From 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:
Maren navigates her way through a tight spot in Shillelagh Canyon in Southern Utah. She doesn't care about BOY, and maybe you shouldn't either.
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? Comment below!
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.