By Dr. Jim Dahle, WCI FounderFrom time to time I get a question about the concept of using a whole life insurance policy to “bank.” This concept has been popularized under the trademarked terms “Infinite Banking®” (IB) and “Bank on Yourself®” (BOY) and prior to that, Lifetime Economic Acceleration Process® (LEAP). I usually refer readers/listeners back to an article I wrote about eight years ago called “A Twist on Whole Life Insurance.”
Honestly, very little has changed about all of this in the last eight years, so, if you are one of the 23 people (including my mother) who were reading this blog back then, you can skip the rest of this article. If this is the first time you have heard of this concept, then read on to get the unbiased truth about it. Today I'm going to cover the seven truths you need to know about “banking” with a whole life policy. But first, a quick explanation of what it is if you have not yet been exposed.
Definition of Infinite Banking/Bank on Yourself
The basic concept behind IB/BOY/LEAP is to get a bunch of cash value into a whole life policy and then, whenever you have a need for cash, you borrow that money against the policy cash value instead of borrowing it from a bank, withdrawing it from your bank account, or selling an investment. When you die, the death benefit is used to pay off the loans, with any remaining death benefit going to the policy beneficiaries (usually your heirs). Instead of having to go to the bank to get a loan, you can simply “borrow” the money from yourself. No matter what your credit score or the purpose of the loan, you can always get that loan from the policy at the terms set up when you bought the policy. Thus you are now “banking on yourself” instead of having to go to a bank. Okay, to be fair you're really “banking with an insurance company” rather than “banking on yourself”, but that concept is not as easy to sell. Why the term “infinite” banking?
The idea is to have your money working in multiple places at once, rather than in a single place. It's a bit like the idea of buying a house with cash, then borrowing against the house and putting the money to work in another investment. If you keep repeating this process “infinitely” you can have your money “working in multiple places at once.” Some people like to talk about the “velocity of money”, which basically means the same thing. In reality, you are just maximizing leverage, which works, but, of course, works both ways.
Frankly, all of these terms are scams, as you will see below. But that does not mean there is nothing worthwhile to this concept once you get past the marketing.
Let's get into seven truths about IB/BOY/LEAP, so you can see through the cloud of half-truths and outright lies surrounding this concept to understand how it really works.
#1 Infinite Banking Requires You to Buy a Whole Life Policy
Step one in IB/BOY/LEAP is to buy a whole life insurance policy. Whole life insurance has a terrible reputation, and for good reason. It is dramatically oversold. According to the Society of Actuaries, approximately 80% of policies sold are surrendered prior to death, which is an abysmal statistic considering it is a policy designed to be held your entire life. When I have polled doctors that have actually purchased whole life insurance, 75% of them regret purchasing the policy. The whole life insurance industry is plagued by overly expensive insurance, massive commissions, shady sales practices, low rates of return, and poorly educated clients and salespeople. But if you want to “Bank on Yourself”, you're going to have to wade into this industry and actually buy whole life insurance. There is no substitute.
Be careful while you're in there. Most agents will not sell you the right kind of whole life policy to do this properly. In fact, many of them will try to sell you something besides a whole life policy, usually some type of universal life policy such as variable universal life or index universal life. Bad idea. If you want to be an “Infinite Banker”, you need a whole life policy. The guarantees inherent in this product are critical to its function. You can borrow against most types of cash value life insurance, but you shouldn't “bank” with them.
As you buy a whole life insurance policy to “bank” with, remember that this is a completely separate section of your financial plan from the life insurance section. You are not buying this policy in order to replace lost income in the event of your death. Buy a big fat term life insurance policy to do that. As you will see below, your “Infinite Banking” policy really is not going to reliably provide this important financial function.
Another problem with the fact that IB/BOY/LEAP relies, at its core, on a whole life policy is that it can make buying a policy problematic for many of those interested in doing so. If you have medical problems that make you more expensive (or impossible) to insure, this is not going to work well for you. Dangerous hobbies such as SCUBA diving, rock climbing, skydiving, or flying also do not mix well with life insurance products. The IB/BOY/LEAP advocates (salespeople?) have a workaround for you—buy the policy on someone else! That may work out fine, since the point of the policy is not the death benefit, but remember that buying a policy on minor children is more expensive than it should be since they are generally underwritten at a “standard” rate rather than a preferred one.
#2 The Policy MUST Be Structured Correctly
Most whole life insurance policies are not structured properly to do “Infinite Banking.” Most policies are structured to do one of two things. Most commonly, policies are structured to maximize the commission to the agent selling it. Cynical? Yes. But it's the truth. The commission on a whole life insurance policy is 50-110% of the first year's premium. Sometimes policies are structured to maximize the death benefit for the premiums paid. This is also a bad thing for an IB/BOY/LEAP policy. The point of an IB/BOY/LEAP policy is NOT the death benefit. It's to allow you to “bank.” So you do not want the policy structured for that purpose. There are three critical aspects of an ideally structured policy:
Paid-Up Additions
With an IB/BOY/LEAP policy, your goal is not to maximize the death benefit per dollar in premium paid. Your goal is to maximize the cash value per dollar in premium paid. The rate of return on the policy is very important. One of the best ways to maximize that factor is to get as much cash as possible into the policy. You want the ratio of premiums to death benefit to be as large as it is legally allowed to be without becoming a Modified Endowment Contract (which prevents the tax-free loans that are the point of the whole system). The best way to improve the rate of return of a policy is to have a relatively small “base policy”, and then put more cash into it with “paid-up additions.” Instead of asking “How little can I put in to get a certain death benefit?” the question becomes “How much can I legally put into the policy?” With more cash in the policy, there is more cash value left after the costs of the death benefit are paid. That leaves more cash for the dividend rate to be applied to each year. An additional benefit of a paid-up addition over a regular premium is that the commission rate is lower (like 3-4% instead of 50-110%) on paid-up additions than the base policy. The less you pay in commission, the higher your rate of return.
The rate of return on your cash value is still going to be negative for a while, like all cash value insurance policies. But instead of breaking even after the typical 10-15 years, using paid-up additions allows you to break even in as little as 3-5 years.
Non-Direct Recognition Loans
This concept is a little harder to wrap your mind around but is still absolutely critical to IB/BOY/LEAP. Some life insurance policies are “direct recognition” while others are “non-direct recognition.” These terms apply to loans against the policy.
Let's say you have a policy with $200K in cash value in it and you decide to borrow $50K from the insurance company against the policy. Like all loans, this loan is tax-free. But it is not interest-free. In fact, it may cost as much as 8%. Most insurance companies only offer “direct recognition” loans. With a direct recognition loan, if you borrow out $50K, the dividend rate applied to the cash value each year only applies to the $150K left in the policy. Seems fair, right? Why should they pay you a dividend on money that is being used elsewhere? However, there are a few insurance companies that offer non-direct recognition loans on their policies. With a non-direct recognition loan, the company still pays the same dividend, whether you have “borrowed the money out” (technically against) the policy or not. Crazy, right? Why would they do that? Who knows? But they do. Often this feature is paired with some less beneficial aspect of the policy, such as a lower dividend rate than you might get from a policy with direct recognition loans.
While there are plenty of magicians in the insurance industry, there is no magic. The companies do not have a source of magic free money, so what they give in one place in the policy must be taken from another place. But if it is taken from a feature you care less about and put into a feature you care more about, that is a good thing for you.
Wash Loans
Just because you maximize the paid-up additions and ensure the policy offers non-direct recognition loans, all is not yet hunky-dory. There is one more critical feature, usually called “wash loans.” While it is great to still have dividends paid on money you have taken out of the policy, you still have to pay interest on that loan. If the dividend rate is 4% and the loan is charging 8%, you're not exactly coming out ahead. Some policies offer “wash loans”, usually starting after a few years.
With a wash loan, your loan interest rate is the same as the dividend rate on the policy. So while you are paying 5% interest on the loan, that interest is completely offset by the 5% dividend on the loan. So in that respect, it acts just like you withdrew the money from a bank account. There is no interest charged on withdrawals, but there is also not interest paid on that money once it is withdrawn. 5%-5% = 0%-0%. Same same. Thus, you are now “banking on yourself.”
Without all three of these factors, this policy simply is not going to work very well for IB/BOY/LEAP.
#3 Most of Those Talking About This Concept Stand to Profit from It
The biggest issue with IB/BOY/LEAP is the people pushing it. Nearly all of them stand to profit from you buying into this concept. They may be selling seminars, books, or online courses, but most commonly they are simply selling whole life insurance, hoping to earn those fat commissions. In fact, there are many insurance agents talking about IB/BOY/LEAP as a feature of whole life who are not actually selling policies with the necessary features to do it! The problem is that those who know the concept best have a massive conflict of interest and generally inflate the benefits of the concept (and the underlying policy). They would have you believe it is a Secret Magic Pathway to Wealth, when in reality all it does is help you earn a bit more interest on your cash in the long run. The amount of hype in the books, courses, and websites is unbelievable and reflects significant misunderstandings even among many of its proponents.
#4 It Allows You to Earn More on Your Cash in the Long Term
The real benefit of IB/BOY/LEAP is that you will probably earn a little more on your cash over the course of your life than you would in a bank account, at the cost of a few years of crummy returns on your money. Seriously, that's it. You would never know it from all the hype. Proponents want you to compare borrowing from life insurance to borrowing from the bank. “Wouldn't it be nice,” they say, “if you could always qualify for a loan to buy your next house, car, RV, or boat?” But that is the wrong comparison. You should not be comparing borrowing against your policy to borrowing from the bank. You should compare borrowing against your policy to withdrawing money from your savings account.
Go back to the beginning. When you have nothing. No money in the bank. No money in investments. No money in cash value life insurance. You are faced with a choice. You can put the money in the bank, you can invest it, or you can buy an IB/BOY/LEAP policy. Let's see what happens when you want to get a boat 10 years from now with each of these options:
Money in Bank
You put a bunch of money in the bank. It grows as the account pays interest. You pay taxes on the interest each year. When it comes time to buy the boat, you withdraw the money and buy the boat. Then you can save some more money and put it back in the banking account to start to earn interest again.
Money in Investments
You invest a bunch of money. It grows over the years with capital gains, dividends, rents, etc. Some of that income is taxed as you go along. When it comes time to buy the boat, you sell the investment and pay taxes on your long term capital gains. Then you can save some more money and buy some more investments.
Money in IB/BOY/LEAP Policy
You buy a policy and stuff as much cash in it as it allows. The cash value not used to pay for insurance and commissions grows over the years at the dividend rate without tax drag. It starts out with negative returns, but hopefully by year 5 or so has broken even and is growing at the dividend rate. When you go to buy the boat, you borrow against the policy tax-free. Then you can save some more money and use it to pay the policy loan. As you pay it back, the money you paid back starts growing again at the dividend rate.
Those all work pretty similarly and you can compare the after-tax rates of return. The fourth option, however, works very differently.
Borrow for the Boat
You do not save any money nor buy any sort of investment for years. Then you want to buy the boat, so you go to the bank. They run your credit and give you a loan. You pay interest on the borrowed money to the bank until the loan is paid off. When it is paid off, you have a nearly worthless boat and no money.
As you can see, that is not anything like the first three options. It is nonsense to somehow equate any of the first three options to that fourth one. So IB/BOY/LEAP really is not about “banking on yourself,” it is simply a different way to invest your money. While it is an inferior way to invest your money for the first 5+ years, eventually it is a better way than just a bank savings account. It is nearly as liquid and safe, and has higher long-term returns. Of course, its returns are nowhere near what you should earn long term in an investment like stocks or real estate, even after tax. So it is not going to be some magic pathway to wealth. But it will help you earn a little more on your cash long-term.
#5 The Other Benefits
Of course, there are other benefits to any whole life insurance policy. For example, there is the death benefit. While you are trying to minimize the ratio of premium to death benefit, you cannot have a policy with zero death benefit. Nor can you “borrow out” the entire death benefit. So there will always be at least a little death benefit for your favorite heirs or charities. In addition, about half of the states provide significant asset protection to the cash value in life insurance policies. So in the (admittedly incredibly unlikely) event that you are successfully sued above policy limits and have to declare bankruptcy, you may get to keep any cash value you have not already borrowed out.
#6 It Is Not Magic
Unfortunately, those are really the only benefits. Everything else is hype or even scam. IB/BOY/LEAP is not a magic pathway to wealth. In fact, it can even retard your wealth-building if it keeps you from investing in assets/investments with higher returns. If you are skipping 401(k) or Roth IRA contributions in order to fund this policy, you are almost surely coming out behind. This does not replace real estate investing; it is simply a way to save up to buy the real estate that will actually build your wealth. Some people selling these policies argue that you are not interrupting compound interest if you borrow from your policy rather than withdraw from your bank account. That is not the case. It interrupts it in exactly the same way. The money you borrow out earns nothing (at best—if you do not have a wash loan, it may even be costing you). If you are the type to keep a lot of cash around (perhaps while waiting to find your next real estate deal), this is simply a way to earn 3-5% instead of 1-2% on it, in the long run. That's it. Not so sexy now is it?
#7 It Is Not Revolutionary
A lot of the people that buy into this concept also buy into conspiracy theories about the world, its governments, and its banking system. IB/BOY/LEAP is positioned as a way to somehow avoid the world's financial system as if the world's largest insurance companies were not part of its financial system. Your money is still denominated in dollars, subject to inflation. It is invested in the general fund of the insurance company, which primarily invests in bonds such as US treasury bonds. No magic. No revolution. You get a little higher interest rate on your cash (after the first few years) and maybe some asset protection. That's it. Like your investments, your life insurance should be boring. If it is making you excited and you feel a need to go proselyte it to your friends and family, you are likely mistakenly buying into the scammier aspects of the concept.
Infinite Banking/Bank on Yourself is not a scam, but the way it is sold frequently feels scammy. It is not a magic way to build wealth but may help you earn a little higher rate of return on your invested cash in the long run and provide a bit of asset protection you probably don't need.
What do you think? Do you Bank on Yourself? Are you an Infinite Banker? What has your experience been like?
I am always surprised when people say that it is wrong that you do not get the cash value AND the death benefit but “only” the death benefit when you die.
I mean this is the way whole life policies are ALWAYS engineered. You have a whole bunch mini one year term policies inside and as you age the cost of one year term per $1,000 of death benefit increases exponentially. Which is why term policies cannot be renewed (at exactly the time you are most likely to die meaning only 2% of term policies actually pay out) and which is why VUL or even IUL policies usually collapse when the person is in their 70s.
With Whole Life the idea is to engineer the policy so that the cash value is equal to the death benefit at a certain age (say 100 or 120). So that when the cash value is say 90% of the death benefit at say age 80 you are only buying expensive one year term insurance for an 80 year old for 10% of the death benefit. Which is why the premiums can stay level.
So of course you would not get your cash value AND your death benefit. That would be like expecting to sell your house and get the full cash price AND get your mortgage paid off.
It’s neither right nor wrong, it’s just the way it is. And unfortunately, some people don’t understand that when they buy a whole life policy. They hear that it’s a life insurance policy AND an investment so they assume there are two pots of money. In reality, it’s a life insurance policy OR an investment in whatever combination you want. Just one pot of money. It’s just financial illiteracy, but it’s tough because confusing this point is to the advantage of those who sell these policies for a fat commission.
Well said. Thank you sir.
First, I will apologize for the agent or companies that led you astray on what infinite banking actually is. I will fault you, as well as those you have interacted with to research this topic for not understanding the concept and how to use it.
The truth is, you do not need to use a whole life policy for infinite banking.
The truth is, that when a policy is written by an agent that actually has the best interest of the client in mind, the agent does NOT receive the commission percentage you have talked about when the policy is issued. (I also think that it is important to note when you are talking about commissions an agent gets and how unfair you think it is… do you say the same for a real estate agent with their one-and-done sale? )
The truth is that infinite banking is done correctly, designed with an agent that understands it working to help a client create wealth and eliminate debt, it is a long term relationship between the agent and client this is not a one and done sale, there is coaching, there is education, there is support.
The truth is infinite banking can and does provide tax-free income for the client, for as long as they keep the policies active, simply meaning that they are making their premium payments.
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Thanks for sharing your opinion.
No, I don’t like paying realtors big fat commissions either. But at least I get a product I need out of the transaction.
It is a shame that you don’t do the research to better understand life insurance products and the fact that you actually do need what they offer. I recommend talking to someone that actually knows and understands life insurance as a financial product.
Every time I read this post, and the comments it gets I am amazed, overall at the minimum education and understanding many have not just about life insurance as a whole, but the concept of infinite banking and how it works. I will leave aside all comments about the commission made by agents… and I won’t debate the reason many get into the insurance world. Though I would not knock any of them that “do this for a living,” when you do something for a living, generally speaking you should have a deeper understanding of the industry that you speak about.
Now, I will try to address in order the issues with the comment from the Deacon.
0 – you are incorrect to state that insurance is not an investment, when it is. Is term insurance an investment? No that is a transfer of risk. It is cheap, most people can get and generally speaking it is used to cover expenses when the primary bread winner dies. Cash value life insurance is an investment and your money grows in that product, depending on the carrier you have, just as it does in any other investment. It is impacted by the market and the portfolio of the company as well as by your premium payment. AND can be significantly impacted by the way your agent writes that policy.
1 – Here I agree, most insurance agents fall short on explaining life insurance products to clients. There are multiple reasons why this happens. To get a license you do not need to understand the variations every company offers on products. Whole life, Universal Life, Final Expense, Term, etc. You need to understand the differences in those policies but not that nuances of each company.
Ideally you are going to learn the nuances and variations of each product based on the carrier you are going to represent. The fact, most don’t. They pick the products they like best or are most comfortable presenting and use the literature supplied by the company to acquire the “new business” that is need to remain an agent and grow their book of business. Again, everything that goes along with this is dependent of whether the agent is captive or not and the guidelines each carrier has.
The focus isn’t really on learning the products, it is on selling the products.
2 – You have “calculated” how premiums are determined and what you are paying for completely INCORRECTLY. The value of a human life is determined by a number of calculations, an actuary then takes a look at you as an individual based on your age, your sex and medical history what RISK you pose to the company. The fact that a person’s premium at 20 is lower than it will be at 30 isn’t because you are less likely to die in your twenties. The premium is lower because overall you are healthier and have a longer life expectancy than you do at 30.
Now it’s important that you understand how cash value is affected by the way a policy is written. 99% of insurance agents write a policy and get paid their commission once the first premium is paid. The amount an agent gets depends on the terms of the contract they have with the company AND whether or not they have used a balance sheet rider (not all companies offer this rider) then they are cut a commission check.
How does this impact your cash value? Generally, it “stalls” the accumulation of value in your contract until about year 3. The reason is that the insurance company has to pay for you to have a policy and then for them to maintain the policy. All those fees are taken care of in the first 12 to 24 months. Then in year three, after all costs of that policy are covered and recouped, you the insured begin to build cash value.
It’s funny to me to hear you complain about this structure, though you don’t understand it and I am willing to bet you have a mortgage where the bank is holding you hostage and you don’t even know it.
I also want to point out that depending on the terms of your cash value policy, the death benefit paid to your beneficiary is not taxed.
3 – what is enough or too much insurance? It depends on who you are, where you are in life and what you are using the insurance for. Insurance is not just about the death benefit. You need to understand that right now.
4 – using the money in your policy. Again, this is going to depend on the carrier and the way the policy was written as well as the type of insurance policy you have. You should never borrow more than 95% of the cash value of your policy. You should definitely put that money back if you can. If you can’t then as long as you are making your premium payments that policy will continue to grow, meaning your death benefit will continue to grow and yes if you die then the loan is covered by the death benefit and what ever is left goes to the beneficiary.
Incidentally that money you are borrowing from your policy, because it is a loan, is not taxable by the IRS.
5 – I seriously have to shake my head at this entire comment. What would you use it for?! The exact same things you would go get a loan from the bank for! Except, you aren’t paying a bank interest, you aren’t paying back an excessive amount of money above what you borrowed. WHO wouldn’t want to go buy a car and NOT have to qualify for a car loan and then pay thousands of dollars more than what they borrowed, not even factoring in the fact that the car depreciates in value. You have kids and you want to send them to college, IMAGINE them and you NOT going into debt so that they can better themselves and go after the degree they want.
6 – Your poor decision making skills should not be the reason that you tell someone else not to get a policy. If anything it should motivate you to be an advocate for people when they are younger to take a look at insurance products and not only how they can help when they die, but how it can benefit them while they are alive.
7 – Do not confuse a policy that has living benefits… with being able to use the cash accumulated in your policy. The fact is that yes, you can do what you want with the money.
Deacon, I would seriously encourage you and anyone else reading this article and comments that are equally misinformed to attend one of our educational webinars.
I rarely comment on blogs but I had to go out of my way to comment on this. You did a fantastic job explaining this. I’ve been a financial advisor for over a decade and I keep running into these “so-called” strategies but never had the language to overcome them. They are marketed very well and some agents are highly trained to overcome any objection that comes their way!
Thanks for your kind words.
I’ve heard ppl say the one use for whole life insurance is in estate planning to cover the taxes after an estate freeze. I would’ve thought that just having your money invested in stocks or real estate would far outweigh any benefit even with the tax advantage…. or couldn’t you just buy a term to 100 to ensure the taxes are covered for the beneficiaries?
A term to 100 would be pretty rare as a solution. If one needs a payout at 100, whole life would do that. But I would expect higher returns out of stocks.
Thank you for this detailed explanation! Sometimes it’s obvious something is a scam, but it’s hard to argue against it without knowing how it actually works, so this is very appreciated!
I wouldn’t call it a scam, just oversold.
I’m currently looking a program called “Crash Proof Retirement, founder Phillip Cannella out of King Of Prussia.
This Program, Bank on yourself seems identical. Do anyone have any dealings with these companies???
Tanks
Never heard of the first but it all gets repackaged up under a new name every few years.
You asked the question if you are doing it and how is it working out. Yes I’m doing it and so far it is working terrifically. My need is I needed more short term capital losses / interest expenses to offset short term capital gains. Short positions including short options are always short term capital gains. Borrowing money out of my investment account and putting it in a tax advantaged life insurance policy is allowing me to save a lot on taxes. The fact that the insurance policy after expenses is higher interest than the margin loan interest rate is just extra gravy.
I find it odd that Bogleheads scream about 60bp funds vs. 5bp funds when it comes to active / passive, but don’t care about 150-250bp when it comes to returns on fixed income. Something like Vanguard Wellsley over the long haul does a great job in providing lots of inflation adjusted income. Were it not for the huge tax drag there would be no reason to bother with insurance. But getting rid of the tax drag is worth a lot. Insurance makes that possible.
Just to editorialize a bit. At the core Whole life (properly constructed) beats savings accounts and money markets as you mentioned. IUL (you can do similar things to cut expenses) crushes taxable bond accounts. VUL (again term blend to cut expenses some) beats a 60/40 portfolio held taxably. VUL is a terrific place to hold low-correlating tax inefficient assets if you pick one with lots of sub accounts. Stocks are pretty efficient held taxably with no shield because of the long term capital gains rules and the fact most dividends are qualified. Other assets not so much. Absolutely holding a short term bond fund inside a Roth will beat whole life, holding Vanguard Wellsley inside a Roth will crush IUL, holding 80/20 in a Roth beats a VUL. If the government allowed unlimited Roth contributions there would be no need to bother with insurance. But they don’t.
Now I totally disagree you can’t use IUL or even VUL or infinite banking though I do agree the purists would be on your side there. You can safely borrow out about 90% of a WL policy. You can safely borrow out about 80% of an IUL policy if you are using indexed options. For a VUL this shouldn’t be above 35% if you are mostly stock. But in both cases you can derisk. The IUL you can push up to 87% if you use the fixed fund inside the IUL. For a VUL if you are holding a 60% stable value, 40% short term corporates you can be at 90% borrowed out. You can adjust the same way you would when using margin in a brokerage account except you aren’t constantly tripped up by trying to avoid taxes. The more leveraged you are using with insurance the more you need to derisk the assets you are holding just like in any other investment. I’ve held spreads between 2 day and 90 day secured debt at 450::1 leverage (though I had other assets in the account so it was more like 90::1). I wouldn’t hold stocks at 2.5::1.
Wait. You own WL, IUL, and VUL? Do you sell this stuff for a living?
No I own an IUL (Allianz). I shopped all the options thoroughly before buying. Took over 6 mo, about 300 hrs of work to really understand these products enough to do a serious comparison. But the difference between getting it right and getting it wrong I’m still making good money on knowing. I saved about $150k in past/future fees by knowing how Alliantz structured their commissions.
Plus I like talking about investing related topics, I suspect we share that. I might be a counter-example of “sold not bought”. I definitely bought. I sought out reputable firms who structured the policies the way I would want and then asked (or read on my own) about every line on every page of the illustration until I made sure I understood the details of why they were doing what they were doing and what the alternatives were.
Why I looked at all 3 options in such details. I have some health problems and I vape (haven’t smoked in decades) so my underwriting was messy. I finally found an agent/insurance company pair to get what I considered fair underwriting. If I didn’t have the health problems I would have gone Nationwide’s no load VUL or Ameritas no load (much more limited fund selection but lower fees) VUL.
But I have to say that since buying I am loving all the “gimmicks” in the IUL. I might very well have been wrong had I picked “what I wanted”. In terms of the gimmicks, the acturial team and derivatives team Alliantz is very competent. The more I’ve looked the more I’ve noticed how well the details are constructed. They really do attempt to provide win-win devices i.e. services that make them the same or more profit while giving me more portfolio options (which usually translate to return). Though I will admit some of the gimmicks are more like them essentially offering you a dollar, 4 quarters or 20 nickles which is annoying.
Another example… the lifetime guaranteed participating loan rate (equivelent of non-direct recognition) is 5%, a bit lower than say Mass Mutual, NYLife for whole (since you know whole better) even at these rates. But if any time in the next 40 years interest rates skyrocket… Huge potential subsidy and a terrific source of risk reduction to have a contractually guaranteed 5% while my tax free money could be earning like gangbusters in a high interest rate environment.
Though on top of the gimmicks there are some things in the policy there is just no way I’m not being subsidized, they simply can’t be that good. For example Oct last year they had a 13% SP500 cap. Fair market was 10.7%. They have their own trading desk so across the board I save about 19bp on options vs. the insurance companies going through an investment bank. That gets them to say 11.1%, how did they get to 13%? That must have been at least another 60bp in pure subsidy.
Etc… I do agree that if I had tons of medical school debt this would have been a stupid purchase despite how happy I am with it.
300 hours? If your time is worth $300 an hour that’s $90K. They would have to be pretty large policies for there to even potentially be enough of a benefit to justify that sort of investment.
At any rate, thanks for sharing your experience.
Medium large. $850k min commit over 7 years. $2025k max over 10 years. Did the full $200k/yr. One of the key needs as I mentioned was a viable fixed income strategy to handle sequencing risk going into retirement. VUL I would have gone 2-2.5x as large because you can risk up and risk down with the loan balance.
FWIW I spent about that much time when I bought a house. And I spent at least double that much time understanding cap weighting vs. fundamental weighting vs. factor weighting for my core stock allocation as various products come out.
Don’t even want to talk about how much time I spent decades ago learning various active managers back when ETFs were on the fringe.
FWIW my understanding is the typical advisor (AUM/fee based “advisors” who are commission based) policy runs $100k to $250k / yr. For younger more self directed infinite bankers $50k / yr. Of course larger ones like $6m / yr for the ultra wealthy who need to get assets out of their estate fast exist.
What’s meant by common really depends on your perspective and where you draw the line. No question the median permanent insurance sold are burial policies with a death benefit around $20k.
Wait wait wait. You make enough money to buy a $200K per year life insurance policy and you’re worried about sequence of returns risk? Really? Presumably this is a relatively small part of your portfolio. So you’re saving what, $500K-$1 million a year. I can’t imagine you’re going to retire with less than $10-20 million. You must spend an awful lot to worry about SORR with a nest egg like that.
No not that rich. I was pulling from existing funds. Remember you have to plan many years in advance with insurance. Anything less than a 4-pay was IMHO a huge waste. I aimed at a 7-pay with 10-pay max (as above). Originally the design was for going into retirement. I wanted to be 75/25 in early retirement erring on the side of more bonds (i.e. being able to be 65/35 was ok, being forced to be 85/15 was not). I could always do a wash loan into stocks if I wanted to up my allocation without bonds, though that money still counts towards CVAT, policy expenses, so I can’t go too far over what I will need.
Since I don’t need to derisk until I have a fixed retirement date I was just margining stock to buy insurance. I picked a broker with good margin rates). I could always borrow out most of the insurance to meet a margin call and again guaranteed rates on the insurance side so guaranteed break even at worst. Though nice after tax arbitrage was the norm since margin loans are deductible.
Again I do a lot of short puts in place of long stock which isn’t relevant to the insurance discussion so I’m oversimplifying a bit. The goal was to have a 120% stock, 20% insurance, -40% cash portfolio prior to fixed retirement date. When I set a date I sell stock to pay margin and the taxes on sale of stock and I’d be just about 75/25. I also had some tax advantaged money I can move freely to adjust asset allocation, though not much in those (about $500k).
I think I’m going to miss my goal for allocation a bit but on a good way, stocks did better than my conservative estimate. But that also means my draw percentage is lower. Since SORR is an exponential function of draw percentage that’s fine.
In terms of spending. I don’t know, I’m better at investing, which is just math, than any particular strong desires about what to spend the money on. The idea of spending decades beating up golf balls sounds more like a punishment than a reward. I can see boosting my standard of living, say double, but not much beyond that. I might be wrong though. So I’ll probably be a degenerate for a year spend a lot and get the lazy retirement out of my system. Then work for a charity for free or way too low salary till I’m much older doing something useful but enjoying the freedom of not having to care about money.
Lots of complexity. Hope it ends up being worth it for you.
Taxable investing is more complex than tax free. Income investing is a lot more complex than growth investing: the math that tends to pull results closer together on growth (example: DCA, mean reversion) causes divergence on safe draw rates.
While insurance is complex the alternatives strike me as worse. Trying to balance out the diversification benefits of stuff like managed futures, covered call funds (ironically very close to the other side for IUL) with their extraordinary levels of tax inefficiency is not an early task.
Anyway thanks for the polite conversation and knowledgeable critique.
Not a big fan of managed futures or covered calls either.
Most people worry way too much about the decumulation stage. Do the accumulation stage right and you don’t have to optimize much in decumulation.
Agree it is all a function of the draw percentage. At 2.5% nothing to discuss at all, the correct play looks just like accumulation. At 7.5% is a series of complex and risky choices. The portfolio probably shouldn’t look anything like accumulation. Not trying to start a fight but IMHO Boglehead literature tends to skip the issue of depletion by just assuming the problem will be simple. Up the draw and 3 fund does terribly.
I don’t disagree. As you push the 4-6% envelope, there is more and more of a role for insurance products, even if they’re lousy in accumulation.
I do however think the problem is very simple for many/most because they don’t live that long or have dramatically oversaved. Too many people unnecessarily fear decumulation.
I think we know different people. I know a lot of people who have dramatically oversaved in which case a SPIA or similar can give them “permission to spend” anything like what their savings would support. I know a lot of people who have dramatically undersaved that are having to work beyond when they wanted to. And I agree this may be less common among doctors, but I do know plenty of doctors in this boat. Even though I’m personally past the all clear point I have friends that won’t get there.
IMHO life insurance is a nice tool because you can (via loans) pull money in and out. For many people money in a 401k is effectively destroyed for decades. They often feel poorer than they are because they are illiquid. While the “put it in there and forget about it” is great for savings it also has the effect of discouraging savings. I don’t know what happens in an alternative world where people make heavy use of insurance and borrow in and out. I suspect it would be worse as their policy loans end up diminishing their effective savings. OTOH it might make a difference for the people who feel too poor to save because the 401k isn’t seen as being available even for emergency liquidity.
“Permission to spend” indicates a psychological or behavioral problem. I’m not sure an insurance product is the answer to that but hey, whatever, for those folks. It’s their money and if it’s easier for them to spend it after running it through an insurance wrapper, they can knock themselves out. I find a SPIA is a lot more useful on the undersaving side to maximize what can be spent without having to worry about running out.
“Nice tool” that causes people to have half or less as much as they’d otherwise have due to the low returns? Doesn’t seem very nice to do that!
Not sure why anyone would view a 401(k) as illiquid, especially after age 55. I mean, illiquid compared to what? You can have the money in your checking account in 24 hours.
I’ve been re-reading this summary of Infinite Banking for years—since the original 2012 article, I think. Finally decided to drop a line to say thank you! It has been an invaluable resource over the years to remind myself why there is nothing magical about whole life insurance.
My dad is a Nelson Nash disciple and has been selling Infinite Banking since 2010. He tries to sell it to me every time I see him. Every holiday, every family gathering, without fail. That’s why I’m here at your site, once again, on the day after Thanksgiving, reminding myself why this is something I would never do.
Thank you so much for this. And see you next year!
Hey, if you understand it and still want it, go for it. It’s not a scam. It’s just not magic like its proponents would have you believe. You’re trading poor short term returns and some hassles for probably a little higher long term return on your cash.
I recently purchased an IUL from
National Life Group. This was a small IUL policy that I’m paying $100 per month for with a small death benefit of $150k. This is in addition to term life insurance that I have in place for $x million. It’s a FlexLife product with several built-in riders that offer accelerated death benefits in case you get terminally ill, critically injured, etc…the rare unexpected life-events. You can access your cash value via loans from the policy (currently around 5%) while keeping the original principal cash value fully invested in one of the available investment indexes (S&P 500, US Pacesetter). Some of their indexes offer a 0% floor protection and participation rates in excess of 200% with no caps.
I am not a huge fan of buying life insurance products as an “investment”. But I do view owning an IUL (has to be the correct structured product etc) paired with Term as a valuable tool in an overall asset protection strategy, especially for a family with children.
I think that’s one thing that doesn’t get emphasized enough here – that for those looking to buy these whole
Life type products for the death benefits and accelerated death benefit type riders, along with the built in ability to tax efficiently borrow against the cash value, and not exclusively as an investment, it can be a worthwhile tool in the broader scheme of your strategy and goals for wealth and asset management. Will you be Ok without one and relying solely on term life insurance and traditional brokerage investments? Yes probably. But I think adding it as another tool in the financial chest of tools is worth the built in fees and cost inefficiencies. You just need to be mindful that you’re paying for a life insurance death benefit that has other tangible benefits packaged in. Not an investment.
Glad you like what you bought. I think most WCIers can spend $100 a month on whatever they want and be fine. There are far worse things to spend $100 a month on.
But if someone wanted to put real money toward one of these things, I think they better be real sure about what they’re buying and that they actually want it. Most of your post sounds like it was written by a salesperson. I mean really….the asset protection benefits on your policy? How much cash value do you have in it, $5K? If someone wants to make a serious asset protection play it’s going to involve a whole lot more than $100 a month.
Most of these are garbage sold inappropriately to people who don’t understand how they work. No surprise that once they do they just want out.
Hey there. Not written by a salesperson at all and I didn’t even run a spellcheck on it! Yes it’s a de minimis $100 per month asset/estate protection tool for me.
After about 18 months it has about $1,000 of cash value. And I am very cognizant that I’m paying life insurance fees and expenses relative to what I could earn in the stock market on the same $100 per month, but it gives me an additional $150,000 of death benefit for my family so I recognize that I’m “paying fees” in exchange for the death protection benefits. I am not here to advocate for cash value life insurance products as “investments”. Although some life insurance salespeople will do that which is unfortunate.
But I do think you are glossing over the fact that you are paying fees in exchange for a death benefit and associated riders which can be extremely helpful for a family if a main breadwinner died or became chronically ill.
If you bought an IUL and 2 weeks later passed away or became chronically ill etc and got a accelerated death benefit rider or death benefit, the insurance company would have taken some fees off your $100 per month (or whatever more significant amount you may be buying etc) but your family/estate would get signicant financial payout and support because you bought the IUL/Life insurance product.
Ultimately, if you are cognizant it’s not an investment but rather an estate planning tool I think it’s a very important tool in the broader asset/investment toolkit. Especially if you have a family and many people dependent on you as a breadwinner for the family. In that respect I believe it serves a role but has to be properly allocated and thoughtfully considered in the broader picture.
The problem is a $100/month, $150K IUL is neither insurance not an investment. If you need life insurance, surely you need more than $150K. If you need an investment, surely you need more than $100/month. This thing is just a sparkly toy in your financial closet.
So blow it up to full size and see if it still makes sense. It probably doesn’t, right? So if it isn’t smart to do with $4,000 a month and a $4 million benefit, then it’s probably not smart to do with $100/$150K either.
Why aren’t you buying more if you think it’s awesome?
It is insurance as it has death benefits. It’s not an investment.
I used the IUL to minimally supplement to my term – as a strategy. Most of my life insurance is term, just a small % (about 5%) is an IUL.
I view it as a strategy to diversify across life insurance kind of like allocating/weighting in stocks / in a portfolio.
I agree it is not a good idea to blow it up which is why I weighed more heavily toward term. Similar idea when you structure a portfolio investment in stocks/ETFs/Mutual Funds etc. don’t put all your eggs into one basket. Also if you overpay into it can become an MEC so have to be careful.
Ultimately I view it as a useful tool in the toolchest. And I think people should be encouraged to consider IULs and similar life insurance products as part of an overall estate planning strategy. You can get easily burned on Life insurance (as you have aptly pointed out in many posts) so have to be very careful when buying these to know what you are buying and the mechanics of how it works (for example how to borrow from it), to recognize that it is insurance and not an investment, and to consider how it fits into your overall estate planning strategy. In that respect I think a bit of IUL (under 10%) can be useful. I wouldn’t weigh it much higher than that. That’s my personal opinion of course.
So you don’t want to buy more than $100 a month of it but you think everyone should be encouraged to consider them? That’s not a very convincing argument. If you want to diversify your life insurance, buy it from different companies. But diversifying between term and permanent just suggests you have no idea what you actually need or want. If you have a need for $3 million in term insurance and $2 million in permanent insurance, then buy that. But most people have zero need for permanent insurance so there’s no need to “diversify” into that.
I’m glad you like your policy. But your argument in favor of your strategies has lots of holes in it.
R. Nelson Nash was the originator of the Infinite Banking Concept. As you would seem to agree, he should have called it Whole Life Banking. Misinformed agents make it sound like a gimmick. But nothing in your article mentions the cash flow of banking, which is what whole life banking is; a cash flow process, using a dividend-paying, cash value whole life insurance policy with a mutual company to implement the process.
There are widespread misunderstandings of how the fractional reserve banking system in the US works, primarily due to erroneous economics taught in public and private schools and universities. Nelson Nash understood this and was well educated in what is called Austrian economics (the a priori approach to economics), which is what ultimately led him to discovering how to become your own banker using uniquely designed whole life insurance policies.
No reason the company needs to be mutual that I know of. I suspect the reason you would like it called whole life banking is because you own that URL. But I actually do like that name better. More descriptive.
I don’t think there’s a requirement to believe in the Austrian school of economics to choose whether or not to bank on yourself.
A mutual company’s financial assets are owned by its policyholders and have voting rights on company decisions. I would like it called whole life banking for the same reason you like it better. It alleviates much confusion people have about the concept. I’m actually interested in truth and in helping people by telling them the truth.
There is a requirement to understand legitimate economics in order to understand how the banking system of the US has enabled the government to create 36 trillion dollars of debt and how whole life banking (infinite banking) is a viable alternative and is literally banking. If you don’t understand monetary theory, banking, or economics, you may unwittingly misinform your readers. If somebody told me something as bold as “economics taught in schools is government propaganda”, I’d want to know how. If you choose to educate yourself on these matters, I’ve provided a time efficient way for you or anyone else to learn. Notice, unlike your website, I’m not actually selling anything at my website and it’s a “.org” site. I’m not even a licensed agent. But I sincerely hope you’re selling a lot. It’s not suspect to earn a profit in a market economy.
Hey WCI, I’m late to the party here, but want to thank you for the blog and also for what seems to be infinite patience to continue discussing it. I like your bottom line: not a scam, but not magic either; trading short-term negative performance for longer-term better performance vs other “guaranteed” places to store your cash.
I myself have max-funded retirement accounts my whole career, even maxed out the backdoor ROTH 401k option at my current employer. Most of that is invested in Index ETFs. That’s the first leg of my stool. The second leg is real estate, but sadly my real estate is for personal use and is not generating income. I have a house in the US and one in Canada, and plan to split time between them. So unless I rent one out (which is a possibility in “retirement”), they’re long-term assets but have no real income value. I have a HELOC so of course can tap some of the equity if needed, but I wouldn’t consider that a strategy for paying my bills, nor even for mitigating sequence of return risk, although I guess in a pinch I could do the math on that one and decide. I’ve paid off my debt, and now need to deploy excess cash to build up that third leg of my stool; the less volatile leg that I can use to mitigate sequence of return risk. I also like the idea of being able to collateralize a “safe” asset for opportunities.
That’s what led me to this concept of IBC, but I’m not really sold on it. I like what some other posters have said, that perhaps a brokerage account with something relatively safe like a bond ladder that can be tapped via margin might be more efficient. I’m sure it would cost much less in fees and commissions. I have pretty-much no experience with bonds, but my understanding is that if you hold them to maturity the up-and-down fluctuations of their market value doesn’t really matter, except that if they’re margined it could in theory trigger a margin call. I’d consider that pretty unlikely unless interests rates skyrocket, but then again with tariffs and other uncertainty it’s not a given that rates couldn’t increase again. I don’t think anyone wants a repeat of the 80s, but that doesn’t mean it couldn’t happen.
I think the bigger question is bond interest. Advisors I’ve spoken with recommend that this “third leg” that’s relatively safe and less volatile be worth 3-5 years of living expenses to mitigate sequence of return risk. That’s a lot of money, and since bond interest is taxable as income holding it in a taxable account seems suboptimal, especially now while I have W2 income that is sufficient to actually build up such an asset over the next 3-5 years. With long-term IRR of Whole Life at somewhere just north of 4%, and with bond rates in the 3-6% range, I wonder if the after-tax effect of a bond ladder is significant enough to consider making that short-term vs long-term tradeoff of Whole Life. My timeframe here is probably 7-10 years, so if I’m going to make that tradeoff, now would be the time to decide.
Another possibility is dividend stocks or ETFs, which tend to be less volatile in market downturns than growth ETFs and have better tax treatment in taxable accounts than bonds. Of course if the margin loan bit is important (not sure yet how important it is), then these are less favorable than bonds since they’re less marginable. Also a bit more volatile in value probably, but with dividend growth could return more long-term passive income at a more favorable tax treatment. So maybe that’s where I should build the next leg…
I don’t necessarily expect an answer, but thought I’d share my own situation and thought process as I try to make some decisions about where my cash will go next. Of course any input you have would be welcome.
Thanks again for the reasoned, considered, and very patient way you’ve been handling this conversation.
Thanks for sharing your thoughts.