component of death benefit), reduces volatility and returns both. I basically used it to compensate for higher risk portion of portfolio (derivative trading). In this regards, term would have been appropriate in my case with hind sight but no one knows future and there are enough features that help make WL useful in specific situation and for limited circumstances. Overall, I respect excellent blog and discussion by White Coat and his in depth honest opinion.
Yea, if you want a life long death benefit and low, steady returns, then a permanent life insurance policy can provide that.
Thank you for your posts. I believe I have saved quite a bit of money by not buying whole life insurance which was brought to my attention by my ‘financial advisor’.
BTW I like the way Liz presented her argument. She is a very diplomatic financial advisor aka insurance salesperson.
Fascinating summary and comments back and forth. I am an attorney and I have been researching this Bank on Yourself comment for the last several weeks. I’m leaning toward using the concept (either with Whole Life or Indexes Universal Life). Let me first start by saying I think both sides of this debate are somewhat clouded by their inclinations for or against this.
First, the for crowd hurts their credibility by overselling it. One of the worst is the Bank on Yourself author. That book is horrible. A better book in my opinion is The Retirement Miracle by Kelly, although I hate that title.
Second, the against crowd hurts their credibility by holding the LI product to a standard they don’t hold the alternatives. Quoting the historical average return of the S&P 500 is irrelevant for comparing for a few reasons: (a) you don’t get the average return if you start investing in 1963 and withdraw your money in 2012. You get the actual return. Here is a helpful website to get the actual return: https://www.moneychimp.com/features/market_cagr.htm. So, while the average (non-inflation adjusted) return may be 9.5% for that period, the actual (inflation adjusted) return is 5.46%; (b) using the Self Banking concept, unlike leaving that money in an S&P index, you actually have access to your money during those 40+ years via the loan option; (c) if you take the money out as a loan or if it goes to your beneficiaries, it is tax free — not so if you sell your S&P index; and (d) if you access money from your cash value, you still earn return on that money (We all know that if you access 20% of the balance in that S&P investment fund to buy something, you are now only earning that 5.46 inflation-adjusted actual return on the 80% left in the account).
In conclusion, I think the problem most have in considering this concept is they look at it as an investment and then try to test it as an investment. As for me, I am in my early 40s and very healthy. I have $6 million in term insurance. I don’t trust the stock market and I don’t trust the federal government. I believe taxes will be higher when I’m 20, 30, or 40 years older. My Capital Gains tax rate just got changed to 23.8%. That 5.46% historical actual return on the S&P just got smaller. I suspect that will go up and I wouldn’t be surprised if the death tax goes up (or the exclusion goes down). My wife and I are looking to buy our next primary residence in the next 3 months. I’ve already contacted a friend in the insurance industry about sitting down after that happens. I’ll strongly consider Indexed Universal Life or Participating Dividend Whole Life because it allows:
1. getting a higher rate of return on savings
2. creating a tax-deferred (potentially forever) vehicle for saving money and accessing money.
3. creating a nest egg for retirement that does not ever get taxed if structured correctly and that does not have withdrawal requirements or penalties on accessing the money (if I do it through a loan).
4. creating a huge part of my estate that I can pass to my children tax free
5. creating a place to put my money that will not be subject to the wild swings of the market.
6. creating a potential financing source that will be much more lucrative when interest rates go up (and with the way the fed has been printing money, it is only a matter of time before they are going to go up)
That’s my current thought process.
1) There is a better way to get a higher rate of return on your savings- stocks and real estate. If you don’t trust them, that’s fine, but you’ll unfortunately have to accept the lower returns you will inevitably get because of that.
2) It isn’t tax-deferred. Dollars used to pay life insurance premiums are fully-taxed. Very different from a 401(k). If you’ve already maxed out your 401K, DBP, Backdoor Roths, HSA, 529s etc, that’s one thing. If you’re buying life insurance instead of maxing out retirement accounts, I think that’s a mistake.
3) Yes, tax-free (but not interest free loans) are one of the major benefits of investing in life insurance.
4) Income tax, but not necessarily estate tax free. You do realize that any investment you leave to your children passes income tax free, right? That includes stocks, mutual funds, income producing property etc. It’s called a step-up in basis.
5) The reason you get higher returns in the market is because of the wild swings. If there were an investment with much less volatility and less risk but the same returns, why wouldn’t everyone pull their money out of the market and buy it? It’s because it doesn’t exist. If you want to eliminate risk, you must accept lower returns.
6) As a general rule, the borrowing costs go up with interest rates. I also would not make the assumption that interest rates are definitely going to go up any time soon. Look at Japan for the last 20 or 25 years. Sometimes interest rates don’t go up.
I wrote a post on the myths of whole life insurance. I suggest reading it (and everything else you can find on the subject) before committing to a policy you will need to hold for the rest of your life. You may still want it, and that’s fine, but it’s important that you understand the downsides to it.
1. I wasn’t aware returns in the market or real estate were guaranteed
2. Understood. The tax deferral is like a Roth. Taxed funds are used and then no taxes are ever paid on any gains as long as you keep it for life and access funds through loan.
3. The interest is paid back to the LI company, which is paying interest on the policy funds. As someone else demonstrated above, that is effectively interest free.
4. I’m not expert on taxation, so I googled life insurance and estate tax. Apparently, you can put the policy in a trust to avoid the estate tax issue. But, even if that were not possible, it is a wash as to alternatives when it comes to estate tax.
5. That is why I am considering (a) the additional “return” as not just the dividends or interest, but the interest saved by using the loan possibility and the death benefit itself as a return (just not to me); and (b) indexed universal, which provides a higher return that dividend paying whole life.
6. The borrowing cost going up are at worst a wash if you are paying yourself interest as opposed to a third party and, at best, makes the Self Banking concept even better. I understand the Japan expirement, but would suggest that the worldwide money printing spree is pushing things to a breaking point.
Agreed. That is why I have read three books (the Nash book and the Banking on Yourself book were painful to get through) and am going to be sitting down with my insurance consultant and going to very carefully and in detail go through the numbers. The point of my original post is that it isn’t just about return on investment because of the loan ability, the tax benefit on the loan, and the death benefit, none of which alone make this compelling to even consider. But, put together in one vehicle, it intrigues me a great deal.
There’s no doubt you can do a lot with a permanent life insurance policy. However, I view it as inferior for any possible financial need I have compared to the alternative. If you’re willing to use something less than the best for everything in order to have the flexibility to use it in a lot of different ways, then you’ll probably be happy with your purchase.
I’m surprised to see how much many people value the ability to borrow from the policy to buy stuff. I really don’t find myself needing to borrow at all any more.
If I can get an 8% return on an Indexed UL policy from a A or A- Company when the S&P is 10% or higher in a year and 2% interest and no loss when the S&P is zero or less in a year, plus loan myself money out of an account where the return on my money will still occur as if all my money is still in the account and instead of paying a loan interest rate to a bank, I pay it to my own LI policy, and I have no cap on my annual contributions (like I have now with an IRA or 401(k)) and my kids will not have to pay income tax on the proeeds when I die, that sounds pretty good. Now I just have to sit down with my guy and make sure it is not too good to be true. I already talked to him on the phone and he prefers the whole life approach with a paid up rider (less risky than indexed UL to him), but we’ll get together after my home purchase and I’ll try to find you guys to give you an update on my thinking at that point.
I think you’re missing the point here. I know it SOUNDS good. Most of the upside with none of the downside and all these fun things on the side like asset protection, tax benefits, estate planning benefits etc. However, the devil is in the details. The cap, the participation rate etc. Post a link to the prospectus of your favorite policy and we can talk about the details. The problem is that you give up too much of the return in order to get all the extras like the guarantee, the tax benefits etc.
I don’t have a favorite. Like I said, will meet with my insurance friend in the next 3 months and then I’ll have the information to assess. Thanks.
Read the contract carefully. Good luck with your decision.
Wanted to follow-up on this — I started reading Kelly, The Retirement Miracle again. He does a really good job of laying down the thought-process that leads to valuing the LI concept. Anyway, he has an interesting illustration that reminded me of your comment “Look at Japan for the last 20 or 25 years. Sometimes interest rates don’t go up.” First, he presents the position that taxes are definitely going up in the future considering how out of control our national debt is and that increase has been on steroids under our current President. Second, after noting that many are saying we are going down the Japan road, he takes the Japan market in part of that 25 year period you mention. He looks at the hypothetical $1,000 invested on December 31, 1989. Using a buy and hold strategy, in 2010 that investment would be worth $240.16. Granted, he picks his starting point as the very top of the Nikkei. But I still wonder how much and how long you would have had to invest to reach $1,000 on 12/31/89. He then uses that same time period and those same returns of the Nikkei to show what an Indexed Universal LI policy would have done. Again, it is simplistic because he doesn’t include fees and as you mentioned, the devil is in the details, but it really shows why this is an alternative that many folks are considering — they think their taxes are going to skyrocket in the future and they think the stock market is on the verge of a Japan-like correction that will either languish under the low interest rate environment like the Nikkei has done or it will be even worse if the Fed has to raise rates. I personally think the federal government will eventually take private retirement plans of “the rich” to try to forestall the impending collapse of Social Security (I was going to say bankruptcy, but it is already bankrupt). I was also trying to find a Time article on the dilemma many are facing today who bought whole life in the 80s because of the decline in the interest rate since they purchased the policy, but my google turned this up: https://www.foxbusiness.com/personal-finance/2012/02/22/legally-cutting-out-tax-man-in-retirement/
I couldn’t find the time article, but here is a WSJ piece that talks about the same issue with whole life (which I believe is less of a concern for purchasers now because of the historically low interest rate environment: https://online.wsj.com/news/articles/SB10001424127887324595904578121484233279270
[Ad hominem attack removed.]
The first few comments on here hit it right on the head. If you can’t get it from that then there is no hope.
Companies like Dalbar have already done enough studies to prove that people don’t get very good returns in the market. Whether it’s mutual funds, stocks, or 401k’s and IRA’s it’s all the same. It’s a failing system that very few do well in.
It’s not being scared of the risk, it’s the fact that the risk is met with little to no reward.
The solution to poor investor returns in an environment of good investment returns isn’t to avoid the stock market. It is simply to get the market returns by not shooting yourself in the foot. I don’t find it particularly difficult to follow a reasonable investing plan. Those who do are likely the same people who bail out of their cash value life insurance plans after 5 or 10 years to buy something else. They’re not going to do any better in whole life (or IUL) than they did in the stock market. It’s sad, but there are some people who would do better just putting their money in a savings account at 1%. Would those folks do better in whole life if they stuck with it? Sure. Are those people the target audience of this website? Not even close.
I guess don’t put any comments with facts or they get deleted…
Only last thing I’m going to say is that if you can do better than 8% in the market with no risk then be my guest. But, I don’t think most people, even the best investors, can consistently do that.
Who invests in the market without risk? I have no idea what you’re referring to.
Ad hominem attacks in comments are routinely edited on this website. I find it interesting that they only ever show up on posts about permanent life insurance.