Is the Infinite Banking Strategy Using Whole Life Insurance Right for You?

Several months ago, I became fascinated with the Infinite Banking Concept.

Since then, I have committed probably something to the tune of 100 hours in to researching the Concept, reading books about it, talking to professionals/bloggers in the personal finance field, as well as discussing the concept with three life insurance agents who specialize in the strategy. It has been a really good learning process, and one that I have truly enjoyed since personal finance is a hobby of mine!

My purpose of this post will be to share with you what I (as someone whose living is in no way dependent on the Concept – I do Alzheimer’s disease research as my primary day job) have learned over the past few months of investigating the highly controversial, highly mysterious, and often highly unknown financial strategy called the Infinite Banking Concept.

Since it’s entirely too hard to find unbiased investigations on this subject due to the sea of commissions that are available to sales agents through this strategy, another goal of this post will be to provide a place where people can share their first-hand experiences and/or questions about Infinite Banking (in the comments), but I will ask that everyone quickly disclose any financial affiliation with this Concept (if any) before approving each comment. This is to help ensure that people receive objective perspectives.

Let’s get started!

 

What is Infinite Banking – From a “30,000 Foot” Perspective?

The Infinite Banking Concept is a very creative/genius idea utilizing whole life insurance as a savings accumulation vehicle created by former insurance salesperson Nelson Nash in the 1980’s and popularized in his famous book, Becoming Your Own Banker.

In an effort to have full disclosure, it is significant in my mind to note that Nelson Nash, who invented this strategy, mentions in his book that he made a fortune as an insurance salesperson, and that his “income tripled” after beginning to promote this strategy. Thus, we must always consider for better or for worse that the creator himself (and any other insurance salesperson you’ll encounter for that matter) has a competing/non-fiduciary-responsibility-to-the-end-client financial interest in seeing this strategy succeed.

From a very general perspective, the Infinite Banking Concept involves…

  • 1) Over funding (with after-tax money) a specially-designed high-cash value whole life insurance policy from a mutual life insurance company which is guaranteed never to decrease in value,
  • 2) Having it accumulate (on a tax-free basis) cash value over the years with a conservative-but-respectable-interest-rate, and then
  • 3) Taking tax-free loans (that don’t necessarily ever need to be paid back) against the policy’s cash value to put money to use in other investments that come along your way or simply to pay for regular living expenses.

The Concept has the word “Banking” in the title for several reasons. First, you are potentially able to mimic the way a bank operates by borrowing money at one (lower) interest rate, putting it to use, and then earning a return at another (higher) interest rate. Second, when you borrow money from your policy’s cash value, it technically is still working for you by continuing to earn dividends in the policy even though you are using it elsewhere. Of course, one big difference between how a bank operates and how the Infinite Banking Concept works is that banks utilize other people’s money, whereas here, you will only be using your own money.

 

What’s the Purpose of Infinite Banking and Why Was I Interested in It?

In reading the general description of the Infinite Banking Concept above, you might be able to imagine why I became so interested in it.

Here we potentially have a system that is highly tax-efficient, delivers a competitive interest rate for how stable it is, can never decrease in value, and not only that, but in it, my money will continue to work for me inside the policy while I am using it elsewhere!

In my mind, I was thinking that this seemed like a perfect option for saving money in a stable way that allowed me to have tax-free access to my cash. 

Having said this, I think it is a good time to point out what the true/intended purpose of Infinite Banking is. Contrary to what some people think about the Concept being “too good to be true” (I’ve read some horror stories about people taking equity out of homes and pouring ALL of their money in to this strategy), Infinite Banking is NOT intended as a long-term investment that will enable you to aggressively accumulate money for retirement. It is NOT something that is going to make you rich quickly, deliver 10% annual returns, replace your real estate investments/stock investments, etc.

Instead, the purpose is to provide a place where money starts.

  • In other words, the purpose of Infinite Banking is to be your personal savings system, where the money grows in a stable/conservative manner, is guaranteed never to decrease in value, and can be dependably accessed tax-free through policy loans at any time.

In portfolio / asset allocation terminology, I like to think of Infinite Banking as being part of the fixed income (short-term bonds) portion of an investor’s portfolio. Indeed, if I was to adopt this strategy in my life, that is how I would count the cash value of the insurance policy in my asset allocation calculations.

 

The Mechanics / Details of Infinite Banking – Is the Devil is in the Details?

So, having gotten on the same page about what the often-misunderstood purpose of Infinite Banking is, we now need to get in to the “knitty-gritty” of how Infinite Banking works.

The reason? For me, it was only after shifting through all of the very minute details of this strategy, that I was able to determine if it was right for me or not.

Many people I talked to (especially ones that were selling whole life insurance policies) said that “whole life insurance could be as simple or as complex as you wanted it to be.” However, in my experience, I felt like I really needed to understand every little minute complexity of the strategy in order to avoid being taken advantage of by the life insurance agents, simply due to the nature of how it is set up. Indeed, I think that the reason most people get in trouble with whole life insurance policies is that they simply go along with whatever the insurance agent recommends, which is a bad idea because the insurance agent does not have a fiduciary responsibility to help the client accumulate the most money.

The following sections include the mechanics of Infinite Banking I have learned from a variety of books and Internet article sources, listed below (along with their affiliation, if any, in parentheses):

 

Mechanics of Infinite Banking – A Properly Structured Whole Life Insurance Policy

At the core of making the whole Infinite Banking Concept work is a properly structured whole life insurance policy.

At this point, you may be thinking, “That doesn’t sound too hard.” In my experience, it SHOULDN’T be hard to obtain, but it is.

The reason for this is because you essentially have to trust an insurance agent, someone who does not have an incentive to act in your best interest, to directly reduce the amount of money he or she gets paid in commissions in exchange for you being able to accumulate more money in the long run. This is almost the equivalent of asking a stock-broker, who gets paid on a per transaction basis, to buy an index mutual fund for you and never make any transactions again.

Because of this conflict of interest, the investor/saver looking at whole life insurance has to have a very solid idea of what kind of policy is properly structured for Infinite Banking.

Listed below are the aspects required in a whole life insurance policy to make Infinite Banking work most efficiently:

  • Be a policy with a mutual insurance company that has close to or more than 100 years of consistent dividend payments and good financial ratings (even through recessions / The Great Depression).
    • Mutual insurance companies are owned by their policyholders (unlike non-mutual insurance companies which are owned by their common stock shareholders, to whom the profit is passed), and therefore, will have more incentive to pass dividends (excess premiums) back to the policyholders instead of to common stock shareholders.
    • You can view a list of mutual insurance companies at Wikpedia here.
    • Several companies that fall in to this category that are commonly used for Infinite Banking include NY Life, Mass Mutual, Northwestern Mutual, Guardian Life, and Lafayette Insurance.
  • Policy is eligible for policy loans, at a varying interest rate (more on this in policy loan section below). 
  • Policy is “participating,” meaning it is paid a dividend (more on this in Expected Rate of Return section below).
  • Policy does NOT reach / become a Modified Endowment Contract (MEC) after a short amount of time (this causes growth to become taxable).
  • Should be a blended / over-funded / high-cash value policy
    • Most traditional whole life insurance policies are structured so that you get the maximum possible death benefit from day 0 for the amount of premium you want to pay in.
    • For the Infinite Banking Concept, you DON’T want to be traditional. Instead, you want to structure your whole life insurance policy so that it has a minimal amount of death benefit in the beginning along with the highest amount of cash value at day 0.
    • In insurance terminology, you want what is called a “blended” policy containing a minimal amount of whole life insurance and maximal amount of paid-up level term insurance (Paid Up Additions rider). The paid-up insurance adds immediate cash value to your policy because you have purchased full death benefit insurance all at once with no insurance or premiums cost.
    • By structuring a policy this way, you will reduce your insurance agent’s commission by 80% or more.
    • According to several articles I read by fee-only insurance consultants, you should make sure that your 1st year cash value is 50% or greater of the premium paid your first year. In several of the illustrations I had run for me, I personally saw that it was possible to get 60-90% cash value access of your first year premium.
    • With a traditionally-structured whole life insurance policy illustration I had run for me, I only got access to around 14% of my first year premium during the first year. Big difference, right?!
  • Has a reduced-paid-up option
    • This is a commonly overlooked option that is available from almost all whole life policies.
    • It enables a policy holder after a set amount of time (usually around 7 years) to exercise the “reduced-paid-up” option, which simply uses the policy’s current cash value to purchase the equivalent amount of paid-up insurance. Once the option is exercised (cannot be reversed), the policy then does not have any required future premium payments (irregardless of future dividends), but still accumulates dividends.
    • In a lot of instances, this can be a much better “out” strategy than cancelling your policy all together!

If all of these details about policy structure sounds like a headache, join the club! Still, when I sort through the details of whole life insurance, I become a little confused myself. However, there are several things you can do to improve your chances that you’re getting the best structure. Two options are listed below:

  • Talk to several different life insurance agents, of whom represent several different insurance companies. 
    • This will give you different perspectives that you can put together to decide which is right for you and what is the truth vs. a myth.
  • Pay a fee-only insurance advisor to review / fine tune your policy before signing the contract. 
    • To find one, simply Google “fee only insurance advisor, and a couple will pop up.
    • If you’re really serious about being with this strategy for the long-haul, isn’t it worth spending a few hundred Dollars to get some professional, objective advice?!

 

Mechanics of Infinite Banking – Expected Policy Growth Rate / Internal Rate of Return

Perhaps one of the most difficult things about the Infinite Banking Concept is getting an objective measure of how much your money, if any, will grow each year.

The reasons this is so hard to obtain are because 1) you can never quite tell if the interest rates figures being shown to you by the insurance company are before or after fees and death expenses, 2) different rates (guarantees vs. non-guaranteed) are shown, and 3) insurance companies are allowed to do what almost no other financial institution in the world can do, which is show forecasts of future performance given current dividend rates.

In an effort to shed some light on what investors can expect as far as growth from a whole life insurance policy, I’ve compiled a summary the interest rates I’ve found from various studies and sources:

  • After talking with an insurance agent representing Lafayette Life, he and I agreed that a 4.5% annual internal growth rate of cash value was realistic to expect.
  • A historical dividend study from Mass Mutual displayed actual internal rates of returns between 1980-2008 of 4.5-6.5% per year average over the 28 year period.
  • In an often-used study by life insurance agents, it is reported that a 40 year 4.5% internal rate of return is realistic given the current economic environment.
  • In article in Kiplinger’s Personal Finance Magazine titled, “Life (Insurance) Begins at 50,” they report cash value internal rates of return between 2.62%-4.41% per year of how total premiums paid have translated in to annual cash value growth from Northwestern Mutual, New York Life, Thrivent, MassMutual, and Guardian over a 20 year period.

It is important to note that these are all after-tax returns, since the cash value in whole life policies can be accessed tax-free using policy loans. So, from the reported numbers above, I came to the conclusion that I can only expect a very long-term (30+ years) average after-tax rate of return of 4.5% from a whole life insurance policy.

However, it is crucial to note that this is only if I hold the policy for 30 years or more. Even with the most efficiently-structured whole life insurance policy, there is going to be a “capitalization” period of 5-7 years minimum where your rate of return on current cash value will be negative.

This “break even” phenomena can best be seen using the screenshot below of a real-life illustration I had drawn up for me by one of the life insurance agents I spoke too. I want to focus on three columns – the one labeled Guaranteed Net Cash Value (no dividends) on the left hand side, the Cumulative Premium paid column in the center highlighted in red, and the Non-Guaranteed Cash Value (including dividends) on the right hand side.
breakeven

As you can see in the table above, if we assume the current 100% dividend rate of the company, it will take 8 years for me to break even (in other words, to have my current cash value accessible = amount of premiums I have paid in to the policy). If we exclude the non-guaranteed dividends, it takes even longer, at 14 years. 

This is a significant phenomena to take in to consideration. Essentially, what it means is that in order to start earning the 4.5% long-term internal rate of return found in the studies shown above, we have to “wade through” 8-20 years of lower returns before we start averaging what the studies show.

In the policy illustration above, I manually calculated the guaranteed and non-guaranteed internal rates of return that you experience at various time points in owning the policy. Below is a summary of what I found (Please note that these are the cash value returns in a specific year only. The overall average return would be lower due to poor returns in the beginning years):

  • In Year 2, you have a guaranteed return of -28.4% and a non-guaranteed return of -20.8%.
  • In Year 5, you have a guaranteed return of -2.6% and a non-guaranteed return of 0.9%.
  • In Year 10, you have a guaranteed return of 1.7% and a non-guaranteed return of 4.1%.
  • In Year 20, you have a guaranteed return of 2.5% and a non-guaranteed return of 4.3%.
  • In Year 30, you have a guaranteed return of 2.5% and a non-guaranteed return of 4.3%.

So, as you can see by these return calculations, the internal rate of return including dividends seems to be converging on the long-term reasonable assumption of 4.5% average return per year. Thus, I think that for once, the current whole life insurance illustrations are pretty conservative/accurate, and maybe even a little bit lower than what you might actually observe by living the policy long-term!

 

Mechanics of Infinite Banking – Policy Loans

While having your cash value accumulate at the respectable 4.5% after-tax internal rate of return mentioned above is good, the thing that makes the Infinite Banking Concept really work is being able to access the cash value tax-free, at any time, through policy loans. Thus, you want to make sure the whole life policy you’re looking in to does, in fact, offer policy loans!

Having made sure that the policy does in fact offer loan provisions, there are several other issues that need to be considered as well:

Policy Loan Issue # 1 – Direct vs. Non-Direct Recognition – Is There a Difference?

The first thing to look in to regarding policy loans is whether the life insurance company you’re dealing with does loans on a direct or non-direct recognition basis. Non-direct recognition companies continue to pay you a dividend even if you have taken out a loan on your policy, whether direct recognition companies do not pay a dividend on loaned money.

At first glance, it seems that if you’re doing Infinite Banking and taking policy loans, it’s a no-brainer that you’d want to use a non-direct recognition company (MassMutual, Lafayette Life are two examples of non-direct recognition outfits).

However, it actually turns out not to be so straight forward. As pointed out by this person who has both direct and non-direct whole life insurance, there is essentially zero difference mathematically between the two at the bottom line. It just differs in how they adjust the numbers. See explanation below for more details:

  • With a direct recognition company, a policy loan does not decrease your death benefit, so the amount you receive in dividends as a percent of your ownership (death benefit) with the company, decreases.
  • With a non-direct recognition company, a policy loan lowers your death benefit (ownership in the company), so the amount you’re paid in dividends as a percent of your ownership in the company stays the same.

Policy Loan Issue # 2 – Make Sure You Get a Policy With a Varying Loan Interest Rate

When I talked to a local Northwestern Mutual life insurance agent and had him run some policy illustrations for me, there were several things wrong with the structure that I later figured out on my own. First, the policy he had drawn up for me was designed to MEC out at Year 14, sooner than I would have liked, but never would have caught on to if I hadn’t of had another agent look at the policy design.

The second thing that was sub-optimal about the policy design was that it contained a fixed 8% loan provision, a fairly common thing for Northwestern Mutual policies. You can view where this fixed rate loan provision is stated in the policy illustration screenshot below:

loandets

Of course, it’s easy to understand why having a fixed 8% loan rate (especially in today’s low interest economy) is not optimal. Sure, if interest rates increase to what they were in the 1980’s, you would be golden. However, since you’re only going to be earning 4.5% average return from your policy, you would be in quite the hole if you had to pay out a full 8% on the money you loaned out to execute the Infinite Banking Concept.

When I asked the agent about this potentially issue, he said that it was possible to have a variable loan rate with Northwestern Mutual, you just had to know to set it up that way.

So, in order to prevent this whole issue, make sure that the whole life insurance policy you are looking at contains a variable loan interest rate that goes up and down depending on what the current Fed Funds Rate is and correspondingly, what the insurance company is currently seeking in terms of required return.

Policy Loan Issue # 3 – A Policy Loan Is Not A Free Lunch

As mentioned above, taking out a policy loan using your cash surrender value is not without costs.

For example, if you have a whole life insurance policy with a non-direct recognition company, the money that you take out as a loan will still be earning a dividend/interest rate on it. However, you will also be charged a loan interest rate that you are responsible for paying (to the insurance company, not to your own policy) at some point in life or death. What this means is that you are essentially financially responsible for covering the spread, or the difference between the interest rate you’re charged and the interest rate you’re earning on the loaned money. 

From my experience talking with several life insurance agents of non-direct recognition company, the spread seems to be fairly minimal (less than 1%). An agent from one company showed me a table that listed historical loan interest rate vs. cash value returns, and even though the spread seemed to fluctuate between positive or negative (so the difference between a loan making you money vs. costing you money), it seemed to generally be between 0.5-1%.

One eBook I read by an Infinite Banking practitioner mentioned that the spread that a policy holder generally must cover is between 0.5% – 0.67%.

Policy Loan Issue # 4 – Paying Yourself Back? Or Not?

One of the nice things about policy loans from whole life insurance is that you pretty much can define your own loan repayment terms. You either a) pay the loan back with interest as soon as possible or b) manage your loans in a way so that you never pay them back until you die. If you decide to do the later method, please note that when you die, your death benefit will be reduced by the outstanding loan balance + accrued interest.

However, it is definitely to your benefit to in fact pay back your policy loans + interest because it frees up more of your cash value to be used for future things/investments/expenses.

 

What Are Other People Recommending Regarding Infinite Banking? Is it A “Go” or “No-Go?”

By now, we’ve gone through the basics + the advanced mechanics of how the Infinite Banking Concept works.

As a next step, I now want to review the opinions of several people I talked to about whether or not this strategy is good to use:

  • I talked to 1 Lafayette Life, 1 MassMutual, and 1 Northwestern Mutual life insurance agent, and they were all big fans of the idea, provided people could stick to the strategy and be comfortable with it. But, they all mentioned that it is not for everyone.
  • I talked to one CPA who said that, “So far, every analysis I’ve encountered from sources I trust has shown it not to be worth pursuing. So, I haven’t done any additional research myself.”
  • I talked to one personal finance blogger who does have a whole life insurance policy with Northwestern Insurance and is satisfied with it. He didn’t take out the policy specifically to do Infinite Banking though.
  • I talked to one fee-only financial planner who said, “I’m not a fan at all of the Infinite Banking Concept. It’s glorified whole life insurance. I don’t like whole life in any of its shapes, forms, or variants unless you either a) have a special needs dependent and will need something close to permanent insurance to ensure a special needs trust is properly funded, or b) you’re going to have a net worth in excess of what gift tax exemptions currently allow for. The rest of the reasons cited by the whole life promoters are to line the pockets of the sales reps. If you can find someone who signs a legally binding fiduciary oath and sells whole life insurance, then you have found either a) the financial services equivalent of Sasquatch, or b) someone who is very, very ignorant about the risks he/she has just taken in signing that document.”
  • I talked to another fee-only financial planner who said, “I’ve read a bit about it, but I have to say I’m skeptical. The whole concept I believe is based upon projections/illustrations that the policies will return. Most illustrations I see are rather ambitious which ruin the whole concept. I probably need to do more research to verify some of the specifics, but that’s my general take on it.
  • I talked to two doctors who mentioned that they were using the Infinite Banking Concept because they wanted to further diversify their other investments, and since they had extra income that they wanted to invest after investing other places, it was a good fit. They also wanted a permanent death benefit for their children if they died.

Essentially, what I found from talking to these people can be summed up in one long sentence.

Unless I specifically need a permanent death benefit and/or am already maxing out essentially all of my other investment options (which I am not, but may be in the future when I’m making more money), the only people that are telling me that Infinite Banking is a good idea are the people who will directly receive money by me purchasing a policy. 

This is a huge red flag for me personally. 

Is the Infinite Banking Concept Right For You?

Clearly, the consensus from talking with others is that Infinite Banking is not something that would be worthwhile to look in to. However, in an effort to ultimately make a decision, I wanted to run my own analysis using 2 scenarios:

Scenario 1 – Saving money and having life insurance coverage using the Infinite Banking Concept with a whole life insurance policy.

Scenario 2 – Buying term life insurance for all my life insurance needs for the next 30 years and investing the difference between what the term life insurance costs vs. whole life premiums.

Analysis Assumptions – In order to simplify things to get started on an analysis, we need to lay out some things we’ll assume throughout. 

  • I do NOT need life insurance after I am around the age of 60.
    • If you do need life insurance around this time, your best bet will be to have whole life since term life will be prohibitively expensive.
  • I have $5,102 per year to either save or pay life insurance premiums.The time frame that will be analyzed is 30 years.
  • I require $446,000 of life insurance coverage for the next 30 years to cover my family in the event that I die prematurely. This is the median death benefit shown on the policy illustrations drawn up for me between now and 30 years from now.
  • The whole life insurance cash value accumulates at the rate of 4.5% per year discussed in the previous section.
  • In Scenario 2, I will invest the difference in a vehicle with an approximately equivalent risk profile and tax treatment to whole life insurance (that is – very stable and tax advantaged).
    • In this case, I will choose the Vanguard Short-Term Tax Exempt Bond Fund, which invests in federal tax-exempt municipal bonds with 1-2 year maturities.
    • Since inception in 1977, it has averaged a before-tax return of 4.33% per year, which equates to a 4.05% after-tax return once a 6.5% state tax is subtracted out. In this time, it has been very stable, and according to the Simba back testing data, has not had a negative return during a 31 year period from 1985-2011.
  • In Scenario 1, we will assume a level/constant cost of a 0.5% spread per year to access the whole life policy cash value through loans during retirement. We will also ignore the capitalization period for the first 7-11 years of the policy.
  • In Scenario 2, we will obtain term life insurance quotes using State Farm’s life insurance quote system. For level-premium 30 year term coverage for $446,000, the annual preferred non-tobacco rate quote that popped up was $719 per year.

I assembled the table shown below to summarize the results of my analysis. You can also view the numerical results in spreadsheet form by clicking here.

table-two-scenarios

While this analysis is by no means perfect, I think it shows us in a good enough way how things would play out using Infinite Banking versus the alternative that I would choose in its place. Essentially, what we see is that because the whole life policy has a higher after-tax return, it actually results in a higher nominal ending value after the 30 year period analyzed.

However, since the cash value of a whole life policy is only accessible using policy loans (which carry a 0.5% spread cost that you must cover), it is quite costly to have access to that money during your retirement years. In effect, what we see is that you end up about the same with Scenario 1 and Scenario 2 after a very long run.

So, the question then becomes which would I choose? Clearly, why would I bother with all of the headaches of a whole life policy, potentially being done-over by a life insurance agent, the low/negative returns during the accumulation period, and all of the inflexibility that would go along with a whole life, when I can get about the same performance with something I firmly understand?

For me, it is clear that Infinite Banking is not right for me (and likely the vast majority of normal folks reading this) because…

  • It doesn’t result in “stellar” performance that I cannot obtain on my own (as we saw above).
  • It is difficult to understand, there are a lot of complexities that could easily mess the whole thing up, and gives me a headache trying to wrap my head around.
  • I could not find anyone that is not being paid a life insurance commission that could convince me it was a good idea.

Who is a Good Fit for the Infinite Banking Concept?

Unlike others who have reviewed Infinite Banking and decided it wasn’t suited for themselves or indeed the vast majority of people, I do NOT think this strategy is the “devil walking the Earth.” In fact, there are some valuable things to learn from the strategy, and I think that the aim of it (having steady, reliable, tax-free access to cash) is well-intended.

More specifically, there are some really good instances where Infinite Banking would be nicely suited. I’ve listed a few of these below:

  • People that do not have the discipline to “invest the difference”
    • If you really have trouble saving money for retirement and are the type of person that needs some external encouragement, being required to send in a monthly/yearly premium to the life insurance company might not be the worst thing ever.
  • People that really need a death benefit in retirement
    • For most people, I think that having a death benefit in retirement is likely a nice thing to have, but probably not a requirement.
    • However, if you are someone that really does need a death benefit during retirement since you have people that depend on you financially (and your savings cannot cover it), whole life insurance is really your best bet to obtain this.
  • People that are pretty wealthy and are looking for another place to diversify, stash money, and avoid estate taxes.
    • As I mentioned above, if I was to the point where I had so much money that I needed to find a place to put money tax-free, I wouldn’t be all that opposed to using whole life insurance.
    • However, in this case, it really wouldn’t be Infinite Banking, but more just using whole life insurance…

How about you all? Have you ever heard of the Infinite Banking Concept? 

What are your thoughts about it and whole life insurance in general as a savings vehicle?

Share your experiences by commenting below!

***Photo courtesy of https://www.flickr.com/photos/pictures-of-money/16678590844/sizes/l

About the Author Jacob A Irwin

Hi folks! My name is Jacob. I am the owner and operator of My Personal Finance Journey. I started this blog in January of 2010 and have enjoyed the journey ever since. Since finishing up graduate school in Virginia in 2014, I have been working in biopharmaceutical development in Colorado. You can read more about me and this site here​. Please contact me if you have any questions!

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Leave a Comment:

436 comments
rjack says April 29, 2013

I have never heard of Infinite Concept Banking, so thanks for educating me. I think I would have to be much wealthier to consider something like this.
My recent post New Tutorial – My Asset Allocation

Reply
    MyPerFinJourney says April 29, 2013

    Happy to help rjack! It seems like whole life insurance is something pitched to most folks at some point(s) during their lifetime, so it's always good to be armed with some background on what it is! 🙂
    My recent post Is the Infinite Banking Strategy Using Whole Life Insurance Right for You?

    Reply
Jenny@FrugalGuru says April 29, 2013

First time I'd hear of it! It's interesting, but definitely not for me.
My recent post Savings Strategy: Best of the Worst, or Worst of the Best

Reply
    MyPerFinJourney says April 29, 2013

    Thanks for reading Jenny! Several people I've talked to say that in the personal finance blogging community, not many know about this. It's good to have some knowledge about it and whole life insurance in general in the event that it ever becomes something you're considering
    My recent post Five Frugal Living Tips Everyone Can Follow

    Reply
Bobby @ BanExcuses says May 1, 2013

I've never heard of it before and probably won't be doing it myself. My parents got screwed on a whole life policy some years ago. The salesman made it seem like some amazing deal, but ended up costing them a lot more than they realized. I don't know if I would care enough to avoid all of the potential pitfalls you mention above.
My recent post The Simple Way To Test A Relationship

Reply
    MyPerFinJourney says May 3, 2013

    Thanks so much for sharing Bobby! I'm curious – in what way was the policy structured that they felt like they got screwed?
    My recent post When Disaster Strikes: The Importance of an Emergency Fund

    Reply
ann says May 9, 2013

thanks

Reply
Deem says June 6, 2013

I've noticed that the examples given in nelson Nash's book show a capitalization phase of 4 years at 40,000 per year compared to yours at 5000 a year. In his example, the net cash value caught the cumulative premium after only 4 years as opposed to 8 or 14. Supposing one can heavily fund the policy as shown in his examples, do you feel it would be a good way to invest? Thanks.

Reply
    MyPerFinJourney says June 6, 2013

    Hi Deem! Thanks so much for your question.

    At first glance, it would seem like adding more dollar value in to the policy premiums each year would reduce the capitalization time. Unfortunately, since the premium value is calculated in part based on the amount of death benefit, it doesn't speed up the process.

    The example Nash is likely using is based on interest rates that are higher, which is a key reason why illustrations cannot be trusted.
    My recent post Emergency Fund Considerations – Where Should the Account Be Located and What Should It Be Invested In?

    Reply
      Deej says June 11, 2013

      It seems to me that it was the ratio between the policy premium for the death benefit and the PUA that brought the capitalization phase to a close quickly, not the interest rate. In my previously mentioned example, Nash uses a policy with a $14,999 premium and a $25,000 PUAR (which together equals the $40,000 annual outlay). The 15K to 25K ratio (favoring a higher PUAR, lower policy premium) is what I had understood to cause the cash value to rise quickly, thus lowering the capitalization phase. Is this correct?

      In your example of a $5000 annual outlay, what was the ratio between the policy premium and the PUAR?

      -Thanks!

      PS – thanks for not laughing at my typo-name from before (no offense to any Deem out there, if there is one…)

      Reply
        MyPerFinJourney says June 12, 2013

        Hey Deej! The ratio of whole life premium to PUAR is a good thing to look at, but I really think that it was the higher interest rates of the 80's-90's when Nash's book was published that enabled it to shown the quicker accumulation phase.

        In the policy example I showed with the $5k outlay, it was $1,807 premium to $3295 PUAR, so a ratio of 0.55, which is a little better tilted towards PUAR than Nash's illustration.
        My recent post The Size of Your Emergency Fund Should Be In Inverse Proportion to the Stability of Your Income

        Reply
sanjeev tummala says June 17, 2013

nice blog. I was actually looking at Lafayette whole life insurance policy after reading Nelson nash book and speaking to Lafayette agent.Yes, I think this is not for everyone. I was interested because I wanted to diversify and am max out in other things. The policy loan to pay for kids school/college expenses using tax free loans and earning dividends at the same time sounds appealing.
For example, the agent said he uses this policy to pay his daughter’s school fees -15K each year upfront using a loan and then he pays it back with monthly payment and little more by year end. That way, he is getting about 4.5% guaranteed interest and some dividend that negates the loan interest. If people use the policy this way do you think its a good reason to buy this policy? Also, if you want to save money in this policy for college and then take a loan for college education, the funds are not considered parent asset for financial aid.Do you agree?
thanks

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    Jacob A Irwin says June 20, 2013

    Thanks so much for your comment Sanjeev. Good to see you’re digging deep in to this to see if it’s appropriate for you.

    First thing, since you’re currently maxing out EVERYTHING else, then you might be more suited for this strategy than most (same as the doctor couple I talked with mentioned in the post).

    To answer your questions…

    The easy one first regarding saving money with the policy not being counted in your assets for financial aid. I would agree with that.

    For me, it’s hard to really trust the advice of life insurance agents with whole life policies since they are directly being compensated by having you purchase the policy.

    1) He mentioned a guaranteed 4.5% interest rate. In my experience, the guaranteed rate is only about 2.5% per year, and then the non-guaranteed dividend makes up the rest of the return, which combined can be assumed to be 4.5% per year.

    2) With Lafayette, the way it generally works is that you take a policy loan out and get charged one percentage rate (say 5%), and then while you have the loan outstanding, you are earning a return on that money that is a little less, say 4.5%. Thus, on the policy loans, it’s costing you a net of around 0.5% per year. It’s not a free lunch.

    As you can see, even though your loaned money technically keeps “working for you,” the whole life policy system only works if you pay yourself back all of the money loaned plus interest.

    You would come out just about the same if you simply saved the money yourself, placed it in short-term tax exempt bonds, and then used the money when needed. This would also save you all of the headache from dealing with the complexities of these polices.

    Having said all of that, whole life policies might be suited for your specific instance for example, if you are high net worth, looking for a tax-free source of retirement income (like Roths) and don’t qualify for funding a Roth.

    Reply
      Christine S says August 7, 2013

      I am thinking of the LaFayette policy for the same reason that Sanjeev mentioned: to pay for looming college tuition and expenses.

      You agreed that it doesn’t count in the financial aid assessment (FAFSA, etc.) It seems to me that there is one consequence of this fact that you didn’t account for in your response: the value of the assets in this policy are not considered, or ‘added’ to, overall parental assets that are themselves assessed by college aid offices at 20%+ per year.

      For example, we are being shown that shielding those non-retirement investment assets in this type of non-MEC insurance vehicle will most likely reduce our annual Estimated Family Contribution from $55k per year to about $35K. Since most colleges we’re applying to commit to meeting ‘all ‘ of demonstrated financial need, the overall cost to attend (our Estimated Family Contribution) drops $20K per year, from $55 to $35; over four years of college, that’s at least $80K less in tuition/fee/etc than would otherwise be charged to the student/student’s family, (or more with the annual costs of college escalating).

      Could you please comment on whether you think this makes sense.

      Thank you.

      Christine in GA

      Reply
        Jacob A Irwin says August 7, 2013

        Thanks for reading Christine!

        I’m curious – who is showing you the shielding numbers? Is it a life insurance salesperson? Just keep in mind that they do not have a fiduciary responsibility to help you save money, so you may want to get a second opinion on the matter.

        Reply
          Christine C. says August 7, 2013

          Thanks for your reply, Jacob. In answer to your question, we are working with a certified college financial planner who owns a wealth management company. Returning for a minute to my earlier question, do you have an opinion as to whether this insurance vehicle would seem to have the added benefit of the $80k shielding of assets (with modest growth) over the four years of college? This is by far the biggest advantage of this financial product for our current needs. Thank you for any further input you may have on this question. Christine in GA

          Reply
          Jacob A Irwin says August 7, 2013

          Good to hear! The FP is likely giving a balanced perspective then.
          There are a few issues at play in your decision that I could see:
          1) is whole life insurance a good way to shield assets from being in your financial aid calculations? My answer to this would be yes, I agree.
          2) The next challenge would be to set up the plan in such a way that you are able to dump 80k in to it very quickly in order for them to be absent when the financial aid calculation is officially conducted.
          3) Next, will the whole life insurance plan give modest growth over a short time period of only 4 years? The answer to this is a definite “no,” since even efficiently constructed WL plans have a 5-7 year accumulation period in which you won’t be earning any growth.
          4) The next question I have, if it were me, would be if it is truly warranted to send your child to a school that costs $50k per year. Have you considered a cheaper state school?

          Reply
          Todd says March 31, 2014

          4) The next question I have, if it were me, would be if it is truly warranted to send your child to a school that costs $50k per year. Have you considered a cheaper state school?

          Strongly agree there… colleges are extremely over priced. Take advantage of in-state college discounts. I don’t know where you live but there is likely a college on par or near par with the other one you’re looking at for 1/5th the price. I went entirely for free paid for by just keeping grades above a 3.0 in state. And quite frankly glad I did, never ended up showing that piece of paper to anyone but my mom… few employers care these days where you went to school, they care about what you can do for them.

          Reply
          MG says April 23, 2014

          Fascinating blog throughout. Limiting my comments only to this specific thread: why hasn’t anyone mentioned 529 plans as the benchmark against which to measure the efficiency of these life insurance strategies when it comes to “saving” for college costs?

          Reply
          Mark Marshall says April 23, 2014

          Great question! As both a practitioner of IBC and the owner of a 529 plan, here is my opinion based on real life experience. I also run a college planning practice.

          1. I started the 529 over 12 years ago, long before I knew about IBC. During that time, it has had a net annual return of only about 3%. The same amount of money in an IBC plan would have grown substantially more during that time.

          2. With a 529, once the funds are used they are depleted. With a safe money plan, I can borrow the funds and pay them back. Therefore, the funds are not depleted.

          3. The good news is that 529’s are tax favored if the funds are used for college. However, contributions are limited and there are restrictions and penalties if the funds are NOT used for college. What if the student decides NOT to go to college? With my IBC plan, I can use the funds any time for any purpose.

          4. Funds from a 529 count AGAINST you on the financial aid formulas once they are used. This is especially true for private colleges. For example, if I use $10k THIS year, my aid award will be REDUCED by $10k NEXT year! This is a trap that many people find out about after the fact.

          With my IBC plan, all of my cash is invisible to the financial aid formulas.

          5. Finally, 529 plans are subject to the whims of the market. When there is a down turn during the college years, there is a double loss of sorts. First the value decreases PLUS a withdrawal is taken in the same year.

          My IBC plan has no down years and I can take a loan instead of a withdrawal. While the loan is outstanding, my cash still GROWS.

          Hope this helps.

          Reply
      Todd says March 31, 2014

      I maybe wrong but just some basic googling of the companies used by people who actually seem to know how to set these up are MUCH higher then 2.5%… try 2-3x higher.

      Even in our super low interest times these that I was recommended considering all are over 5%:
      http://bejs.com/sites/all/files/bejs/attachments/BEJS_White%20Paper_Update%20on%20Mutual%20Company%20Dividend%20Interest%20Rates_June%202013.pdf (end of pdf)

      Am I missing something? Do they end up lower then the 5-7% for some other reason such as fees?

      Reply
      David says December 24, 2016

      im definitely going to be using the Infinite Banking Concept as I think it is great for folks who have high incomes. Say I take out a $40,000 policy loan for a car. I’ll easily be able to pay the loan repayments plus 8-10% interest to my policy so my cash value can continue to grow.

      Reply
Bob Richards says June 20, 2013

It is easy to get caught in the minutia and not see the big picture:
1. you can invest in the exact same things as the insurance companies (primarily bonds and mortgages)
2. they must take a cut off the top to pay their expenses
3. they must take a cut off the top for mortality costs.
4. The tax advantage is no different than a Roth IRA (yes, the Roth has an annual contribution limit but so does the life policy or it becomes a “modified endowment contract” and loses its tax benefit)
There is no magic in the world of investing. if you hand your money to a a manager and they do what you can do on your own, they must take compensation out of your earnings or principal.
I love life insurance. I wish I could buy more (too expensive as I have a medical condition). But I love it because it is INSURANCE. NO ONE ever talks about insurance being an investment other than life insurance salesmen.
Bob Richards retired CPA (inactive), ex-financial advisor and insurance licensee, Harvard MBA

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    Todd says March 31, 2014

    Interesting, except you can’t access Roth funds at will till retirement? That’s one of my biggest issue and reason for considering this.

    Also Roth IRA’s are NOT protected from lawsuits it appears: http://www.latimes.com/la-ira-story3,0,6977190.story#axzz2xYA3fERk

    I’m leaning towards adding it as a part of my overall strategy. I swing for the fences in my business but something guaranteed like this may make sense for a secure back up.

    And don’t tell me it’s not guaranteed, it’s as guaranteed as you actually owning your mutual fund shares in the case the mutual fund company collapses. If the company goes under, you’re shares are NOT direct registered in your name unless you go through the extra process to do it… bet your financial advisor never told you that.

    Reply
    Lorin P says October 1, 2014

    There is a limit on both an Roth IRA and an IBC plan, but there can only be one Roth IRA, where as you can have as many IBC plans as you and the insurance companies are willing to.

    Reply
Jack Reitzel says June 23, 2013

I’m 66, retired and living on Social Security and a relatively small monthly pension. I’m looking into liquidating most of my stock holdings (120k) and 401k (65k) to fund a whole life policy to the maximum to utilize the infinite banking concept. I want to preserve my recent stock market gains in both stocks and 401k before another market decline such as in 2008 which caused my accounts to lose about 35% of their before crash value. I have a large long term tax loss carryover from last year to offset most of the taxes that will be due on my gains from the liquidations this year.
Do you think this is a good or bad decision in order for me to be able to borrow from the policy to pay for cars, home repairs, etc. down the road, plus draw from for future retirement income. I need about 200k of life insurance to offset the loss of my pension if I die before my spouse. I’m not a fan of annuities, and that has been recommended as my only other possibility. I currently have a 200k flexible premium adjustable life policy in force that may become underfunded at some point in the future that I wouldn’t mind replacing with this new policy. I have already been approved for a policy at a “standard” rate for this proposed policy.

Reply
    Jacob A Irwin says June 24, 2013

    Thanks so much for reading Jack and also for your good questions!

    There are a lot of facets that go in to a decision like this, so I’ll try to address things one by one to show you how I would be thinking about it:

    1) What is your current asset allocation split between fixed income and stocks (equities)? If I was retired, I would first look to make sure I had a very conservative asset allocation tilted towards fixed income so that even if a correction comes, I will have an appropriate risk tolerance.

    2) Who have you been talking to about these recommendations that says that your only other option is an annuity?

    The reason I ask is that were you getting the advice from a life insurance sales rep, which can only really SELL annuities and life insurance, so I might imagine they would want to keep your money with them so they can make money.

    3) What would you be looking to achieve specifically with Infinite Banking?

    For example, you have about 200k that you’re looking to invest. If you just need it to be stable, then there are other options for where you can invest it aside from whole life insurance.

    4) Do you really need life insurance now that you’re retired?

    For example, if you died, could you use your savings instead of life insurance as a way for your spouse to have financial support?

    Reply
      jerry says June 9, 2015

      I think you need to talk to a Tax guy or CPA about selling your 401K but stock outside a 401K. the gains can be offset. My understanding is that a withdrawal from a 401K is considered ordinary income and not capital gains so that you would not benefit in offsetting prior capital losses. I do however believe that the IBC is a great idea if set up properly. You might want to think about, if you have children, taking a policy out on them but you would be the owner of the policy(s) and have the benefits of the cash value during your life then policy can go to your children when you and your wife pass on.

      Reply
Jack Reitzel says June 24, 2013

Thanks for the reply.
My responses:
1. I’m very heavy (way too heavy!) right now in only stocks.
2. The guy recommending the annuities says he has “been in my profession since 1967 and throughout those years I’ve used and worked with about every type of investment and program that has ever been created. Both professionally as well as personally. As an Independent Registered Representative I do NOT work for a particular company. I can and often use a wide variety of investment programs from various companies. Myself and my Broker-Dealer constantly compare hundreds of investments. Therefore, the investment programs I offer are in my opinion, the best there is! If something better comes along I’ll recommend and use it!” He provides assistance with Financial guidance , Pre & Post Retirement, Education, Trusts & Estate Planning, Tax Guidance, Charitable Gifting, plus numerous other services.
3. I’m mostly wanting to be able to utilize my “bank” funds (cash value) from the policy to finance new cars, major home repairs, etc. that may be needed in my remaining years, as well as draw retirement income as needed tax free from the paid up additions built up within the policy.
4. Yes, as I stated above, I need at least 200k (or more if affordable) of life insurance for my spouse to invest and live on to replace my pension income which will go away when I die. The policy I currently have may become under funded in a few years, so I could surrender it for it’s cash value (approx 27k currently) and put that into the new policy as well. I’m waiting on the new policy illustration to be presented to me this week to see how much coverage I can afford and how it’s cash values project out to see if I want to proceed with it. I don’t have to replace my current policy, but that is one option to free up the $185 monthly premium I’m paying now for it. I’ve had it since May 1997. The rep I’m dealing with is very knowledgeable on the IBC topic and is my age as well, so I trust that he knows what I’m looking for.

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    Jacob A Irwin says June 24, 2013

    Thanks for sharing those details Jack!

    While I am not intimately familiar with all of the details of your situation, if I were you, I would hold off pulling the trigger on the whole life insurance/Infinite Banking strategy.

    First, it doesn’t seem to me that you actually need Infinite Banking. You don’t seem to need the “death benefit,” but instead, simply need a stable place to put your 200k in savings, which can be achieved elsewhere from whole life insurance. You also don’t need the tax benefits offered by whole life insurance in the case of a super high net worth individual.

    Second, for a middle class retiree, it seems way too risky to me to be 100% invested in stocks. If I were you, I would look at putting the majority of my money (60-70%) in short-term and intermediate bond index mutual funds, perhaps with some allocation to TIPS as well. Hope that helps. Please let me know if you have any more questions!

    Reply
    frank obrien says May 19, 2015

    why not use your older policy before it becomes underfunded? you have a lower insurance cost on that policy. over fund that, plus there is no new underwriting. personally i dont think you should put all your money into one policy- because you can only have one loan at a time and its a loan you should be paying back to the policy or it will lapse and you will have no insurance and a big income tax bill( from any loans out at the time it lapses
    Frank- financial advisor/ insurance advisor 15+years

    Reply
Jack Reitzel says June 24, 2013

I appreciate your input. I have been wanting to get out of the top-heavy position I’m in with stocks for quite some time, and that’s what got me into contact with the rep recommending the annuities as the best place to “park” my investment funds in retirement instead of the stock market. Then I learned about the infinite banking concept from a newsletter I subscribe to and I thought maybe that was a better way to go, since I have my own reservations about tying my funds up in annuities.
If the IBC policy works as explained, and I can access my funds as easily as promised, then I have to seriously consider which way would benefit me the most. Having additional life insurance would assure that my spouse would have adequate replacement of my pension income if I were to die sooner rather than later, while the steady growth of the cash value of the whole life policy would be much safer than leaving it exposed to the ups and downs of stocks and/or mutual funds if I live to a ripe old age. My family genes would support thinking that I could live into my 90’s, so I need to be sure I don’t run out of money too early. It’s not an easy decision, but it’s probably the last and BIGGEST and most important financial decision I will make in my lifetime. I can’t afford to be wrong.

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    Jacob A Irwin says June 25, 2013

    I definitely agree. It’s a very large and important decision. For your situation, it sounds like it’s a little more involved than simply deciding for or against Infinite Banking. You likely need help putting together an entire retirement plan.

    Since there are so many complexities and factors going in to this, it may be something that you want to get some advice on. For that, I might look at going to a FEE-ONLY certified financial planning. He or she will get paid only for their time and not via commissions for what they get you to invest in, therefore, it’s more likely that they will provide unbiased advice.

    Reply
Uri says July 24, 2013

Thanks for the nice intro. To my understanding, however, direct and non-direct recognition works differently. Non-direct recognition means that regardless if you have or don’t have an outstanding loan with the company, the interest on your cash value (the dividend) will be the same like everyone else on the who,e amount. In contrast, direct recognition companies give you a higher interest against your outstanding loan than the regular dividend you get against the rest of your cash value. They reward you for your loan and thus, by the way, making the actual cost of the loan lower.

As an example, say I have a policy with a company that gives 5% dividend and my cash value is $20,000. I will get that year $20,000 * 5% = $1,000 dividend. If this was a non-direct recognition company, if I had an outstanding loan of $10,000 in 8% my dividend would have been the same and my actual cost of borrowing was 8%-5%=3%.

Now say that the same company is a direct recognition company, they will pay me 5% against my un-loaned $10,000 (=$500) and against my outstanding debt they will give me, say, 7% (=$700). My dividend would be $1,200 and my actual cost of borrowing is 8%-7%=1%.

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    Jacob A Irwin says July 24, 2013

    Thanks so much for reading Uri! Although I am by no means an expert on all of this, I do not believe a direct recognition company pays you interest on loaned money.

    See explanation below (excerpted from the post above) for more details:

    With a direct recognition company, a policy loan does not decrease your death benefit, so the amount you receive in dividends as a percent of your ownership (death benefit) with the company, decreases.

    With a non-direct recognition company, a policy loan lowers your death benefit (ownership in the company), so the amount you’re paid in dividends as a percent of your ownership in the company stays the same.

    Reply
      Uri says July 25, 2013

      Thanks again. I based my comment on Kim Butler’s short but informative “Live Your Life Insurance” pp. 34-35. As well as this short document from Guardian, which is a direct-recognition company: http://www.wholelifeunlimited.com/wp-content/uploads/2012/03/Cost-of-Borrowing-2012-Dividend.pdf

      Thanks.

      Reply
        Jacob A Irwin says July 28, 2013

        Thanks for sharing that link Uri. One of the things that can extremely frustrating about whole life policies is that they are very hard to understand. From what I can tell, the way that Guardian is doing it is that since they’re direct recognition, they are not technically paying you a normal dividend on your loaned money (as a non-direct company would), but rather, they are offering a slight “adjustment” to decrease the cost of borrowing.

        Reply
Karen says August 7, 2013

Jacob,

Thank you for taking the time to dig into all of this. I’ve read a lot on the concept, and you have explained things that I could never get to the bottom of! One thing I think you did not discuss in your comparison — which Nash harps on a great deal — and which I believe is an important issue to think about is using loans against the policy along the way to retirement. Any thoughts there?

Regardless, I think your final “who is this good for” still stands. Again many thanks for sharing this!

Reply
    Jacob A Irwin says August 7, 2013

    Glad the post was helpful Karen!

    What specifically were you curious about regarding policy loans? There are so many details that it’s hard to discuss only in general terms. Thanks!

    Reply
      Karen says August 8, 2013

      So, what if you needed say to take a car loan and instead of paying the bank, you take a loan from your insurance policy (say after 10 years or so of owning it). If you have a policy that allows this, and say you have a policy from one of the big mutuals that continue to pay dividends on the cash value (regardless of the loan amount taken), i.e. non-direct. Then you decide to pay the loan back to the policy using the going commercial interest rate that a bank would have charged you. Is this a good idea, and if so, under what conditions would it be a good idea? Does it matter what the relative rate of the commercial interest rate to the policy loan rate minus the dividend? Does this help you accumulate more money in your policy so that you’d have more money to work with in retirement?

      Reply
        Jacob A Irwin says August 8, 2013

        Thanks for the additional details on your questions Karen. Normally, the thing that makes the policy loans scenarios look so tempting in the books written about Infinite Banking if that they all involve you paying back your policy loan (so essentially replacing your savings).

        Let’s walk through an example to think more about if what policy loans involve and whether or not they are suited for what you’re asking. Below are the details of a hypothetical policy loan:

        -Policy loan = $100,000, you plan to pay back in 1 year
        -Cash value accumulation rate (includes guaranteed + dividends) = 4.5%
        -Current policy loan interest rate you must pay back = 5% (generally, the spread ie what it costs to take out a loan is around 0.5-1% per year from the numbers I’ve seen. Since the policy loans from most of the mutual companies are “variable,” they do change according to what the current interest rates are.)

        This would mean you would be earning $4,500 per year in accumulation/dividends, and paying $5,000 in interest for the loaned amount in a non-direct mutual company. This also assumes you PAY BACK THE ENTIRE $100,000 from some other source within the loaned period.

        So, the net cost to you of the 1 year loan would be $500. In other words, you paid $500 to have access to your OWN money. Since you are accessing your own money, in my opinion, you cannot compare this strategy with taking a loan from the bank where you are using SOMEONE ELSE’S MONEY.

        The proper comparison, in my opinion, is what it looks like to use your own money. Using the stable Vanguard Short-Term Tax Exempt savings vehicle mentioned in the post, which has averaged a 4.05% after tax return, let’s walk through how that would look as well with a “loan.”

        $100,000 “loan” from your savings
        -do not earn any interest on money you take out, but you are not charged interest on it’s use either.
        -You then pay back your “loan” to your own savings.

        Net cost to use your OWN money = $0.

        So, as you can see, the main benefit to a policy loan is that it “forces” you to pay back money to your own savings. This can be accomplished (if you have the discipline) in cheaper ways WITHOUT whole life insurance.

        Reply
          Karen says August 14, 2013

          Thinking as I type.

          Scenario 1: take bank loan. 2% loan means $300 for 30 payments = 9000. Money goes to bank forever gone from you.
          Scenario 2: take WL loan. Spread on loan rate v. Dividend is say 0.5%. Now still pay in 9000. Excess money goes to work for you forever more.
          Scenario 3: take money from savings. Pay back 9000, and hopefully put it somewhere it can work for you.

          Scenarios seem like they get better as you go from 1-3, but the WL loan is better than borrowing from bank. Am I missing something? Besides being restricted to loans in WL?

          Reply
          Jacob A Irwin says August 14, 2013

          In my opinion, the WL loan and a bank loan aren’t comparable since WL is your own money and a bank loan is someone else’s money.

          Also, keep in mind that with taking the money from your own savings (scenario 3), you wouldn’t need to pay back as much since you wouldn’t be charged any interest.

          Reply
          Mordy says August 19, 2014

          Therre are a few very important points that aren’t being addressed in the discussion here.
          1) in this post you just mentioned that when using your own money the cost is ZERO, I beg to differ with you, PLEASE, there’s always a cost either interest that you pay using someone’s money or the lost opportunity that you could have earned on your money, in your example where the loan was $100,000 and 4.05% could have been earned on that is the cost still ZERO?
          2) it’s very interesting to me that when buy term & invest the difference is used, the question of “is it guaranteed” isn’t raised, only when the non guaranteed numbers on the WL illustration are being quoted is that question being asked, when in reality, one thing is absolute that once a dividend is given, it cannot be taken away, where in an investment portfolio, it can be there today and vanish tomorrow, and it might just be at the most inopportune time.
          3) You used here a tax advantage fund, where again in reality, most people will not be there, when matching up the numbers, you always fail to take into consideration the taxes that are being paid along the journey which are almost always paid from another pocket, as well as the fees, in addition there is an abundance if independent research where even though the average fund does X amount of percent a year 98% of people only make a fraction of that for a variety of reasons.
          4) when all is said and done, you MIGHT have more in your portfolio account, however, people are locked out of their wealth, as when people reach the age of retirement they tend to start worrying about outliving their assets, legacy and most if not all will live off the interest , now I want you to make the calculation, if we were both retiring tomorrow with $2.4 million in the bank the only difference being that I also have a $2.4 million policy collecting dust in my basement filing cabinet, how much would you spend each year & how much would I spend. If you have a hard time running and posting those numbers, let me know, so while you might not NEED the insurance after 60/65, you might just WANT it.
          5) I’ll leave out with one last note, that strategy of “buy term & invest”, where you write about “people” that aren’t disciplined enough (you make it sound that it’s some kind of minority that needn’t be reckoned with) I don’t know who sees he world upside down, me or you, if that is followed through in more than 1% of people that have used that fancy cliche, I would be VERY surprised. Check out this TED talk from a well known finance behavioral professor.
          http://www.ted.com/talks/shlomo_benartzi_saving_more_tomorrow

          Your research is greatly appreciated

          Reply
bullet says August 14, 2013

It seems to be different than a Roth since its money can be available anytime after being funded whereas a Roth you need to wait to a certain age. To invest in mutual funds is no guarantee either-most do not do well. With whole life you get access to the money and a death benefit — assuming you like your kids or the people you are leaving the money to in the end. For someone to say ‘don’t trust them because they’re selling it’ does not make sense — unless you stop trusting anyone selling you anything ( have fun being a hermit—-and by the way –hand over your cell-phone). If this whole life is funded and I can pay off my mortgage or car and then pay back the whole life with the SAME payment that I would have paid to the mortgage co. or to the car finance co., it seems I have just created my own finance co. The 1/2 % net cost does not sound bad compared to the 7% or more of a finance company. Tell me what I am missing!!!!!!

Reply
    Jacob A Irwin says August 14, 2013

    Thanks so much for reading bullet. In my opinion, whole life insurance is NOT terrible.

    However, I think that it’s not everything that it is hyped up to be by the salespeople (like some magic formula better than anything else). From your website, I saw that you might be a dentist. In your case, whole life may be appropriate if you are maxing out all of your other investing outlets, particularly tax free ones.

    Below are my thoughts about your points in your comment:

    1) “Whole life is different than a Roth since the money is accessible anytime.”

    Absolutely true. With a Roth, you cannot access earnings easily until during retirement. However, with a Roth, you can withdraw your CONTRIBUTIONS at any time tax and penalty free. Just keep that in mind.

    2) “If this whole life is funded and I can pay off my mortgage or car and then pay back the whole life with the SAME payment that I would have paid to the mortgage co. or to the car finance co., it seems I have just created my own finance co.”

    In my opinion, it’s not fair to compare whole life insurance to taking out a loan from a finance institution b/c with whole life insurance, remember that it’s YOUR money/savings that you are having to pay back. With a regular loan, you are borrowing OTHER PEOPLE’S MONEY.

    Reply
      Eric says November 16, 2014

      Jacob,
      I’ve read your analysis and just about every comment up to this point. You’ve certainly done a lot of research and statistical analysis and I commend you for that, but your above response indicates that you do not fully understand this concept. The purpose of the infinite banking concept IS to create your own finance company. The average person will pay 35-40% of every dollar they make in finance charges over the course of their life. 35-40%! That’s 35-40% of the money the average person makes over their life where THEY GIVE UP THE INTEREST EARNING POWER OF MONEY FOREVER! Money can accommodate many different kinds of transactions but the only real power money has is it’s ability to generate interest. This dynamic is the same for everyone regardless of how much they have. The decisions we make either give us the ability to earn interest on our money for our benefit or gives others the ability to earn interest on our money for their benefit. The infinite banking concept allows people to maintain the interest earning power of their money (through dividends) AND control the financing needs over the course of their lives. When you “borrow with other people’s money” you are paying interest and giving up the interest earning power of that money forever. When you finance using the infinite banking concept you maintain the interest earning power of your money and when you pay yourself back plus interest (being a good banker to yourself) you are compounding your savings AKA increasing your wealth. The infinite banking concept also shifts the risk of generating wealth onto the individual. The individual has to be a good banker to themselves in order for this to work. They need to capitalize their bank properly and pay themselves back honestly. Those are the only risks associated with the infinite banking concept. When it comes to generating wealth, I would much rather take those risks than be subject to market fluctuations that I have no control over. A lot of wealth can be generated by recouping finance costs.
      The truth about truth is that it is widely criticized and disregarded before it is finally accepted. Whole life has been around for over 200 years. It’s one of the best financial tools available to us, but people are polarized by it (by design). Most of the complaints about whole life aren’t about the product, it’s about the people selling the product. I sell life insurance but I’m not good enough to sell people something they don’t want.

      Reply
        Graeme says February 9, 2017

        Jacob,

        Just a quick point – you say “remember that it’s YOUR money/savings that you are having to pay back.” Not exactly. You are not “taking your money out”, like when you borrow from a pension fund or TDA. You are “borrowing AGAINST the cash value of the WL,” using it as collateral. You are still using other people’s money. Same as borrowing using your house as collateral for a loan.

        Carry on.

        Graeme

        Reply
Lisa says September 21, 2013

We are starting our 3rd WL policy with Lafayette Life, one of those being a small one where we put 4K/year in for our son, that we started at his age of 16. I was very big in to Dave Ramsey and was adamantly against
Whole Life. My age is 55, and all I can say is, I wish I would have started this concept of Infinite Banking many years ago. We have used ours to loan money to buy vehicles, property and yes even to fund the next years premiums. Yes we pay ourselves back with interest and I look forward to those payments …because I know they are helping to build my supply of money in my cash value. No, it is no where near get rich quick….but when we have suffered downturns in the stock market, our policies are slow and steady to grow. Our policy illustrations have been pretty much at the 50% guaranteed rate so far and cap rate is right as scheduled….6-7 years. I couldnt be more pleased . I love the concept of my tax free retirement, but in the meantime I can use that money any time I want and YES I want to pay back the interest. Also the life insurance is a nice addition (no we didnt do this for the life insurance, obviously Term would be better)
Using the concept of buying a 40K car… borrow from the bank, pay the car back plus interest and in 5 years all you have is the depreciated car. Borrow from your own bank and in 5 years you now have your money back plus interest plus the car. THere are downsides and those are, if you are not committed you WILL lose your money if in the first 7 years or so you decide to quit your policy. Never quit your policy, work with your advisor to set up another way.

I could go on and on but suffice to say I am sold on these policies, at least the way ours have been set up. My advisor earns her money because she has spent hours and hours with me over the years and is there for me at the drop of a hat. Would not consider doing a policy without her.

Reply
    Jacob A Irwin says September 21, 2013

    Thanks for sharing Lisa. I’m so happy to hear your policies are working well!

    I’m curious – in you all’s situation, would you consider yourselves “high income?” A lot of times, these policies make a ton of sense if you are already exhausting other investment avenues and have money left over.

    Reply
Robert Trasolini says September 30, 2013

Great analysis, I thought you were very thorough on the concept, although i think you missed one principal of the concept. The idea of using the policy as a financing tool. You talk about loss of money when taking a loan with a greater interest rate on the amount being earned. However if you take a loan calculator out and calculate the interest lost if you take a $5,000 loan and pay back the loan over 5 years @8% interest. Total interest you would have paid $1082 in interest. If that same money was earning 7% in your policy( lesser rate than you are paying) over that 5 year period you would have earned $2,012 in interest. I would love if you did more analysis on the financing aspect of the system and run some numbers with a loan and compounding interest calculator. I of course am biased as I am in the industry, but have also done a considerable amount of research and come to my own different conclusion.

Reply
    Jacob A Irwin says September 30, 2013

    Howdy Robert! Thanks so much for reading, stopping by, and bringing up this great point!

    I definitely agree with you in the numbers you ran. Since you are paying back the $5k loan (decreasing the loan principal), you will pay less in interest to the insurance company than you will be earning in interest on your policy dollars (since the policy dollars is compounding on a ever increasing $5k amount). This is not surprising at all.

    Even though stopping at this face-value comparison makes a whole life policy loan seem like a great deal because, hey, you’re earning more money in interest than you are paying out, I don’t believe it changes the key takeaways I mentioned above.

    With the policy loan, at the end of the day, you are essentially paying interest / paying back YOUR OWN MONEY, not a bank or someone else’s money after you use it.

    As I state in the article, the same magnitude of an effect can be accomplished by withdrawing money from a savings account. Let’s just assume your savings account can earn 7% interest (unlikely today, but let’s keep this consistent) and that you have $5,000 in it. You want to buy a nice road bike for $5,000. You take out the money at time 0 (you don’t get charged any loan interest), and pay back yourself to your bank account the ~$100 per month that you would have been paying back money to your whole life policy loan if you had taken the policy loan route. If you let this accumulate interest over 5 years, you will earn roughly the same amount as you would have made letting the policy cash value grow.

    My spreadsheet calcs – would lover to hear your thoughts!

    https://docs.google.com/spreadsheet/ccc?key=0AmFbyISqaYDadHNySzJOaER4SmhLVDhRNldacWRteVE#gid=0

    f you take a $5,000 loan and pay back the loan over 5 years @8% interest. Total interest you would have paid $1082 in interest. If that same money was earning 7% in your policy( lesser rate than you are paying) over that 5 year period you would have earned $2,012 in interest

    Reply
      Kyle D. says November 20, 2013

      I looked at your spreadsheet. I have a lot of personal experience with Infinite Banking in my own life. The 8% loan rate you assumed is almost double the loan rate I’ve got in my policies. I currently pay a 4.4% rate, not 8%.

      It’s not a very fair comparison. Even if it were, I think there are multiple issues you need to address if you’re going to play this game. That 7% savings scenario does not exist. If it did exist, if you were actually earning 7% in a 100% safe savings account, you’d also be paying tax on those earnings as you go, creating either a drag on the account, or additional out of pocket on your side. Not so with IBC. If you did this with a brokerage account to earn that kind of interest rate, you’re going to pay brokerage or management fees, capital gains, and investment expenses, with no guarantee of safety. Not so with IBC (The cash value is simply a discounted expression of the death benefit in today’s dollars at a given rate, minus future premiums. don’t believe me? Ask the actuaries that engineer these things.) If you were sued and there was a judgement against you, your savings could be seized. Not so with IBC (In Florida where I’m from anyway). You are paying extra $ (which has its own opportunity cost) if you buy term insurance. Not so with IBC.

      I could go on, but I’m not here to pick a fight. You have the right intentions in trying to educate people, but you’re only viewing IBC as a matter if interest rates. It’s not about interest rates. It’s about who plays the role of banker in your life, and what that really means. you’re paying cash over financing, which is good, but that doesn’t make your scenario realistic.

      I’m happy to answer any questions you might have about IBC. I am a student of Austrian Economics and an Authorized IBC Practitioner. You can easily search me on the IBC official website.

      I feel sorry for people who shy away from IBC after reading things like this. It’s a shame that they are missing out on something that’s genuinely there to help them.

      Reply
        Jacob A Irwin says November 20, 2013

        Hi Kyle, thanks so much for reading and for creating some good discussion.

        (Disclaimer to other readers: As I mentioned in the post above for the sake of clarity, I want to bring attention to when people have a conflict of interest with these policies – because there is much money tied up in them and to be made. So, I just want to make sure everyone knows before we proceed that as an IBC practicioner, Kyle makes money by selling these whole life policies. There’s nothing wrong with that – I just want people to know the context that he is coming from)

        Below are my questions/comments on the points you brought up. I look forward to hearing your input!

        1. “I looked at your spreadsheet. I have a lot of personal experience with Infinite Banking in my own life. The 8% loan rate you assumed is almost double the loan rate I’ve got in my policies. I currently pay a 4.4% rate, not 8%.”

        I apologize for the confusion here. The policy loan illustration I got from Northwestern Mutual showed an 8% interest loan. I did not mean to generalize that ALL whole life policies have an 8% interest rate on their loans.

        Furthermore, as I state in the “Is the Infinite Banking Concept Right for You” section, the important thing to look at is the spread between the variable policy loan rate and the cash value accumulation rate, which is usually in the range of 0.5%. Since I assumed a cash value accumulation rate of 4.5%, this would put the loan rate at 5%, so about in line with the figure you mentioned as well.

        2. “It’s not a very fair comparison. Even if it were, I think there are multiple issues you need to address if you’re going to play this game. That 7% savings scenario does not exist.”

        If you look at the comment that Matt made below this comment string and some of my follow up comments, we addressed and put to rest this issue/concern about the use of an assumed 7% interest rate on a savings account.

        3. “in a 100% safe savings account, you’d also be paying tax on those earnings as you go, creating either a drag on the account, or additional out of pocket on your side. Not so with IBC. If you did this with a brokerage account to earn that kind of interest rate, you’re going to pay brokerage or management fees, capital gains, and investment expenses, with no guarantee of safety. Not so with IBC”

        In my calculations for the post where I tried to determine if the IBC concept was right for me, I utilized the Vanguard Short-Term Tax Exempt Bond Index Fund, which is exempt from federal taxes, and I also incorporated the subtraction for state taxes income tax and all investment fees/expense ratios. In addition, I analyzed the standard deviation and annual rates of return, and found the Fund to be very safe (see stats in post), although you are correct – it is not guaranteed to not lose money. That guarantee is a benefit of IBC.

        Regarding capital gains, you are correct that with a bond fund, they may be incurred. However, I would assume that since we are dealing with bonds and not stocks, the majority of the cash you will accumulate will be a result of dividends. Thus, I assumed capital gains taxes would be negligible. However, if you can quote a good study about capital gains on tax exempt bond funds, it’d be very interesting to see.

        4. “If you were sued and there was a judgement against you, your savings could be seized. Not so with IBC (In Florida where I’m from anyway). You are paying extra $ (which has its own opportunity cost) if you buy term insurance. Not so with IBC.”

        Regarding the term insurance issue, the important thing is what the comparison looks like between using IBC and the “buy term and invest the difference” scenario. That’s why I showed both in my post above.

        Regarding the safety of whole life cash value in lawsuits, I definitely agree with you. That is a benefit of IBC.

        Overall, my conclusion with IBC is not that it is inherently evil or it does not have its place. Quite the opposite – if I get to a point in my life where I am higher net worth and higher salaried, I will probably use one of these polices to get tax free earnings later in life.

        My conclusion is that people just have to be careful b/c IBC is not well suited for the MAJORITY of people out there.

        Reply
          Kyle D. says November 20, 2013

          Hi Jacob,

          Thanks for your response. I appreciate you taking the time. Yes, if you’re using tax-free muni bonds, you’re not going to have tax issues, so you’re spot on there. Sorry if I didn’t catch a previous post and made you rehash something. I want to be very clear to you though that although I am an IBC Authorized Practitioner, none of my IBC clients are what I would call “High Net Worth”. These are folks that make from 30k to 100k/yr. Regular people. When I started my first policy at $250/mo, my wife and I were not even making 50k a year together after taxes.

          From a practical standpoint, from someone who studied IBC for over a year before he even had the courage to try and talk to people about it, I thought long and hard before deciding to put my name next to this concept. My business would be doing fine without recommending IBC policies. Furthermore, if an advisor really builds these policies properly, we can take anywhere from a 20%-70% commission cut over selling regular whole life insurance. Anyone who is using pre-built products without heavy PUA riders (with the exception of maybe a strong 10-pay), there’s a good chance that what they are calling IBC isn’t really IBC. I am my own biggest customer.

          Something that people must understand is that IBC is NOT an investment. It’s a savings. It’s a place to warehouse money and build a capital base in a tax-favored risk-free environment, allowing you to earn interest while still giving you full access to those funds (not all of it initially, of course. I have to be very clear about that). I disagree that IBC is not right for the majority of people. I think it is definitely right for majority. The majority are the ones who need our help the most. Not the rich. Why would I tell someone that it was ok to finance a car, for example, and pay someone else interest when they can build up a capital stock and leverage that for their banking needs, while never interrupting their compound interest? Over a lifetime of repeating that process they will end up with more money in their pocket than if they had done the traditional finance way, and all the while making the same payment at the person who financed…after the initial savings. Plus, people die. There’s a death benefit throw in in there just for the heck of it ;).

          I’m going to be late for a meeting if I keep writing, and I’m really not the type of person who likes to debate strangers online, so again I appreciate your input on the topic, even though I do not agree with your conclusion at all. There is no apples to apples comparison you can make to IBC and something else. Believe me, I’ve heard it all.

          I wish you nothing but the best,
          -Kyle

          Reply
          Jacob A Irwin says November 20, 2013

          Thanks so much for sharing your thoughts Kyle. I definitely respect your opinion, as everyone is entitled to their own. 🙂

          I do honestly believe that IBC offers many benefits and I would like to believe in it.

          However, at the end of the day, the harsh reality remains that I still have not found anyone [not receiving money by selling whole life policies] who can convince me that they are appropriate for the majority of people.

          Reply
          Kyle D. says November 21, 2013

          I understand where you’re coming from, Jacob. There’s a trust factor that’s missing for you. I would suggest for you reading Robert P. Murphy PhD’s report and his personal experience with IBC. He is an economist and, like me, didn’t know what to think of this stuff at first. It’s an easy read and I think you’d like it.

          All the best!

          https://s3.amazonaws.com/IBC-General-Resources/2013.05+Murphy+My+History+With+IBC+May+2013+LMR.pdf

          Reply
          Jacob A Irwin says November 21, 2013

          Thanks for the reference. I’ll take a look and report back with questions/comments I have.

          Do the authors of this report, Carlos Lara or Murphy, sell or have ever sold whole life insurance?

          Reply
          Kyle D. says November 21, 2013

          They have never sold life insurance in any form. Murphy is an economist and Lara is a finance professional.

          Reply
          Jacob A Irwin says November 22, 2013

          I took a look at the pdf document you recommended last night, and unfortunately, there were no technical details in it explaining IBC and/or his reasons for believing in it other than a qualitative surface explanation that could give me any more trust.

          Also – I discovered that Murphy does profit from propagating whole life policies, as he makes money through the practioner’s program – http://www.infinitebanking.org/practitioners-program/, similar to Nelson Nash.

          Can you recommend any other documents I should take a look at? This topic is very fascinating to me.

          Reply
          Kyle D. says November 22, 2013

          I don’t have anything right here at my fingertips for you, but I think you need to adjust your viewpoint a little bit. At least, that is what helped me to really understand why this is a good thing.

          Also, before I forget, I took offense to your disclaimer on your first response. I just wanted you to know that. I am not wealthy. I work hard to do the right thing for my clients. The implication was not very nice.

          IBC is not an investment. It is a savings strategy that allows uninterrupted compound interest and a slew of other benefits that most other financial tool do not have, which I will list for you in a moment. I REALLY think you should re-read Becoming Your Own Banker. If you need a copy, I will mail you one. I do not have any desire to try and make you a client, but I really feel that you are in the perfect position to start an IBC policy. Those benefits are below:

          Tax Deferred (Not Tax Deductible)
          No limits on contributions
          Tax Free income and withdrawals
          No mandatory withholdings
          Tax Free to Heirs
          Penalty Free Access to money under 59.5
          No required minimum distributions at age 70.5
          Has guaranteed costs, expenses and contribution amounts
          Can take out a loan over 50K (no limits) vs. 401(k) – No loan repayments required (but it’s in your best interest to pay them back.)
          Unlimited Investment Options (i.e rental real estate, land, business)
          Can be used as Collateral (i.e. for loans / small business)
          Estate Tax Free
          Liquid (access to funds at anytime without penalty– no hardship required)
          Disability Protection – automatic funding of retirement if you become disabled
          Use as your own bank – source of financing
          Self Completing – if you die income for spouse and children (college education) are paid for
          Judgment Proof – protection against creditors and lawsuits in many states
          Potential for Dividends – more beneficial than employer match as it can potentially guarantee future tax free retirement income
          Protection from future income tax rate increases
          Guaranteed to grow every year – you know what account will be worth in the future (worst case scenario)
          Guaranteed retirement income (if structured correctly)
          Not stock market based – protection against market risk
          Long Term Care benefits – protects against the costs of health care in retirement
          Retirement Income Flexibility -Allows you to spend down your other assets in retirement most efficiently
          Provides money for terminal and chronic illnesses ((I can access up to 50% of my death benefit early if I’m terminally diagnosed))
          Last but not least…death benefit – money when you need it most..

          Let’s play that game. This is coming from a guy who knows he will not profit in any way from YOU starting an IBC policy. Fair enough? Ok. Jacob, I think you are a perfect candidate for an IBC policy, and I think it should be a big part of your overall financial picture. Other than the reasons above, here’s why I think that.

          You are young like me (I just turned 30), so your mortality cost on the insurance portion of it will be less than someone who is older. You’ve got more years of being young than say a 50 yr old, which spread out equals left cost. you have a TON of time to let a WL policy compound, tax-deferred, using it for your own personal costs and investment opportunities at any time. Also, I KNOW for 100% fact that in a drastic economic downturn, you will not lose a penny inside of your policy. We can’t say that about stocks and bonds. All cash values are 100% funded. The insurance company could pay it all out if they had to.

          I also have to go back to your spreadsheet that you did with Robert. You’re also assuming that you can go out and find loan rates for your purchase (whatever it may be) at a low rate. This will not always be the case. If your FICO score is below 690 right now, you’re going to pay 7.07% on a 60 month note according to Yahoo finance http://autos.yahoo.com/car-finance/ Not everyone has great credit. Also, don’t even bother mentioning 0% interest deals. It’s just a clever form of discounting, and that person with the under 690 score wouldn’t qualify anyway. You’re also paying their taxes too. It’s built in to the price of the car. Can the IBC policy make a whole lot of sense in that situation? You bet it can!

          A friend of mine who is opening a restaurant next year. The former owner is going to self-finance it for him at 1% first year, 2% second year, then 7% til it’s paid. No early payment penalties. Guess what we’re going to do in year 3? If you guessed throw a chunk into a maxed-out policy and take advantage of that spread, you get an A+!

          My point is, there are going to be opportunities in your life that do not exist inside of a spreadsheet or vacuum. I love spreadsheets, but as Harry Markopolis said, “There are no straight lines in finance”. He is my hero. He should be a proclaimed a hero of the 21st century, bar none. Cash is King. Having accessible cash that is always compounding will allow you to make more strategic moves than the average bear.

          Even having your money in that safe muni bond position (smart, I agree. I love tax-free bonds), you do not get 19 of the above benefits for utilizing a strategy that appears comparable on paper. Again, paper. Not real life. In real life, I’d take the life insurance position any day of the week.

          I don’t expect to change your mind, but I feel- no, I know- that you are missing the boat.

          Best of luck to you sir,

          -Kyle

          Reply
        Lisa says November 20, 2013

        Totally agree with you Kyle. I am not a student of Austrian economics but my husband and I have just started our 3rd policy. All I can say is that I feel fortunate to have learned about IBC, BOY or what ever terminology you want to use. Being 55 I wish I could have been introduced to the concept 20 years ago.

        Reply
          Kyle D. says November 21, 2013

          I’ve got to tell you, Lisa. I am 30 years old and started when I was 27. Wow, you can imagine how blessed I feel. My wife and I recently increased our contributions dramatically, due to my business growing. I started policies for my 27 year old cousin this year and also a husband and wife who are both 26…and a current client started a small one for his infant son. I’m so excited for them, needless to say.

          You’re still in a great position even at 55. You have a risk-free banking system that serves as a source for borrowing and uninterrupted compound interest. How many people do you know who can say that?

          Very happy for you!

          Reply
          Jacob A Irwin says November 23, 2013

          Thanks for all the great, robust discussion points here Kyle.

          I think you are correct – neither of us are going to change one another’s minds on this. However, that’s not a bad thing at all. It’s good to have some discussion and let folks come to their own conclusion.

          Furthermore, I honestly don’t think that IBC is all that terrible – there are positive aspects about it and I will more than likely use one when I have a higher net worth and income and am needing more outlets for tax free investing (not the case right now).

          I just don’t think it is well-suited for the majority of people vs. the alternatives out there of using very stable tax-exempt bond funds in conjunction with other retirement accounts such as Roth IRA, Roth 401ks, 401ks, etc because of all the headaches/confusions/potential of being taken advantage of from whole life policy salespeople.

          You listed out a very informative list of the benefits of IBC, which I will not dispute at all. Below are my comments comparing with using a stable tax exempt bond fund along with more “traditional” tax free, tax deferred, and taxable retirement vehicles:

          I would love to get your thoughts on this.

          1. Tax Deferred (Not Tax Deductible) – Tax exempt bond fund is exempt from federal income tax.

          2. No limits on contributions – also true of tax exempt bond fund

          3. Tax Free income and withdrawals – Tax exempt bond fund is exempt from federal income tax.

          4. No mandatory withholdings – also true of tax exempt bond fund

          5. Tax Free to Heirs – Only useful for high net worth people, not normal individuals due to $5MM estate tax exemption or whatever it is currently – however, this is not guaranteed.

          6. Penalty Free Access to money under 59.5 – also true of tax exempt bond fund

          7. No required minimum distributions at age 70.5 -also true of tax exempt bond fund

          8. Has guaranteed costs, expenses and contribution amounts – I would argue that also true of tax exempt bond fund – Vanguard is very efficient and has been for a long time.

          9. Can take out a loan over 50K (no limits) vs. 401(k) – No loan repayments required (but it’s in your best interest to pay them back.) –

          also true of tax exempt bond fund, except you don’t incur loan spread cost like with IBC

          10. Unlimited Investment Options (i.e rental real estate, land, business) – also true of tax exempt bond fund

          11. Can be used as Collateral (i.e. for loans / small business) – also true with tax exempt bond fund – http://www.inc.com/guides/201101/5-tips-using-collateral-to-secure-a-small-business-loan.html

          12. Estate Tax Free – Only useful for high net worth people, not normal individuals due to $5MM estate tax exemption or whatever it is currently – however, this is not guaranteed.

          13. Liquid (access to funds at anytime without penalty– no hardship required) – also true of tax exempt bond fund

          14. Disability Protection – automatic funding of retirement if you become disabled –

          Question – I am familiar disability waivers on life insurance, stating that if you become disabled, you don’t have to pay insurance premiums, but does life insurance pay a “death benefit” if you are disabled?

          Or, is it just your cash value?

          15. Use as your own bank – source of financing – also true of a tax exempt bond fund

          16. Self Completing – if you die income for spouse and children (college education) are paid for – also true of buying term insurance and investing difference.

          17. Judgment Proof – protection against creditors and lawsuits in many states – this is a clear advantage of IBC/whole life.

          18. Potential for Dividends – more beneficial than employer match as it can potentially guarantee future tax free retirement income – tax exempt bond fund fed income tax free.

          Roth IRA / 401k withdrawals tax free.

          19. Protection from future income tax rate increases – also true of tax exempt bond fund.

          20. Guaranteed to grow every year – although not guaranteed, a stable bond fund is enough for me to cover this.

          21. Guaranteed retirement income (if structured correctly) – also true of tax exempt bond fund.

          22. Not stock market based – protection against market risk – also true of tax exempt bond fund.

          23. Long Term Care benefits – protects against the costs of health care in retirement – also true of tax exempt bond fund.

          24. Retirement Income Flexibility -Allows you to spend down your other assets in retirement most efficiently – also true if use mixture of tax exempt bond fund, tax free, taxable, and tax-deferred vehicles

          25. Provides money for terminal and chronic illnesses ((I can access up to 50% of my death benefit early if I’m terminally diagnosed))

          A nice benefit, but is this also true of term life insurance?

          26. Last but not least…death benefit – money when you need it most..

          I would argue that most people only need a death benefit when they have dependents, ie when you can get term life insurance.

          Lastly, in my spreadsheet that I did with Robert, I do not believe I included a loan from a bank, just a loan from a whole life policy.

          Reply
          Kyle D. says November 24, 2013

          Hi Jacob,

          Thanks for your response. I think I’m totally convinced by now that someone tried to foist a WL policy on you at some point, as every response mentions some form of built-in mistrust from anyone having any financial interest in writing policies. Even Robert Murphy, who helped develop a training course to educate the next generation, and doesn’t make a dime if a Practitioner writes a policy That’s a shame.

          “I just don’t think it is well-suited for the majority of people vs. the alternatives out there of using very stable tax-exempt bond funds in conjunction with other retirement accounts such as Roth IRA, Roth 401ks, 401ks, etc because of all the headaches/confusions/potential of being taken advantage of from whole life policy salespeople.”

          I still disagree wholeheartedly. Three things.

          1) You gave a scenario in your spreadsheet of using a policy loan vs. paying cash and then paying back the savings into bonds. I cannot say I’ve ever met anyone who has done that or has even presented the idea. In reality, people are either financing or paying cash, and then replenishing their cash because they feel uneasy about not having liquid savings. In reality, it’s FAR more likely that someone is either operating on a cash basis or a financing basis. My example above with the 7.07% 60mo car loan above is what’s happening in the real world with real people in which case IBC will be a huge benefit for them vs. having their money in cash or going into debt with a bank. Sorry, but I work with clients every day, and even though the knowledge is out there and someone could follow your advice with the bonds, they just don’t. I have to coach them to start a savings plan, for which IBC can be a good fit. We won’t even talk about transaction costs or account fees where you’re keeping those bonds.

          2) You have to remember that when we use qualified plans like the ones listed above, the money is under government regulation and control, subject to early withdrawal penalties/Required Minimum Distributions, and subject to changes in the rules and tax brackets at any time, as per the decisions of the Federal Government. you have no control. They make all of the rules. Also, where is this IRA or 401(k) that has no management fees or trading costs whatsoever? Please don’t be fooled into thinking that there are no-fee accounts out there. http://www.marketwatch.com/story/no-free-lunches-no-fee-free-iras-2013-08-10?pagenumber=2. There’s a drag there at some point. Company match in a 401(k)/403(b) can offset some of this, usually but not always.

          3) Headaches and confusions will not be a factor if you’re working with an ethical financial professional. You have risk of being taken advantage of by anyone selling anything. It’s not exclusive to WL policies. Again, I feel that you’re assuming that all of us are slimy insurance salesmen that must be liars. I’m just reporting that vibe I’m getting here.

          I’m glad to share my thoughts on the list. I said ” you do not get 19 of the above benefits for utilizing a strategy that appears comparable on paper” I’ll put a little O by the ones that share the identical benefit with WL and an X when there is a problem:

          1. Tax Deferred (Not Tax Deductible) – Tax exempt bond fund is exempt from federal income tax.- O

          2. No limits on contributions – also true of tax exempt bond fund- O

          3. Tax Free income and withdrawals – Tax exempt bond fund is exempt from federal income tax.- O

          4. No mandatory withholdings – also true of tax exempt bond fund- O

          5. Tax Free to Heirs – Only useful for high net worth people, not normal individuals due to $5MM estate tax exemption or whatever it is currently – however, this is not guaranteed.- X the rules can change at anytime w/ estate limits. the 5mil increase only happened this year. IBC is always tax-free no matter what.

          6. Penalty Free Access to money under 59.5 – also true of tax exempt bond fund- X only if it’s in a non-government plan. WL cannot be held in these plans.

          7. No required minimum distributions at age 70.5 -also true of tax exempt bond fund- X only if it’s in a non-government plan. WL cannot be held in these plans.

          8. Has guaranteed costs, expenses and contribution amounts – I would argue that also true of tax exempt bond fund – Vanguard is very efficient and has been for a long time.- X It’s nice that Vanguard is good, but not everyone is with Vanguard. Even so, do you know what the yearly account fees or transaction costs will be when you go to sell the bonds? Any trading costs going on?

          9. Can take out a loan over 50K (no limits) vs. 401(k) – No loan repayments required (but it’s in your best interest to pay them back.)
          also true of tax exempt bond fund, except you don’t incur loan spread cost like with IBC – O

          10. Unlimited Investment Options (i.e rental real estate, land, business) – also true of tax exempt bond fund- X Only if you sell the bonds, in which case you no longer have a compounding bond. My Policy goes nowhere and gives me investment interest deduction when I use the investment gains to pay it back.

          11. Can be used as Collateral (i.e. for loans / small business) – also true with tax exempt bond fund – http://www.inc.com/guides/201101/5-tips-using-collateral-to-secure-a-small-business-loan.html- X This is not in any way guaranteed. They do not have to give you a loan because you can show bonds. Policy loans provisions are at-will and guaranteed.

          12. Estate Tax Free – Only useful for high net worth people, not normal individuals due to $5MM estate tax exemption or whatever it is currently – however, this is not guaranteed. O- True, it’s not guaranteed.

          13. Liquid (access to funds at anytime without penalty– no hardship required) – also true of tax exempt bond fund- O and X- True you don’t have to qualify for hardship or anything, but again, you have to pay transaction costs and liquidate the bonds, hopefully at a profit.

          14. Disability Protection – automatic funding of retirement if you become disabled –

          Question – I am familiar disability waivers on life insurance, stating that if you become disabled, you don’t have to pay insurance premiums, but does life insurance pay a “death benefit” if you are disabled?

          Or, is it just your cash value?- Life insurance won’t pay a death benefit if you’re disabled, but many companies will offer an accelerated death benefit if you’ve been diagnosed terminally ill (Ours will give us 50% access to DB early). However, the key here is that they will pay the premium for you if you become disabled via waiver, like you mentioned. If you’re paying 400/mo into IBC and you become disabled, the insurance co will continue your 400/mo payments for you. There are time limits of course. I think 5-10 years is the longest they’ll do that in many cases, but usually if you’re paid in a few years and then have 5 years of additional payments, you can usually cease premiums and still be paid up in the long run…leaving you with a fully functioning banking policy and a permanent death benefit. This happened to a client of my mentor. He paid out 30k over 5 years, and then was disabled for 5 years. They stopped funding it after the 5 year waiver ran out and by then he had 70k cash value and the policy was self-sustaining from there on. Not too shabby!

          15. Use as your own bank – source of financing – also true of a tax exempt bond fund- O True. Nelson even gives an example of banking with CD’s in his book.

          16. Self Completing – if you die income for spouse and children (college education) are paid for – also true of buying term insurance and investing difference- O and X. You’re 100% correct, but when you bring term into the picture, I want to see numbers when you put a strategy next to IBC. Term has a cost, and it grows over time…and those term premiums have opportunity cost. Also, insurability becomes harder to prove as we age, or you may be uninsurable at some point…which would force you to keep Yearly Renewable Term, which is a HORRIBLE idea! That stuff is ridiculous.

          17. Judgment Proof – protection against creditors and lawsuits in many states – this is a clear advantage of IBC/whole life.- O

          18. Potential for Dividends – more beneficial than employer match as it can potentially guarantee future tax free retirement income – tax exempt bond fund fed income tax free.

          Roth IRA / 401k withdrawals tax free.-O and X Keep in mind account fees and such. I know I keep harping on that, but when we show IBC illustrations, its usually net of all fees and commission…and when people show other investment numbers, usually fees and commissions aren’t factored in first because it’s usually done with a financial calculator to come up with the desired numbers…in other words, not being run through a real account. But this is minutia. Don’t mind me.

          19. Protection from future income tax rate increases – also true of tax exempt bond fund.- O- I love this.

          20. Guaranteed to grow every year – although not guaranteed, a stable bond fund is enough for me to cover this.- O- Can’t argue there. I’m not going to talk about default.

          21. Guaranteed retirement income (if structured correctly) – also true of tax exempt bond fund.- O- But are you talking about drawing the interest, or selling off the bonds? It doesn’t really matter. There would be an obvious course of action when the time same.

          22. Not stock market based – protection against market risk – also true of tax exempt bond fund.- X Taking your liquidy comments above, I’d be careful assuming this. The value of bonds can and will drop as interest rates rise. If you need to cash out, this could really hurt your bottom line.

          23. Long Term Care benefits – protects against the costs of health care in retirement – also true of tax exempt bond fund.- X How do you mean? I know I can leverage death benefit for LTC costs without hurting my cash value. (This part is VERY NEW for me, so I probably couldn’t answer much as far as details, yet.)

          24. Retirement Income Flexibility -Allows you to spend down your other assets in retirement most efficiently – also true if use mixture of tax exempt bond fund, tax free, taxable, and tax-deferred vehicles- O- Definitely.

          25. Provides money for terminal and chronic illnesses ((I can access up to 50% of my death benefit early if I’m terminally diagnosed))

          A nice benefit, but is this also true of term life insurance?- X- Yes, it can be, but again that has a cost, which we need to factor in. It’s already rolled into IBC numbers.

          26. Last but not least…death benefit – money when you need it most..
          I would argue that most people only need a death benefit when they have dependents, ie when you can get term life insurance. O and X- It’s more of a want than a need. A lot of people use future death benefit for planned giving, but of course I see your point.

          Ahhhh, looks like you got me. My 19 number was off on IBC having benefits that bonds didnt. It was only 15! Oh well. Can’t win em all…although if I promised myself I wouldn’t bring up default possibility for obvious reasons…if you’re in bond funds, you’re good. However, I’d get my license pulled for claiming some of those things about bonds. You can’t say that to clients. Such as, “22. Not stock market based – protection against market risk – also true of tax exempt bond fund.” I’d be roasted and lose my license in 2 seconds flat for that one!

          I appreciate the discussion about this. I also appreciate that you’re not the usual “12% mutual fund” guy that I have to deal with often.

          Again, I wish you the best and I still think you should consider starting a policy for yourself. It is the ideal resting place for capital. someone has to play the function of banker in your life. You might as well do it yourself and make what the banks would otherwise make off of you, tax-free. Later in life, who knows? You may even find yourself paying off your house early via policy loan and still being able to claim the mortgage interest deduction. A nice little trick 🙂

          All the best!

          Reply
          Lisa says March 20, 2014

          Hi Jacob, just browsing through the post where you are comparing BOY to tax exempt bonds. I have NO experience in bonds but on your last comment regarding death benefit..”I would argue that most people only need a death benefit when they have dependents, ie when you can get term life insurance.”
          This in one where I have experience in:) At 37 my husband and I took out a 20 yr term policy because our retirement accounts were doing well and we knew we would be on the mark to retire at appx 60. Well that didnt happen..lost alot of money in the market. We have finally past the mark of money that we have contributed. We are no where near retirement. Our children are grown , we are 56 & 58, and my term policy will expire worthless in appx 1 year. I can renew of course, and my yearly premiums go from $480/year to $9400/year. And the bottom line is that we are likely to live another 30 years. We are no where near where we need to be in our retirements, after putting away appx 20% per year into retirement.
          Hindsight is 20/20 and I can only speak for myself, but one of my biggest Mulligans would be to set up CV whole life policies with a reputable advisor starting in my 30’s. I can tell that our financial future would look a lot different. So what am I trying to say? We are in our late 50’s and STILL need life insurance, because our retirement currently wont hold us pas 12 years of retirement at TODAYS inflations…

          Reply
Matt says October 17, 2013

I appreciate all your effort that has gone into this. I am a relative novice in personal finance, and I only just recently have become aware of this concept as it was introduced to me by my insurance agent (who told me it took him over 2 years to understand this…). I have spent only a fraction of the amount of time trying to research this that you have, but I am quite skeptical/confused as well. What you have here is the most complete and seemingly fair treatment of the topic that I have seen so far. It seems strange to me that there aren’t many really detailed projections with side-by-side comparisons, aside from what you can find in the insurance-industry published marketing material, which often have essentially straw man comparisons (investing in CDs or other low yield vehicles, ignoring the tax benefits of investing in your employer-sponsored 401K, Roth IRA, HSA, making weird assumptions about tax code, etc).

However, I still find the issue of using it as a financing tool alluring, and I take issue with your 2 illustrations above. First, in your response to Karen on 8/8 above, you provide the illustration of a $100,000 loan with a 1 year term, with a hypothetical 5% interest rate and earning 4.5% in a non-direct recognition WL policy. You incorrectly state that the total interest paid on that loan would be $5,000, vs earning $4500, and demonstrating a net LOSS of $500 to borrow her own money. If you actually amortize a $100,000 loan over 1 year you’d see that the total interest paid is in fact only $2728.98 (because of reductions in the principal), and you would in fact earn $4,500 in the WL policy, for a net GAIN of $1771.02. That sounds like a winning proposition.

The second issue I have is with your illustration in your last post, of the $5000 loan vs $5000 in a savings account. Of course if the rates of return on the WL policy and the savings account are equal (7%), you will end up with equal amounts after 5 years, that’s not really surprising. But why on earth would you assume a 7% return on a savings account?? Certainly in years past this might have been possible, but if interest rates on savings accounts go that high again, presumably the internal rate of return in the WL policy would also increase proportionally. It seems very unlikely that the interest rate on a savings account will ever be equal to the rate of return on a WL policy. Maybe I’m wrong about that, and maybe somebody has historical data showing the MMA rates against WL rates. That would be interesting.

I do agree that it seems that this concept would only be useful when you are already addressing your retirement needs through more conventional means, and I don’t really see how WL can be superior to those for retirement planning, for which you ought to give up your liquidity during your accumulation years anyway. Also, I don’t plan on financing much of anything in my future aside from my mortgage, so there is no initially obvious appeal to me for financing a home stereo system or something that no one should EVER finance in the first place. However, there is a reality that even if we are very frugal and reasonable with our spending and saving for retirement, there are still going to be large ticket purchases in life that most of us can’t simply pay for out of one or two paychecks (autos, major home renovations, repairs, etc). Many of these are recurrent/perpetual as well, not something you just save up for and spend once (like a downpayment on a house or a college education). In some sense you are always preparing for or recovering from the next big expense, whether you mean to be or not. There are 2 conventional options: borrow from a lender, or save it up in a savings account. Saving up is clearly superior to borrowing for most things, and for anything that depreciates. But if you can use a WL policy as a savings account for these types of purchases, earning 4-5% interest even when you’ve taken out the money, it seems that would be superior to a conventional MMA earning 1%. At the end of the day, I do agree that the time and effort to carefully select the right agent, right policy, remain vigilant and educated about this complex financial instrument may not ultimately be worth it.

Reply
    Jacob A Irwin says October 17, 2013

    Hi Matt! Thanks so much for reading and for all the insightful questions. You’ve made me really think about some things here! I think you and I are on the same page – I really would like to believe in this strategy and I do think it has a place, you just have to educate yourself to protect what you’re getting in to.

    Let’s take a look at some of your points/questions and see if I can provide some answers:

    1. You mentioned – “First, in your response to Karen on 8/8 above, you provide the illustration of a $100,000 loan with a 1 year term, with a hypothetical 5% interest rate and earning 4.5% in a non-direct recognition WL policy. You incorrectly state that the total interest paid on that loan would be $5,000, vs earning $4500, and demonstrating a net LOSS of $500 to borrow her own money. If you actually amortize a $100,000 loan over 1 year you’d see that the total interest paid is in fact only $2728.98 (because of reductions in the principal), and you would in fact earn $4,500 in the WL policy, for a net GAIN of $1771.02. That sounds like a winning proposition.”

    I definitely admit that when I first wrote this post, I forgot to consider amortization of a policy loan, which didn’t affect too much since my original analysis was more based on using this strategy as a retirement funding method, instead of a short-term financing method.

    However, your question brings up a good point/question. With whole life policy loans, is the interest amortized/re-evaluated/accrued monthly or on an annual basis? In looking online, I am still not sure which is the case. I found one article indicating that it might be annually (http://www.newyorklife.com/nyl/v/index.jsp?vgnextoid=291447bb939d2210a2b3019d221024301cacRCRD), but then in reading nelson Nash’s policy loan mechanics article, it states that it might be monthly. If it is monthly, then making monthly payments would reduce the loan principal of the 1 year loan, and I agree, it would be less than the $5000 interest I stated.

    2. You mentioned that assuming a 7% interest rate on a liquid/secure savings account isn’t realistic in this day and age. I agree for sure. I was just stating that as a comparison with the reader’s example. Based on the research I did for the original post, I found that 1) a good assumed cash value increase % is 4.5% per year for a whole life policy, 2) a good liquid savings vehicle I would use for comparison is the Vanguard Short-Term Tax Exempt Bond Fund, which invests in federal tax-exempt municipal bonds with 1-2 year maturities. Since inception in 1977, it has averaged a before-tax return of 4.33% per year, which equates to a 4.05% after-tax return.

    If we were to re-run that scenario analysis from the Sep 30th comment using realistic whole life loan interest rate of 5%, WL cash value increase rates of 4.5%, and the Vanguard Short-Term savings vehicle after tax return of 4.05%, I think it would turn out with about the same conclusion.

    Reply
      Matt says October 17, 2013

      Thanks for your thoughtful reply. A couple other thoughts:

      1. It would be interesting to know how often the interest is re-evaluated on a policy loan. If it were only annually, then in the example you gave it wouldn’t matter, but I doubt that is the case. I would assume it re-calculates every time you make a reduction in the principal, as this is how it works with virtually every other type of loan that I’m aware of. Also, your example of borrowing a large sum of money for only a year is probably not the best use of this concept either. If I can pay it back in a year, the opportunity costs with respect to the time value of money weren’t that great. I’m more interested I suppose in the possibility of using the method to finance purchases that I might take 2-3 years to save for in a conventional savings account.

      2. With re: to your comparison of a low-cost bond fund like VWSTX, I don’t think it’s fair if we’re talking about SHORT TERM financing to use the LONG TERM 36 year rate of return as the comparison, especially when that 36 years includes the 1980s. The 3, 5, and 10 year rates for this fund are 0.83%, 1.65%, and 2.09% respectively–hardly in the ballpark of a 4-5% return on your WL cash value you could get today. I know we’re at a time of historically low interest rates, but all that proves is that there are likely to be long periods of time where a liquid short term savings vehicle with returns comparable to WL cash value doesn’t exist.

      Reply
        Jacob A Irwin says October 20, 2013

        Hey Matt! Thanks for stopping by again. Again, you’ve made some of the most intellectual and insightful comments I’ve seen around this topic.

        @ # 1 – I’m still not sure exactly how often the interest is re-evaluated. If you find out about that, I’d love for you to share!

        @ # 2 – You make a good point. At the PRESENT TIME in 2013, provided that you had a fully funded (capitalized) policy, then I would have to agree that short-term financing (with payback of your own money) from your WL policy would put you ahead compared to doing something similar.

        Indeed, the fact that short term financing using a WL policy is advantageous at this present time in history is probably why it is getting more press recently. The same sort of thing happened a year or so ago with Harry Browne’s Permanent Portfolio because our financial environment made it so that gold and long term bonds were outperforming so much, so more people started buying in to it.

        However, for me personally, the fact that short term borrowing from a WL policy is attractive RIGHT NOW alone doesn’t convince me that it is right to jump in to a WL policy, which is a very LONG-TERM commitment. There are several reasons I think this way – 1) It takes 7-10 years to capitalize a policy to the point where you can actually earn 4-5% annual returns, and 2) we as humans are historically very terrible at predicting the future of the stock market and/or interest rates, so I wouldn’t trust myself to make that kind of a call based on shorter term interest rate behavior.

        I look forward to hearing your thoughts!

        Reply
          Matt says October 21, 2013

          I remember in the late ’90s getting near 5% on a 6 month CD, so yeah I agree, the current interest rate environment likely has a great deal to do with the current appeal of this concept.

          I think all in all, I’m probably not going to pursue the IB/BOY concept, mostly for the reasons you espoused above. The most telling point is the lack of promotion for this idea outside of people selling WL policies, and the amount of time and energy that would be involved on my part to carefully select and manage the policy. I enjoy managing my personal finances, but I enjoy many other things as well, and I’m just not convinced it’s worth my time. I also like a fair amount of freedom and liquidity in the allocation of my investments and the ability to leave them if my philosophy or life circumstances were to change. This is a pretty substantial long term commitment to make this successful, and a pretty significant risk if you were suddenly unable to make your premium payments due to a loss of employment or a new unanticipated recurring financial obligation. If a similar instrument existed without being tied up with WL insurance (for which I have no use), I would probably be more inclined to pursue it, especially if it was offered by a bank or other financial institution and didn’t have to be sold to me by a commissioned rep.

          Thanks for the back-and-forth, all your investigative work that went into writing this post, and the fairest and most balanced treatment of this topic that I’ve found!

          Reply
        Lisa says January 21, 2014

        Matt, I always have one or two policy loans going and my interest is recalculated yearly.

        Reply
Karen says November 24, 2013

Well, since we seem to have some knowledgeable folks actively discussing this, I’ll ask a question/give some feedback on my experience.
I have a WL policy with NYL and recently purchased a new car. I first took out a loan from my credit union where I got a great rate of 2% APR. I decided to try out the IBC and found out some very interesting things:
1) Nash seems to indicate that if I take a policy loan that the cash comes from my account and the interest paid then along with the principle returns to my account. This is not true for NYL. The loan comes from some general pool and so the interest on the loan also goes back to the general pool. NY claims this is OK because while the money is loaned out, they still pay me my full dividend on the cash value of my policy as if no loan had been taken. I’m skeptical, but that’s what they claim.
2) If I take a loan and pay it back, the value of my WL policy does not increase. I have illustrations I was given from NYL to prove it.
3) The rate on their loan was about 4.5% when I asked and the dividend was around 5%. So, while some might argue that the effective rate of the loan was -0.5% (just go with it, I know it sounds crazy and I have a feeling if I had gotten farther into the process I would have been told this was incorrect.) the reality was that since the 4.5% wasn’t going back into my account, it seemed somewhat silly to do this.
4) So I could not figure out how I was supposed to make this work practically speaking. It seemed that it would work if a) the interest rate I was being charged “outside” was > than the interest rate from NYL and I send in the monetary difference to NYL as additional payment toward cash value or some other increase in coverage or b) I should have added some other rider to my policy to make the IBC work that I’m not aware of.

I’d love to hear from Kyle — who seems to have some experience here — his insights into how he actually implements IBC and if what I’ve been told/inferred (#1,2,3,4) are in keeping with his understanding. Maybe it just is not possible with NYL.

I have to say that my financial planner was also stumped, and she was the one who gave me the Nash book in the first place. She indicated that my 2% loan was unusual and that in other cases IBC “would work better”, but I’ve got my doubts because of points #1 and #2. She actually arranged for me to talk with the NYL specialist and I’m still confused. And I will add that I have advanced degrees in engineering — so it is not that the math is too hard…

Reply
    Jacob A Irwin says November 24, 2013

    Some great questions Karen. It’s also awesome to hear from someone who has real life experience with executing this strategy with a “live” policy.

    I’m definitely with you on how confusing this stuff can get. It seems like every time I start pondering IBC, I start thinking myself in circles, which does not happen with many financial strategies.

    Below are my takes/input on your points. I look forward to hearing what others say as well!

    “1) Nash seems to indicate that if I take a policy loan that the cash comes from my account and the interest paid then along with the principle returns to my account. This is not true for NYL. The loan comes from some general pool and so the interest on the loan also goes back to the general pool. NY claims this is OK because while the money is loaned out, they still pay me my full dividend on the cash value of my policy as if no loan had been taken. I’m skeptical, but that’s what they claim.”

    This is a common misconception about policy loans with whole life insurance. With all companies I know of, the policy loan comes from a general company wide account, NOT from your policy’s cash value. In fact, it is this aspect that makes it tax free b/c it is a loan and not a return of your own money/earnings. So, when you pay back the loan, it DOES NOT go back to your account directly. It is paid back to the company, along with interest. The company then releases the lien it has on your policy’s death benefit or cash value, depending on structure.

    “2) If I take a loan and pay it back, the value of my WL policy does not increase. I have illustrations I was given from NYL to prove it.”

    I’m not sure what you’re asking here. Could you clarify if this result was different than you were expecting/told?

    “3) The rate on their loan was about 4.5% when I asked and the dividend was around 5%. So, while some might argue that the effective rate of the loan was -0.5% (just go with it, I know it sounds crazy and I have a feeling if I had gotten farther into the process I would have been told this was incorrect.) the reality was that since the 4.5% wasn’t going back into my account, it seemed somewhat silly to do this.”

    This is actually quite possible. An IBC salesman I talked to showed me Lafayette’s current dividend rates and policy loan interest rates, and although the spread is generally +0.5% in the direction of the loan interest rate being higher, there were/are time periods when the dividend rate can be slightly higher than the loan rate.

    “4) So I could not figure out how I was supposed to make this work practically speaking. It seemed that it would work if a) the interest rate I was being charged “outside” was > than the interest rate from NYL and I send in the monetary difference to NYL as additional payment toward cash value or some other increase in coverage or b) I should have added some other rider to my policy to make the IBC work that I’m not aware of. ”

    I’m a little confused on what you mean here. What is your definition of “making it work practically speaking?”

    Reply
    Kyle D. says November 25, 2013

    Hey Karen,

    I’m going to try and answer your questions with as little fluff as possible (even though I know myself and it’ll probably be loaded…see?). You hit on some very important subjects inside of IBC, and even some people who claim to practice IBC don’t necessarily know the answers. Also, you made me laugh out loud with your engineering degree comment. You are probably better at math than all of us ;). By the way, get your Becoming your Own Banker book out. You’re might want to reference.

    “1) Nash seems to indicate that if I take a policy loan that the cash comes from my account and the interest paid then along with the principle returns to my account. This is not true for NYL. The loan comes from some general pool and so the interest on the loan also goes back to the general pool. NY claims this is OK because while the money is loaned out, they still pay me my full dividend on the cash value of my policy as if no loan had been taken. I’m skeptical, but that’s what they claim.”

    The claims from NYL are correct on all counts. I was trying to find the wording that Nelson used about loaning and returning from your account. I think if you turn to page 26, it’l all pop into focus. Yes, your account cash value is what’s available to you alone, but it all comes from the same pool. All of the premiums paid go into the general pool. All of the cash values are in the general pool. The amount of cash value in your policy is just how much they are willing to lend to YOU from that general pool, and that number is governed by your equity in your policy. That’s where expenses come from, that’s where death claims come from, and that’s where they lend from to earn interest. The insurance companies have to lend money to pay promised death claims later. If it’s not to you, it’s going to be to others. And yes, NYL will pay you a full dividend even if there’s a loan. Example: You have 50k cash values and you borrow 30k of it. You’re still going to earn a dividend in relation to the entire 50k, not just the remaining 20. This is because NYL is a non-direct recognition company, and that’s what that term means. I understand you being skeptical about that. I get funny looks EVERY TIME I explain that to someone, but it’s worked that way for 200 years. Also, I want to put to bed forever something that life insurance agents like to claim, since we’re on the topic…

    Direct vs. Non-Direct recognition of dividends. One is not necessarily better than the other. There are non-direct companies (like the policies I own) that currently, in real life, pay a 6% dividend, flat, regardless of policy loans. There are direct recognition companies that currently pay a 7% dividend on funds that are not being loaned and 4% on loaned funds. Can you say for 100% that one is better than the other? Nope. Me neither. The math is completely dependent on the lifetime loan use of the policy, which is not something we can necessarily predict. We might need to take the money at some point for a reason we never saw coming…that’s just life. So, the Direct vs. Non-Direct argument is just hot air. I’ve said this exact same thing to some NYL guys here in town and they had no idea. These companies teach you what they want you to know…

    2) If I take a loan and pay it back, the value of my WL policy does not increase. I have illustrations I was given from NYL to prove it.

    This is going to be long. Yes yes yes! You couldn’t be more correct!!! If you take a loan, and pay the loan back at the current policy loan rate, it will NOT cause your cash values to increase. It’ll be right back where it was as if you never took a loan(with a non-direct company) which at face value is a big deal. You just used money for your own purposes, paid the loan back, and still earned interest on it at the same time. That does not happen (that simply, mind you. home equity anyone?) anywhere else but inside of an insurance contract. After I first read Becoming Your Own Banker, I was in a mental coma for days trying to replicate what Nash showed in the book. I was clueless to what was really going on because I could not get my software to do that stuff!

    However, doing what I just described is NOT what Nash was describing…not by a long shot.

    If you look at his famous “Equipment Financing” chapter starting on page 51, this is where EVERYONE gets off track. The illustration on pg. 54. this is showing a 4-year capitalization period, which would have to be longer today because dividends are down, yes we understand that. Look up in the top left hand corner. You’ll see how the policy is designed with a $14,999.99 base premium and a $25,000 paid up additions rider. (Fun fact for you. That base premium is what we, the practitioners, get paid on. The paid up additions are almost negligible. Your imagination can fill in the blanks with what might happen with a less than ethical person. That person wouldn’t be able to do what we’re doing though. They wouldn’t have enough cash value as quickly.)

    What is going on there is 25k of that 40k premium is going straight into fully paid up additional insurance benefit each year on top of the initial death benefit of 1.2 million. Those paid up portions are almost fully liquid because no further premium is required to assure that extra death benefit. Look how the death benefit rises sharply in the first 4 policy years on pg. 54. So, each year, they are adding 25k worth of additional 1 shot bursts of fully paid up insurance that never goes away. (hence 24k of that 25k being accessible immediately in cash values in year 1. If there weren’t a paid up additions rider, you’d have to wait til the first dividend was paid at the first policy anniversary, which would buy paid up additions, which would then grant access to cash value on an increasing basis. Now, between year 5 and year 16, I want you to look at the death benefit. It’s dropping, isn’t it? There is 0 premium after the first 4 years going in…therefore to keep the policy alive, we have eat up some of those liquid paid up additions in order to make our premium of $14,999.99- the BASE premium (The only reason we have to do it this way is because of the government MEC line. Otherwise, we could lump it all into the first year and be done with it.) Now, look at what the dividends are doing in those first years. They are starting to grow. Look at the dividend at year 17, and look at the death benefit on year 17. The dividend is bigger than the base premium and the death benefit is starting to rise again! That’s because the dividend is more than enough to cover the premium now and will be forever and ever. The excess dividend above the 15k base premium will buy paid up additions to increase cash value and compounding.

    HERE IS THE KEY TO THIS ENTIRE EXAMPLE: This policy, starting in year 5, can accept up to $14,999.99 of premium each year. If we don’t pay it, the paid up additions and dividends will do that for us. That’s what makes this whole example work.

    What Nelson says to do, and i’m paraphrasing, “When you take a loan from the policy, you want to pay it back at a rate equal to or greater than what the finance companies would have charged you for that same loan.” The illustration on page 59 is showing exactly that. The loans he is taking, he is paying back at 15% when the policy only calls for 8%. He does this because he is playing “honest banker” and the rate that the equipment lender was going to charge him on a commercial loan was just above 15% (See pg 56, and you can see the auto loan package and the interest being charged. Also, since he is self financing it, he doesn’t have to pay for insurance on it like he would if he were using a lender.) That results in the loan being paid back early, and the extra capital is going into the policy as more premium, which adds to the compounding base of your policy.

    BOTTOM LINE: He would have had to pay 15% interest through the lender. He used his policy to borrow at 8% but still paid back at 15%. Since the policy can accept up to $14,999.99 of premium each year, that extra “interest” is going into the policy as extra premium…meaning more cash value over the life of the policy.

    3) The rate on their loan was about 4.5% when I asked and the dividend was around 5%. So, while some might argue that the effective rate of the loan was -0.5% (just go with it, I know it sounds crazy and I have a feeling if I had gotten farther into the process I would have been told this was incorrect.) the reality was that since the 4.5% wasn’t going back into my account, it seemed somewhat silly to do this.

    If you can find a loan rate better rate than 4.5% and get approved for it, you’re right. It would be silly to pay extra interest since the required interest on the loan does not go to you. However…don’t get suckered into low interest rates that are really just a clever form of discounting. A lot of them are teaser rates anyway. There’s no such thing as 0% APR…it’s an illusion. If you search the topic and read into it a bit, you’ll see what I mean. Cash is king. You can find some incredible deals if you’re a cash buyer…and you might find investment opportunities that you weren’t expecting.

    4) So I could not figure out how I was supposed to make this work practically speaking. It seemed that it would work if a) the interest rate I was being charged “outside” was > than the interest rate from NYL and I send in the monetary difference to NYL as additional payment toward cash value or some other increase in coverage or b) I should have added some other rider to my policy to make the IBC work that I’m not aware of.

    I think most of this was already covered above.

    Final thoughts:
    I want you to look at this chart here. http://www.moneycafe.com/personal-finance/prime-rate-history/ This is the history of Prime Interest Rate from 1930 to the present. We have depression-like interest rates right now which is heavily distorting people’s view and use of money. Now, we as common folk, we don’t get prime rate. We have to pay 1.5% over prime in most cases. *When* interest rates rise again, IBC puts you in a position of control. In the early 80’s prime rate peaked at 21.5%…which means that we would be charged 23%. People with life insurance cash values had access to capital at lower rates. Nelson had borrowing power in his policies at that same time at 5%, 6%, and 8% interest. It got him out of a LOT of trouble. He describes the whole mess on pages 12-13.

    Right now, IBC can have the outward appearance of being a raw deal once you scratch the surface and dig a little bit into it…and it’s mostly because all people look at is present interest rates and present rates of return. These things won’t last. They never do. It’s a cycle. What position do you want to be in when rates rise and we’re paying 8-10% on regular loans? I see tremendous opportunity to set ourselves up to win the game using IBC.

    IBC only requires 4 things of you:

    1) Long-Range Thinking
    2) Don’t be afraid to capitalize. The more you put in, the more you’ll have.
    3) Don’t steal the peas. Don’t rob your bank by not paying back loans. (Dividends can pay a loan back for you, but it’s not ideal. If you get strapped for cash, well, at least you have this option.)
    4) Don’t do business with banks. They create money out of thin air and are an engine for inflation. Every time you take a loan from a bank, it is inflationary. http://radiofreethinker.files.wordpress.com/2012/01/fractionalreservebanking.png

    All the best,
    -Kyle

    Reply
Karen says November 24, 2013

2) If I take a loan and pay it back, the value of my WL policy does not increase. I have illustrations I was given from NYL to prove it.”

I’m not sure what you’re asking here. Could you clarify if this result was different than you were expecting/told?

So if I take a loan and pay it back, there is no difference in the value of the policy. According to the Nash book, when I pay back the loan the value of my policy should increase. But it does not. So they only way for the value of the policy to increase is if you over pay the loan back. For example:

Case A: Bank Loan @ 6%, WL policy loan @ 4.5 % — Instead of just paying back my loan @ 4.5% I’d have to pay back the additional 1.5% and ask my agent to put the this extra as cash value into my policy.

Case B: Bank Loan @ 2%, WL policy loan @4.5% — If I pay back the 4.5% loan, then my policy has no additional money put into it, and thus remains at the same value as it would have been if I had not taken the loan.

So for my situation it was Case B. But according to the Nash book it sounded like it should be Case A.

If you have the book this comes from pg 52. ” The extra cash flow becomes capita) in the system and
enables his “gophers” at the life insurance company to lend more money to all those other borrowers.
This extra money does not go to the general portfolio of the company-it goes to his policy that is being
administered by the company on his behalf. So, examine illustration #2 closely. Note the
year 5, column 1 and you see (-) $34,600 expressed lS an outlay. That is “shorthand” for the fact that he
jorrowed $52,600 that year and paid back $18,000 S1,500 per month). Notice that the debt is being
reduced to zero at the end of four years. Remember that the policy loan provision calls for interest at 8%
– but he is repaying his policy at the rate of a bit over 15%. It should be obvious that he will repay
the loan before the four years are up. The additional S l ,500 per month becomes additional premiums and
adds to the capital base. Go to line 36 (his age 65) and look at the cash value now in comparison with the previous
illustration. Note that the cash value is now 51,988,254 compared with $1,517,320. He made 5470,934 by financing just one truck with his bank!

Reply
    Kyle D. says November 25, 2013

    One more thing Karen,

    “If you have the book this comes from pg 52. ” The extra cash flow becomes capita) in the system and enables his “gophers” at the life insurance company to lend more money to all those other borrowers.
    This extra money does not go to the general portfolio of the company-it goes to his policy that is being administered by the company on his behalf. So, examine illustration #2 closely. Note the
    year 5, column 1 and you see (-) $34,600 expressed lS an outlay. That is “shorthand” for the fact that he borrowed $52,600 that year and paid back $18,000 S1,500 per month). Notice that the debt is being reduced to zero at the end of four years. Remember that the policy loan provision calls for interest at 8%
    – but he is repaying his policy at the rate of a bit over 15%. It should be obvious that he will repay
    the loan before the four years are up. The additional S l ,500 per month becomes additional premiums and adds to the capital base. Go to line 36 (his age 65) and look at the cash value now in comparison with the previous illustration. Note that the cash value is now $1,988,254 compared with $1,517,320. He made $470,934 by financing just one truck with his bank!”

    This is 100% accurate. If you did that at today’s policy loan rates (4-5% not 8%) he’d have even more cash at age 65. He’s just playing “honest banker” with himself and adding more cash to his system opposed to the alternative of paying 15% interest to someone else’s bank. It’s brilliant.

    Like I said in my other post, it’s kind of distorted by today’s extremely low interest rate environment, but if you look at that interest chart again http://www.moneycafe.com/personal-finance/prime-rate-history/ and understand that it’s all cyclical, your imagination will quickly see how IBC can really set you up for success over a lifetime. Long range thinking.

    Page 55, the “Great Wall of China” example is a great little piece to help people understand finance. The finance companies are borrowing a lot of that money from insurance companies and then chopping it up and selling it off as loans to you and me. IBC eliminates the middleman.

    Reply
Karen says November 24, 2013

4) So I could not figure out how I was supposed to make this work practically speaking. It seemed that it would work if a) the interest rate I was being charged “outside” was > than the interest rate from NYL and I send in the monetary difference to NYL as additional payment toward cash value or some other increase in coverage or b) I should have added some other rider to my policy to make the IBC work that I’m not aware of. ”

I’m a little confused on what you mean here. What is your definition of “making it work practically speaking?”

I mean just that if you can go out commercially and get a loan at a lower interest rate than the policy loan rate, I’m not sure how IBC can ever work. So I’m assuming this inversion of bank to policy loan rates is a fluke of the 2008 financial crisis. But this is an assumption. I’d really like to hear from someone who has done the IBC to understand how it works.

Reply
    Jacob A Irwin says December 2, 2013

    Thanks so much to Kyle and Karen for sparking some great discussion here! 🙂

    Karen – I’d be very interested to hear your take on whether policy loans seem like something worth pursuing after synthesizing Kyle’s feedback on your above questions. Thanks!

    Reply
      Karen says December 7, 2013

      My assessment after getting very close to doing the IBC with a WL insurance policy from NYL is that the IBC could work, but the current economic climate is not ideal for it because borrowing costs are so low.

      I do believe that the IBC should really be seen as something to do after you are doing all the other more obvious, and lest overhead/costly investment options. For example, I’m already socking 15% of my income into a retirement account and another 5% into shorter term investments most of which are in stocks & bonds (or collections of these like mutual funds, index funds, etc.) It is also something to consider if you are in a higher tax bracket because then the tax free growth is key. Again, all my income (from investments) is going to be taxed at the >25% point. So the fact that insurance growth is guaranteed is appealing and the fact that they are mostly invested in long term, low risk investments is also appealing.

      So I’ll try again later to use IBC, but when commercial borrowing costs are less than the borrowing cost from your WL policy, then it does not work. It only works if you find commercial borrowing costs higher than your WL policy and then you pay back your WL loan as if it were the commercial loan. It will be important to tell your insurance agent how you want the repayment money applied. For example, if not properly instructed they would likely apply all of your payment (principle + interest + difference between commercial & WL interest) directly back to your WL loan. Instead you want to put some of it back as additional cash value. (You can of course pay off your loan by doing the above, and then transfer the remaining payments to your additional cash value). Either way the amount of money you pay and the number of payments should be the same to your WL loan as to your commercial loan. The way you repay may have some impact on MEC — your agent can tell you.

      If you are going to use the IBC with your WL policy, you should be sure to tell your insurance agent because they can structure the policy to help you to avoid MEC (if you go over MEC then you have to pay tax).

      If you like the idea of the IBC with whole life, but don’t like the idea of the slow growth of WL, and you feel you have not already over exposed to the stock market, you may be able to do this with other types of Insurance Policies such as variable life or universal life. But if you are confused by WL, then stay away from variable or universal, it only gets more complicated.

      Reply
        Kyle D. says December 8, 2013

        Karen,

        What you have to realize is that interest rates are cyclical. If you look at the chart I provided for you above, you have to admit that we are in depression-like interest rates right now. It will not last. It never does. Also, not every loan out there sits a point and half above prime. Go out and try to borrow some money. You’ll see what I mean. Real life is different than conversation on the internet. Also, it’s my understanding that NYL’s mortality cost is pretty high and their loan rates are like 6-8%. Correct me if I’m wrong. I have policies with Ohio National. Lowest mortality cost in the business and right now the loan rates are 4.4%.

        I think you need to address your idea of timing when you say, “I’ll try again later”. It is going to take time for you to build up cash values. You won’t get to that point where you can take a reasonable loan for a while (unless of course, you’re putting in large premiums. Most people aren’t though). If you wait years to implement this, you might never have time to benefit from it. If interest rates went up tomorrow, you would not be able to leverage cash values because you have none, even though the market interest rates might make IBC look much more appealing to you at that point. When rates get pushed up, you have to be ready with a strategy like this.

        I live in Florida. To me, this would be like saying, “I don’t need to get my air conditioner fixed because it’s winter right now and I’m not hot in the house. I’ll fix it when it gets hot” The day I wake up sweating, I don’t automatically get access to an A/C tech. It might take time for them to work me into their schedule. What if they have to order a part and it will take another week? All the while, I’m having to suffer higher temperatures. Suffering higher interest rates because you have no cash value collateral built up beforehand…it’s the same thing.

        Also…apple and oranges. You’re putting 15% into a retirement account. I don’t know what you’re invested in or what type of “retirement account” you have, but the tax rules and safety of those type of accounts usually do not make them comparable to IBC. If it’s a government qualified plan, remember they have full discretion to change the rules at any time on those things…

        I want you to know that you know more about IBC than most agents I know. You give the sales force too much credit 😉

        All the best,
        -Kyle

        Reply
          Karen says December 10, 2013

          Yes, I get that. I think you interpreted my “try again later” phrase to mean that I will try later to buy WL insurance for the purpose of IBC. Instead I meant that I will try again later to use my WL insurance to fund a loan instead of taking a commercial loan.

          Reply
          Kyle D. says December 10, 2013

          You’re right…I did misunderstand.

          Sorry!

          Reply
          dave says April 21, 2014

          Hi Kevin, just recently signed up for Ohio as well – the Prestige 10 Pay. I went with them mostly because of the ONL reputation and the loan structure. However, their CV is a lot lower first year – more like 20% vs. the 50+ % that is recommended in the article. What were your thoughts on that?

          Reply
Christine says November 28, 2013

Kyle,

Going back for a minute to your list of benefits of IBC: could we add a 27th benefit — ‘sheltering assets from view of college financial planning offices’? This is a benefit that our financial adviser is promoting to us. I’m having a hard time finding information on others using IBC for this benefit and their experience with it for this purpose. Thank you for any thoughts you have on this idea as it relates to IBC. Also, how can I get a copy of ‘Becoming Your Own Banker’. Thanks. Christine in Georgia

Reply
    Kyle D. says December 3, 2013

    Hi Christine,

    I do know that life insurance cash values don’t factor in to financial aid calculations…but that’s about it. I don’t really like to promote IBC as a way to shelter assets. That’s not why I’d recommend someone do it, but yes, it will get the job done. I can’t say I have personal experience with people using it for this purpose specifically, although I’m sure there have been plenty of situations where it’s helped behind the scenes.

    You can get a copy of the book from the IBC website https://www.infinitebanking.org/ and just click on Store at the top. You can order a hard copy or a digital e-book download through the store. I buy them by the case. I’ve got 20 copies left before I have to order more. I’d also recommend picking up the “Banking with Life” DVD. Watch the little preview and you’ll get a sense why.

    I do not make any money off of the sale of these items. I know they will help you. I can’t believe that someone has spoken with you about IBC and not sold/given you a copy of the book. That’s a big No-No among authorized practitioners. Everyone needs to read that book. I’m putting together a video introduction to IBC pretty soon. Let me know if you’d like a copy and I can send it over when it’s done.

    All the best to ya!
    -Kyle

    Reply
Fledgling Self-Banker says December 7, 2013

Hi, all. A bit of web surfing for an IBC annuity calculator and insomnia led me here.

To aid with the perspective: I am a 31 yr old male, making a decent living as an auditor. I have a 9 month old and for the past 3 years (at least) have been researching passive income and alternative investment strategies. I stumbled across the IBC concept, did some research, found an agent, and signed up last month. I’ve made my 2nd policy payment and am sitting on a whopping ~$540 of cash value.

I am not an undisciplined saver: I’ve always been rather frugal, my retirement accounts sit around ~$100k all of which was accumulated while digging myself from mid five figure debt.

I give all of that background to say that I am not high net worth, I am not an insurance salesman, I do have a son to provide for in the event of my untimely demise, but that is a sidebar to my motivation behind executing this policy. I totally get where Jacob and others are coming from in their assessment of the benefits and being able to accomplish similar results elsewhere, but I don’t see any savings/investing vehicle that can generate a return while said funds are being otherwise deployed.

I view my IBC policy as a capital account that will eventually permanently replace my need to jump through loan qualification criteria ever again. Now if the funds are being used only for financing purposes, then, yes, the myriad benefits can all seem like smoke and mirrors, mostly. However, as a budding real estate investor who nearly lost my deal on account of the incompetence of my mortgage company’s personnel (said loan changed hands three times in the span of the first 2 months, btw) I told myself there has to be a better way to fund my investments. I believe that, over time, my IBC policy will be that tool. I intend for it to be an unfettered source of capital to fund my own ventures, until such time that I choose to passively invest in others like the banksters.

I feel like I’m getting preachy and as though I’m rambling, so I’ll cut to the quick: this strategy is something that can benefit anyone but is not for everyone. I’m a contrarian at heart and the ability to take myself out of the conventional bankster financing loop is, personally, worth any perceived complexity or downside. I can’t see losing on having capital that I can deploy to generate a return that while being deployed will still net me a return regardless. So even if I fail on the venture my policy is still providing a return.

Where’s the loss?

Reply
    Jacob A Irwin says December 7, 2013

    Hi Self-Banker! Thanks so much for stopping by and sharing your story/background. Always great to meet another person interested in this fascinating concept.

    I definitely agree with you that the downside risk / potential to lose money with IBC is very comforting b/c it is so secure.

    However, I’m curious on your take on 2 things you mentioned that would make it hard for me to jump on the IBC wagon:

    1) “but I don’t see any savings/investing vehicle that can generate a return while said funds are being otherwise deployed.”

    Even though your savings are earning interest while they are deployed elsewhere (via a policy loan), the interest that you have to pay on the loan can cancel out the interest earned, generally resulting in a approximate loan interest rate spread you have to cover of ~0.5% annual.

    2) “I view my IBC policy as a capital account that will eventually permanently replace my need to jump through loan qualification criteria ever again.”

    For me, it’s hard to compare a traditional loan (other people’s money) with an IBC policy (my own money).

    Reply
Fledgling Self-Banker says December 8, 2013

Jacob,

Thanks for the quick reply, on a weekend to boot. I thoroughly have enjoyed this post.

To your points:

1. My understanding of my policy is that it functions like a 401k loan in that any interest accumulated goes back to the cash account. The only fee that I am aware of with my policy is the nominal loan processing fee on the front end. So while I get your illustrations, if I were to take a policy loan tomorrow it will not have a stated interest rate, but will be what I choose. However, if the insurance company’s cost of capital is 4.5% that would be the minimum I charge myself.

But going back to the scenario you prescribed of the interest rate spread. If I can acquire a property by way of a policy loan and lose a point of interest, I would still be receiving 3.5% – 4% on my entire cash balance, correct? All the while, my policy loan portion will be utilized to fund my real estate venture that, if successful, theoretically will have an infinite rate of return.

But say I deploy the funds in a program like the lending club, or speculation in the market, etc. these scenarios can generate returns that can offset the perceived loss on the interest spread.

2. I understand your perspective: paying any fee to access your own capital is counterintuitive and paying a fee for OPM is reasonable, rational, and inherently a more practical value proposition. The first rule of investing: use OPM, where possible.

That is a valid argument and perspective, and I don’t disagree with that logic. But where IBC intrigued me was in allowing me to develop a system by which I could put myself in a position to no longer need to be funded by these institutions.

As modestly as I live, and despite maintaining near 800 credit, I am limited by the amount of mortgage credit that I can receive. My rental generates $600 of monthly profit. However, I have to wait two years before I’ll be able to recognize that income for DTI purposes. The mortgage note, which negatively impacts my profile, of course has been recognized immediately. Also, the first four mortgages are said to be relatively hassle free (after my first foray, I shudder to think about my 5th closing) to acquire, but then one cannot have more than 10 mortgages at a time. These seasoning limits and restrictions only serve to impede my real estate enterprise’s growth rate.

With IBC, the day will come when I literally no longer need to apply. Additionally, it affords me a method of recouping a significant portion of the interest that I would otherwise forfeit using conventional financing methods. That capitalized interest will further capitalize the account and expand my opportunities for deployment.

I may not get to experience the full potential of the account in my lifetime, but it is a legacy product that I can teach my son to utilize, pass on to him, and hopefully positively impact future generations.

I rambled again. The TL:DR version: strictly by the numbers, I can understand an analytical person’s reservations with the program. For me, there are qualitative benefits to be derived from the IBC system that in the long run make it a worthwhile capitalization strategy.

Reply
    Kyle D. says December 8, 2013

    Self-Banker,

    You’re like me. You like to ramble 🙂 Question, have you picked up a copy of Becoming Your Own Banker? If not, I’d highly suggest you get a copy. That is the IBC bible, so to speak. Also, check the replies I made to Karen above. It might help you understand a little deeper what’s going on “Under the Hood”.

    Best of luck to you!

    Reply
    Michael Sparks says February 9, 2014

    “I may not get to experience the full potential of the account in my lifetime, but it is a legacy product that I can teach my son to utilize, pass on to him, and hopefully positively impact future generations.”

    I believe this is an often under-represented benefit of IBC. The ability to easily leave the legacy that you created without it being squandered by the successive generations. I want my great great grandchildren to say “Wow, who was that guy Michael Sparks” that allowed us to have a head start on life.

    Good luck teaching all that other financial mumbo jumbo to anyone but a certified guru. IBC can be easily shared, taught and used by the average person. Understanding that your own bank can be larger, safer and more rewarding that the bank down the street.

    Lastly, a person experience, my daughter who just turned 21 was finally exposed to a small UGMA that was left by her grandmother. Since she became the owner, she promptly removed half of what was in the account to “Pay for school”. She’s managed to pay for the last 3 years without this money. But I guess that clothes, shoes and purses got the best of her. Now that “emergency fund” is a 1/2 emergency fund. If this would have been in an IBC, the policy owner (me in this case) would be able to decide when to release control. I would have also been able to teach her how to borrow the money and pay it back, hence replenishing her bank. Now it’s gone with the wind.

    Reply
      Jacob A Irwin says February 22, 2014

      Thanks for reading Michael. I agree that UGMA’s are not my favorite tool for saving for a child’s education / future since it reverts to their control.

      Reply
Fledgling Self-Banker says December 9, 2013

Thanks for chiming in Kyle,

I definitely have a copy of the book. It’s what got me hunting down and getting in touch with my agent.

Thanks for chiming in,
S-B

Reply
robby says December 21, 2013

Thanks for this great post. I am still not fully clear but here goes

I am high NetWorth and have a large bank account that is earning a piddly amount. Say 1%. If I buy Whole life can I view it as account earning a guaranteed interest. The only downside is that I loose liquidity for 7-20years. The gauranteed interest is 2.5% and its tax free. Forget the extras of Death Benefit and Infinite banking.

Something is wrong here or is it?

Reply
    Jacob A Irwin says December 21, 2013

    Hi Robby, Thanks for stopping by!

    That’s a great question. Overall, I believe you’re on the right track, and I think that since you’re high net worth, a whole life policy would be something suitable for you.

    The issues of liquidity and earning guaranteed interest are sort of separate with a properly structured whole life policy.

    1) Liquidity/tax free access – With a properly structured, high cash value whole life insurance policy, you will have liquidity/access to between 60-80% of your 1st year premium right away, so you don’t technically “lose complete liquidity” for the 7-20 years, you just wouldn’t be earning the 2.5% return.

    In addition, it’s also important to note that your cash is only accessible tax free via policy loans (which do incur an ~0.5% interest rate spread, so it’s not exactly a free ride).

    2) Earning interest – In the policy illustration I was shown, a guaranteed overall annual interest rate of 2.5% was earned after averaging over a 20-30 year accumulation period (as shown below). While you technically start earning interest before that time, as you can see below, it takes a while for the policy to capitalize. In addition, it’s also important to note that not all policies will have the same 2.5% guaranteed interest rate, so you’d want to check on what that specific number would be for your policy drawn up.

    “In Year 2, you have a guaranteed return of -28.4% and a non-guaranteed return of -20.8%.
    In Year 5, you have a guaranteed return of -2.6% and a non-guaranteed return of 0.9%.
    In Year 10, you have a guaranteed return of 1.7% and a non-guaranteed return of 4.1%.
    In Year 20, you have a guaranteed return of 2.5% and a non-guaranteed return of 4.3%.
    In Year 30, you have a guaranteed return of 2.5% and a non-guaranteed return of 4.3%.”

    In addition, if you simply go to your insurance agent and ask for a whole life policy (without specifically requesting for a high cash value one), chances are they will structure it so that you have the most death benefit (highest commission to the agent), which will result in extremely low liquidity and cash value. Therefore, be careful about how/who you approach to help you with this! 🙂

    Reply
Fledgling Self-Banker says December 21, 2013

Hi Rob,

As a subscriber to the system I would say that is a mostly accurate assessment.

It would be inaccurate to view the dividend (interest) as being guaranteed. View the insurance companies as dividend aristocrats that have a long history of paying out, but that return isn’t guaranteed or federally insured (for whatever that’s worth) like bank interest.

To your point about being illiquid, during the initial capitalization phase, depending on the amounts you plan to access, that is debatable.

I am on month three of my whole life journey and have already taken a policy loan to buy Christmas presents. So, considering your net worth, depending on the size of your policy and PUA contributions and the amounts you need to access, you may experience a satisfactory level of liquidity from near inception.

::Sidebar::
To OP, and others, I had an opportunity to speak with my agent and share my travails on this blog. She corrected me by stating that whole life policy loans do not consist of “your money”, one’s cash value is used to collateralize the policy loan, not fund it. Because it is the insurance company’s funds a loan holder has to pay the insurance co’s cost of capital. However, because one’s cash stays untouched, policy holders still receive their dividend at year end and any excess loan repayments are used to further capitalize the cash account.

Hopefully, that corrects my misstatement before and clarifies some for others.

Seasons Greetings to all!!

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robby says December 21, 2013

Thanks Jacob and fledling_banker.
I got an illustration of 300K policy with yearly premium of ~12K over 11years. I am in the long haul and don’t care about withdrawals. Just want the max interest and pass the maximum onto heirs. I am already maxing out 401k etc. so no other places

With this illustration, I see the guaranteed rate is ~2.5% like you said and Breakeven is ~18yrs and Death benefit never increases; stays at 300K.
With non-guaranteed current the breakeven ~10yr, rate is closer to 5.6% for cash value and 2.1% for death benefit.

Thats a huge difference. Is that common? How can insurance company even offer 2.5% when the banks are offering .1%. I presume they are taking on some more risk.

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    Jacob A Irwin says December 22, 2013

    Hi Robby, glad the responses were helpful here!

    Yep, it’s quite common for the non-guaranteed to be higher than the guaranteed. In fact, it is that very aspect that gets people in to trouble/misconceptions with whole life policies since those non-guaranteed rates are subject to change based on current interest rates. For example, folks taking out policies in the 2005-2007 were likely shown non-guaranteed total cash value accumulation rates of 7-10%, which of course didn’t hold up from 2009-2012.

    As mentioned in my post, a solid long term cash value accumulation / total interest rate to assume for WL policies is 4.5% per year (based on long term historical studies).

    As far as the investments a life insurance makes, since they are able to spread out risk among many policy holders, they can invest in a slightly more risky securities than you or I could individually to still have liquidity. I found a pretty good table in this article about what they invest in – http://econintersect.com/b2evolution/blog1.php/2013/03/13/where-do-u-s-life-insurers-invest

    Needless to say, I have found plenty of evidence to convince me that life insurance company money is very safe, likely more safe even than money placed in the federal govt.

    Reply
Fledgling Self-Banker says December 22, 2013

Banks offer interest based on the Fed Reserve prime rate and LIBOR. Insurance companies generally hold bonds, which like Jacob stated, have experienced erosion on returns brought on by the bull market in equities. We should experience improved non guaranteed returns once the effects of Fed tapering start taking hold.

To your point about not being interested in making withdrawals, Robby, I would challenge you to consider taking policy loans to increase your policy’s cash value.

I know Jacob would say it’s a negative value proposition, but if you have nowhere better to park your funds, consider that the portion of your policy payments above the principal and the insurance co’s interest rate further increase the cash value of the account.

For example, I borrowed $500 from my policy and I chose a repayment amount of $600. The insurance company will get ~$44 (4.75% borrowing rate) the remaining $56 will go to the cash value portion of the policy. At year end (or on whatever basis the dividends are paid) I will receive a dividend on that $56, as well. So in addition to my scheduled PUA payments I will have diverted more funds to the policy to further grow the policy’s value and receive a dividend on.

I say all this to point out that if your main objective is to maximize the policy’s value, policy loans are a fantastic means of rapidly increasing the overall value of the policy. The death benefit will always be what it is, but the cash value can grow almost exponentially via excess policy loan payments (of course keeping in mind the MEC limit). With the amount of free cash that you have at your disposal you sound as though you would be a prime candidate for such an approach to funding your policy.

S-B

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robby says December 23, 2013

Hi S_B
” The insurance company will get ~$44 (4.75% borrowing rate) the remaining $56 will go to the cash value portion of the policy. At year end (or on whatever basis the dividends are paid) I will receive a dividend on that $56, as well. ”

a)4.75% of $500 = $24. So I am confused about the numbers
b) In addition, does this mean $44 goes away as fee/expenses so only $56 goes back to us.

Something I don’t understand in IBS is how the cash value and DB both decrease when one takes out a loan. Say I have 100K in cash value and 300K in DB. Then I take out 10K as a loan. What happens to cash value and DB. And when I pay back the 10K+Interest (4.75%), then do I get both my cash value and DB back to the original values (as if I had never taken out the loan). If so, does this mean I am taking a loan and then paying myself back. There has to be some expense the insurance company charges.

Sorry to be so dumb about this but this one I don’t understand. A simple spreadsheet would be most helpful.

Thanks!

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Fledgling Self-Banker says December 25, 2013

Robby,

Far from dumb. I am certain I have oversimplified. The $44 came from an annuity calculator compounding interest over 10 periods.

To answer your question about fees, the $44 constitutes the insurance company’s fees on my transaction.

You are correct that only $56 will go back to the account in my situation as PUA. I will have my agent model something for me in a spreadsheet that I can share with you all to illustrate.

From what I understand, the death benefit is only impacted if the loan is not repaid and your cash value is not enough to satisfy. Your cash value will be offset by the loan balance. In the event that there is an outstanding balance(s) on the policy, the disbursement will be reduced by the loan amounts.

I will speak to my agent about circumstances that can lead to DB reduction, but I don’t see how that would be. In your example, it is my understanding that your 300k would be paid at face value and your 100k of cash value would be offset by the loan balance resulting in a $90k cash payout.

When you repay the loan, the 4.75% is going to the insurance company. So going by simple interest, $475 will go to the insurance company. When you take out the loan, ideally, you would elect to repay it at, say 10%, so that $525 will go to your cash value balance.

The thought there being that your account will now have $100,525 which will receive a dividend of 4.5%. So you lose .25% on the transaction overall, but you have added to your cash value basis, which will receive the 4.5% dividend, as well as increase your access to virtually unfettered capital in the process.

Merry Christmas to all!!

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Steve R says January 2, 2014

Thanks so much for this well written and organized post!!! Also thanks everyone for the shared experiences. After reading Nash’s book, and seeing illustration after illustration from 2 different insurance agents and representing 4 different insurance companies, I really wanted to get some “unbiased” thoughts on this whole thing.

I plan to take your advice. At 29, I have some time to get into this when I make more money, and making only $100k per year at the moment will allow me to still use a ROTH IRA. For now, I will be maxing out my Roth IRA’s and using a 20 year convertible term policy to protect my family and convert it to while life later for this system if I start making too much for the Roth.

Also, having this vehicle in place when my kids are applying for college sounds useful for the purposes of FAFSA.

Thanks again and have a great 2014!!

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    Jacob A Irwin says February 22, 2014

    Thanks for reading Steve! It was very hard for me to get unbiased viewpoints on this as well, so I definitely see where you’re coming from.

    Reply
BRD says January 2, 2014

I may have missed this somewhere, but isn’t the 4.5% earned in the policy compound interest? As opposed the 5% straight interest on the loan that is getting paid back into the policy?
Great article and comments by the way.

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    Jacob A Irwin says February 22, 2014

    Hi BRD – thanks for stopping by. The distinction between what is compound vs. simple interest was something I forgot to address in the original post.

    You are correct though. The policy loan is simple interest.

    For more information, see the Sep 30th, 2013 comment/response above to Robert Trasolini.

    Reply
      MikeD says June 6, 2014

      According to my state farm agent on our WLP is it True that the loan is simple interest, but the interest on the cash value is compound interest. Potentially earning more than your paying for your loan. In addition to this as mentioned about taking out a loan and paying it back increases your cash value put right back in the compound category.

      Reply
CB says January 8, 2014

Jacob,

Excellent analysis of both the issues surrounding whole life for IBC as well as the IBC economics. I was unaware (but suspected) that “the house” was getting its .5% somewhere in there! Therefore I agree with your assessment (and that of others) that this is not an investment vehicle, rather it is a savings vehicle that comes at a cost (.5% on outstanding loans).

On the other hand I also agree with those who say that for the middle class this is a smart savings vehicle because forced savings is a good idea from a behavioral finance standpoint. You have people on this post who seem to sleep better at night knowing they have themselves to borrow from (subject to a .5% fee). As Mastercard would say – that’s “priceless”.

However, I am wondering if this really is a useful tool for above middle class, and here’s my thinking:

1. The estate tax threshold is now $5MM-ish for individuals and $10MM-ish for married couples. Therefore the real, core value of life insurance for estate purposes (ie, to avoid estate taxes) is not applicable to 99.9% of the population, myself included.
2. So if you’re between middle class and $10MM+, you aren’t going to benefit from either forced savings or the estate tax avoidance.
3. If you’re in that wealth range you probably also have some valuable real estate you can use for a reverse mortgage when the time comes…you may even have a second home that you can RM. (Note: I am not a RM salesman or any other financial advisor – I have just read that the product has gotten better since the 2008 mess, particularly for higher net worth homeowners)

Given this line of thinking, wouldn’t the group between middle class and $10MM+ (including docs, other professionals, small business owners) benefit more from a reverse mortgage to bank on themselves than whole life?

I don’t really want to digress into a debate on RMs but for higher net worth folks with plenty of home equity this seems to be a no-brainer, and while RMs have their costs too it’s a bank you already own.

If you or if any readers who fit this profile have an opinion I’d appreciate it!

Thx

CB

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    Jacob A Irwin says February 22, 2014

    Hi CB – sorry for the delayed response. I’ve been buried in putting together my PhD dissertation for the past few months.

    You make some very nice points to consider.

    However, one place where a whole life / IBC savings account would come in handy for higher net worth individuals is providing “tax free” income during retirement through policy loans, since higher net worth/higher income earners aren’t allowed to take advantage of the more traditional tax free sources like Roth IRAs.

    Reply
      MikeD says June 6, 2014

      This is a great point. I learned from my dad who failed to create an IRA (or any kind of retirement account) until he was past 50, he created a policy that allowed him to pay 11k per month in premiums for 5 years. Now more than 15 years later he takes out loans to live off of basically his new income not taxable. This amount of stashing is not available by any other means, IRA or 401k.

      So to play catch up I can think of no other way. In 2008 I like many others lost my job, after fumbling around for 3 years trying to get back on my feet I dumped and lived on my 401k, now that it is gone and I am over forty a 401k or an IRA is never going to “catch” back up to what I had. 15kish /year in a 401k isnt going to allow me to retire in 15 years, thats chump change that might last for 2 years of retirement.

      Now that my car is paid for, i have a single house payment, 5-6k per month into a whole life policy is easy and several years from now I can increase my capitalization byorrowing on it for a new car, then taking what I would have been putting into a new car and placing that into another new similar policy. The more ways you can stash into multiple policies the better because at time of retirement you will thank yourself for not having to pay the government while you have free spending money and zero tax to pay for. Also having multiple policies to have more places to stash and not worry about creating an MEC.

      Reply
Tom says January 13, 2014

Don’t know what happened to my post but I’ll try one more time…
I am not an insurance agent and use IBS for many things. I have studied with Robert Castiglione (LEAP) and Douglas Andrew (Missed Fortune) as part of my finance education.
Your analysis is not complete. The main feature of the IBS is not rate of return per se, but elimination of opportunity loss by using your own cash in a taxable environment to purchase things.
I would be interested in hearing your thoughts on the cost of loans paid to others for financing things bought during the 30 years of buying term and investing the difference. And if you’re suggesting paying cash cost nothing – YOU’RE WRONG. It means you do not have that cash for other opportunity purposes for strengthening your financial bottom-line.
Also – a key part of Missed Fortune you do not reference is the fact that people that take retirement distributions from Gov’t sponsored plans (IRAS/401ks) spend through their tax deferred savings within 7 years. The best option there is to do a strategic withdrawal before the distribution phase and take the tax hit and move the money into a tax protected environment. There are components to this process that need to be considered as part of this decision that I will not go into here.
Regarding reading material, one of the best books on the subject is PIRATES of MANHATTAN.
If you have not read this, you should. It will give you a broader education on the subject including doing more accurate comparisons with other investment types.
The benefits are enormous if one has the discipline to follow the system. The reason this system is not widely used is because 1) lack of knowledge, 2) perceived lack of commissions (the normal way), 3) the hit the mutual fund companies would take 4) the hit the gov’t sponsored retirement plans would take, 4) the 80-20 rule….most people want to do what everyone else is doing thinking it is the right thing to do vs opening their eyes and educating themselves on the other possibilities for safely saving, protecting and having access to your money when you need it. IBS will not work as intended if you do not pay your loans back with interest. Yes the insurance company charges interest but companies like the Guardian (one of several I use) will increase their dividend % if you have a loan taken out vs the normal dividend if no loans are taken. Also, you can use the IBS strategy with other insurance like for example I do with Variable Universal Life, but this requires a lot more hands on tracking of the mutual fund-like allotments you use for growth within the policy…not recommended for most using IBS, but one key feature I like about this, is that although I won’t get a dividend on my policy or my cash value goes down based on the loan, at least the borrowed amount is protected by being shifted into a guaranteed interest account at 4.5% while I pay 5.5% on the loan while I’m using the money. Of course, you would still pay back the loan (with interest) and follow the strategy. The difference is you can get mutual fund-like growth returns in a tax-free environment (if done properly..)
So there are a lot of ways to use IBS and knowledge is key to being successful with it. THanks for providing your forum to discuss. Tom

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    Robert Castiglione says January 20, 2014

    I am Robert Castiglione, the inventor of the LEAP System. I developed a “Be your own banker” life insurance “strategy” prior to Nelson Nash. Nelson Nash admitted in writing in his own book that if it wasn’t for LEAP and LEAP Licensees , he would not have been able to write his book. Many of the agents using the IBC concept are ex-LEAPERS and some of those have written their own books about the subject of “banking” and use LEAP concepts they acquired at LEAP.

    Since I developed a “Be your own banker” insurance strategy in the 1970’s and used it with my clients, and although the strategy was different but better at that time because of the tax laws, interest rates, life insurance dividends, and more, I think I know more about this subject than anyone else on this planet. So I will not beat around the bush. The Insurance Banking Concept and all of the other names it has been given by a variety of authors is not all they are cracked up to be.

    There are many reasons why IBC fails to perform as advertised: (1) The mathematics is flawed. (2) Insurance policy illustrations are outdated. (3) Unfair, false, and unequal comparisons are made, (4) Omitted lost opportunity costs of the IBC policy taint the results, and (5) Most of the economic and financial principles cited in IBC are arguably false.

    I have written a manuscript about the fallacies of IBC and have verified that it is a losing strategy for consumers to use. I have also checked with the life insurance companies selling IBC policies and they tell me that the IBC strategy gets more consumer complaints than any other selling systems they use.

    So which one of the following options would produce the worse results for a 21 year old woman who is in the market for a car and wants to get a new car every four years until she is age 65: (1) leasing the car from the dealer, (2) buying the car by taking a car loan from a bank, (3) saving money monthly in a savings account to be able to buy a car with cash each time, (4) capitalizing an account first and then saving money to buy the car with cash, or (5) using the IBC life insurance policy method of financing?

    If you said the option that would produce the worse results is option (5) IBC – congratulations, you would be correct. Instead of IBC being the clear winner as their advertising claims, it actually would produce the worse results for the consumer. Most consumers fall prey to the advertising because they are vulnerable to the misrepresentations, illogical principles, and confusing but incorrect math that is employed in the advertising of IBC.

    I asked one compliance department of an insurance company that sells IBC policies how they can allow such misrepresentations. Their answer was, “We are not endorsing the IBC system. We only endorse our life insurance policies that are used by agents that sell with us.”

    If there are agents reading this blog that are interested in this matter, or have not figured out why IBC is a losing strategy as of yet, I would be more than happy to help you see the light. I am willing to answer legitimate and intelligent questions that are posed on this blog or you can write me at rcastiglione999@comcast.net Thank you

    Reply
      Jacob A Irwin says February 22, 2014

      Hi Robert, thanks so much for stopping by. It is an honor to have your comments. I would be interested in reading your manuscript you referenced above about the fallacies of IBC. Would you mind providing a link to that? Thanks!

      Reply
    Jacob A Irwin says February 22, 2014

    Hi Tom, thanks for stopping by and sharing your opinion. It is valuable to get different perspectives even if we are not in agreement. Thanks.

    Reply
Paul Nick says January 21, 2014

One thing I think that has been overlooked with muni-bonds. This is from Charles Schwab.

“Although municipal bond interest income is generally free from federal income tax, the IRS considers that interest part of your “modified adjusted gross income” for determining how much of your Social Security benefits, if any, are taxable. Let’s say you’re married and filing jointly. If half of your Social Security benefits plus other income, including tax-exempt muni bond interest, is more than $32,000 ($25,000 for single filers), up to 85% of your Social Security benefits are taxable.”

Whole life policy loans do not affect taxation on Social Security Benefits.

For full disclosure, I am a 2nd generation life insurance/retirement planner and my family owns over 50 whole life policies between my parents, the adult children and the grandchildren. It has helped our family over the years tremendously.

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    Jacob A Irwin says February 22, 2014

    Thanks for sharing Paul! That is another interesting detail to keep in mind going forward.

    Reply
Thomas says January 22, 2014

People who say whole life is worthless seem to forget that some of the people who have life insurance die ‘early’. Who is supposed to cover that premature loss to the insurance company?

The idea underlying life insurance (or any type of insurance for that matter) is that the risk is being spread among insureds. Some people’s beneficiaries will receive ‘windfall’ profits if the insured dies too early; others, if the insured lives ‘too long’, will only receive the 3% (actually closer to 4%) return you cited, tax free.

As someone once said, “If you know you are going to die next week, buy Term Insurance; if you know you are going to live to age 100+, buy an Annuity. However, since no one knows when he is going to die, over the long run, Whole Life is the best ‘deal’.

A 3% to 5% internal rate isn’t all that bad.

It is also worth noting that most superior mutual life insurance companies, i.e. Northwestern, New York Life, Guardian, do not invest those monies held in the stock market, but rather in safe, AAA bonds, for the most part.

If you wish to invest your money in Facebook, fine. But, I suspect your spouse might look at is differently if you died today, after having bought Facebook at the IPO price.

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Chris S. says January 23, 2014

I would greatly appreciate if Kyle would answer this.

I was told by many IBC agents that when taking a loan from my whole life policy to buy equipment or any high price item for my business LLC, I could claim the interest payment as an investment expense deduction. I was considering taking a loan and deposit the check from the insurance company directly to my LLC business account and make all interest and loan repayments directly from the LLC business account back to the insurance company. When I talked to my CPA accountant about this, he told me that this might be a problem since it is loan from my own policy (it is personal), and the debtor is myself, not the business LLC. It would not be a problem to claim as business interest expense, if the LLC has actually taken a loan from any commercial bank since the debtor would be the business LLC, not myself. Would greatly appreciate any comments on this.

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    Jacob A Irwin says February 22, 2014

    Thanks for your question Chris. I have read about people doing something similar in deducting the policy loan as a business expense.

    For example, if you set up an LLC to manage your real estate investments through, you could use your personally-owned whole life policy as the funding source, and then have your LLC pay you back.

    Reply
Dan Proskauer says January 30, 2014

Greetings. Thank you for creating this post / thread. The discussion has been good.

I want to honor your first request. I am not an insurance salesperson and make no money from the sale of any kind of insurance policy. But I also want to inform up front that if you Google my name you may find me quoted in various blogs or web sites from people who DO have connections to insurance sales. This is solely because I am an incredibly satisfied *customer* and wanted to share my success with others. Despite being interviewed a few times and being willing to share my story in a public forum, I receive no money from anyone related to insurance sales.

I too spent 100+ (definitely hundreds) of hours researching this approach to saving and building wealth and I thought that your analysis was reasonably good. This concept is NOT easy to understand or appreciate. Like many people who have followed this path, I started small to ensure both that my understanding of it was accurate and also that it performed as advertised. Once I gained confidence, I (really I mean “we” because this is a family and ultimately inter-generational wealth buiding tool) directed larger portions of our savings into it – with great success. I am also an Excel junkie and have created some sophisticated spreadsheets to calculate the cumulative and compound returns (at every year) from one or multiple insurance policy illustrations. I track my policies (and I have nine) on a monthly basis and know exactly how they are doing against their plan and my expectation.

I did struggle with three of your main themes though. Those are that this strategy works only for the wealthy, should be undertaken only when everything else is maxed out and that any book written by an insurance salesperson should be suspect by default.

Let me tackle them one at a time. Although I myself would probably be considered on the upper end of the middle class, I have seen this strategy work very well for people of all income levels. In fact, it can be a huge benefit to people who are accustomed to borrowing to pay for things. In this circumstance the policy loan aspect can allow a family to operate as they are used to while suddenly transforming their personal economy from one of borrowing to one of saving. I know that sounds a little bizarre, but if you really think about it, it works. There is a great diagram in Financial Independence in the 21st Century (one of the books you referenced). If I had it in front of me I would cite the page number, but I don’t.

As for maxing everything else out first… I used to be a VERY active investor in the equities and options markets. I made money doing that. However, I was making money when the market was going up. If you want a relevant read, check out “Fooled by Randomness”. After living through TWO major stock market events and watching my absolutely by-the-book asset allocation investments return next to nothing for 10+ years, I stepped back and looked at the traditional approaches to saving and wealth building with a very critical eye. What I found was surprising. I won’t quote you back a lot of the material from the books you cited, but I urge you to go back and review it again. There is more material as well, and I would be happy to send you some privately. Another great book if you haven’t read it is “The Big Short”. After reading that I just couldn’t stomach the thought of my hard-earned money going back into a system that rigged and that suspect. At this point I am the opposite from maxed out in traditional investments – I contribute the *minimum* required to fully capture the matching funds offered by my company and I have that money allocated to the *most conservative* choices available. I regret every dollar that is stuck in qualified plans and constantly question the wisdom of even continuing to capture the match (but my spreadsheets tell me it is still the right thing to do).

Finally, although there are undoubtedly some self-serving folks out there, I think it is risky to discount everything written by someone who is also in the industry. As a good friend said recently, “Wouldn’t you rather read a book about brain surgery written by a brain surgeon then by an auto mechanic?” This is a complex topic. Wouldn’t folks who do this for a living be in the *best* position to be able to explain it? As I informed up front, I am a very happy client. I have been doing this since 2009 and the results have far exceeded my expectations. By that I don’t mean that the policies have returned more than the illustrations said they would (in fact it has been slightly less due to the dividend scales drifting down with the artifically low interest rate environment we are in now). What I mean is that the results that count – our family’s net worth, financial security and peace of mind – have FAR exceeded my expectations. If it weren’t for me keeping an open mind when reading exactly the kind of material you raise such concern over (and doing my homework, of course too!), we wouldn’t have achieved these results.

I’ll leave it there. There is a lot more I could say, and I will be happy to engage in dialogue in any direction on this topic that people want to take it.

Thanks again for initiating the post and doing the research. It was well presented and thorough and I know how hard this concept can be to explain!

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    Jacob A Irwin says February 22, 2014

    Thanks for your comments Dan.
    So I agree that folks who work in the WL industry would be better at writing a book on this topic than others.
    The “rub” that was getting me is that I could not find any one, except people who profit from selling whole life in some way, that could honestly recommend this strategy as a good path for me.

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Chris Doherty says January 31, 2014

One point that has not been made in this forum… What happens if you lose your job and cannot make the policy payments for an extended period of time? This whole strategy is dependent on always making your payments. Yes you can use the cash value to pay the premiums, but wouldn’t that quickly erode the cash value and the whole point of investing this way? At least with other forms of savings the money stays put and does not depend on more money being added to make the strategy not fail.

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    Tom says February 1, 2014

    Hey Chris….you raise a valid point. You absolutely can spend down your cash contributions or rum into problems taking out policy loans to pay the premium if no payments are going into the policy. The main component of financing your policy aka “your banking system” is to look for areas where you are currently spending that could be reduced and funneled into the policy so there is a minimum (if any) out-of-pocket. An example would be raising the deductibles on your homeowners or auto insurance…how much can that generate off of your monthly expenses that could be applied to the policy premium, etc… Another area would be to look at your pre-tax savings into a 401k…if you are contributing more than your employer’s maximum for employer contributions, than pay only the employer maximum contribution limit and use the overage contribution for your policy. These are just 2 common examples…the idea is to have your financing system being capitalized regardless if you are employed currently or not.

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    Hendog says February 2, 2014

    I think Chris asks an excellent question, it is very easy to commit to premium demand that you can’t meet long term. The crash of 2008 illustrates how quickly career & lifestyle changes can happen. Be careful, study your policy in depth before signing anything. Insurance salesman can be convincing in order to get their sale. Know long term what you are capable of!

    Here is some of our IBC background. We started in 1995. We now have 6 policys, DB of 4M, CV of 850K, 3 of the policys have been naturally abridged, dividend & CV pay the premiums. I plan to abridge the other 3 policys in the next 5 years. We view this as the conservative, fixed income portion of our portfolio. I think a long term, 5% return is reasonable. You also receive key benefits such as DB, flexible policy loans, tax advatages. It’s not what you make, its what you keep!

    Reply
    Uri says February 6, 2014

    Chris, There are ways to deal with this concern. For example, you can structure a policy where your annual primium is relatively low, but supplement it with an addition called Paid Up Addition. If things become difficult, you stop contributing your opptional PUA and only pay the primium. Secondly, in a later stage of the policy, your dividend might be substantial enough to cover part, all, or beyond your primium. This should not effect your policy other than slow it’s growth (because now your dividend will be directed to the primium and not to buy additional insurance, the same PUA). Finally, there is an elective rider that basically insures your primium. An additional annual pay will ensure that if you cannot work and pay your primium, this rider will, usually for up to 10 years. This might also include your usual PUA contributions and not just the primium. I’m not sure this will work if you loose your job, but it will if you’ll loose your ability to work in the unfortunate case of injury or illness. So here is the other side: which other insurance will continue and pay your investments for you if you are no longer capable to work?

    Reply
      Jacob A Irwin says February 22, 2014

      Chris, great point. However, there is a pretty simple way I found that can take care of that.
      I believe it is called the Reduced Paid Up Rider or something of that nature.
      Essentially, it is rider that you can exercise one time during the life time of the policy after 7 years of funding, that allows you to never owe any more premiums, and just let’s your policy “cruise.”

      Reply
Lisa says February 1, 2014

Dan, so thoroughly enjoyed your post. So well articulated. We have three policies, and like you started with a small one, then after a few years graduated to a larger then our last biggest policy. Just can’t say enough about these policies. We borrow, pay back and borrow again and so far is working great for us. I would love to be able to put our accounts on an exel spreadsheet to see exactly how they progress..Thanks for your insight.

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    Dan Proskauer says February 4, 2014

    Thanks Lisa! So glad I was able to speak clearly on it. As Jacob (and many others) have pointed out, this is not a simple concept to understand. What is ironic about it, is that once you do understand it, the actual execution of the strategy is extremely easy and low maintenance. No constant portfolio rebalancing, no messing around with figuring out capital gains taxes and pass-through taxes and all that each year, no managing lots of accounts at different banks and brokerages, etc.

    As for tracking, I have two main tools I use – both homegrown. One is a spreadsheet where I can copy and paste in the original policy illustration (from text based pdf) and it parses the text and puts the numbers into columns in Excel. It has the ability to take multiple illustrations for policies started at different times and interleave them based on dates so you get a single combined illustration. The other thing it does, for a single illustration or the combined one, is to calculate the equivalent rate of return (as if the policy were a savings account) that you would get in each policy year. The first year it is negative, the second year, less negative, ultimately crosses zero anywhere from year four to eight (depending on policy design) and hits a maximum of 4.5% – 5.3% (based on policy design, based on dividend scale at the time of illustration). Each year return is what a savings account interest rate would have had to be from the policy start to that year to end with the same cash value. This tool is really a projection tool.

    The second tool is a tracking tool. In this spreadsheet I have some basic information about each policy (base premium, MEC limit, etc.) and then I enter each month any premium paid and the values from the insurance company for Net Cash Value, Outstanding Loan Balance, Available Loan Value and any dividends received (those are annual). Using that I can see all my current policy values and compare both the values and the return to the projection from the original illustration.

    With these tools combined, I have had much more visibility into both the projected and actual performance of my savings / investment than I ever had using more traditional approaches with mutual funds, individual stocks, 401K plans, 529 plans, etc. I am definitely a numbers guy and Life Insurance is the last thing I ever expected to wind up finding good performance, security, flexibility and predictability. I am constantly shocked, but very, very happy!

    Reply
      Lisa says February 5, 2014

      THanks for the explanations Dan. I am totally Exce illiterate but have a family member who is very good at this type of thing, so I will see if we can put our wits together and come up with a set up like you have.
      Do you do this monthly, set date etc so you can compare apples to apples? Because if you look at your policies online,they change daily.

      Another plus that isn’t discussed a lot is the safety of your cash in these accounts. We had a recent scare with our son who was in a car wreck, no one hurt but in South Texas, a quick lawsuit is similar to a small lotto. In any case we had some cash in our accounts(that we had borrowed from a BOY account) that were getting ready to be used to build a barn. It was sure nice to be able to move those into 2 BOY plans that had room in them. Safe and sound yet there to use when we need it.

      My only regret on these policies is that we didn’t start a lot sooner! My only concern about these policies is what would happen in the event of a coming dollar collapse. Actually I know what will happen, but for now they are a pretty safe bet.

      Reply
robby says February 1, 2014

Is the Internal rate of return 4.5%-6.5% for death benefit or cash value. Suppose I am not interested in taking a policy loan but strictly in how much money I make on my investment to pass over to my spouse, then what rate of return do I assume.

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    Dan Proskauer says February 4, 2014

    The internal rate of return is typically calculated for the cash value. The rate of return on the death benefit is always higher (but you are dead). The two are always equal at the point where the policy is calculated to terminate (typically age 121 of the insured). I calculated the return on the death benefit of one of my policies and in the first year it was 2276.89%!! Of course, I would have to die to realize that awesome return, but what a deal! I’m pretty certain that if I owned a stock ETF and I died it would not bring that kind of return! 🙂

    Reply
Uri says February 2, 2014

Chris,

There are ways to deal with this concern. For example, you can structure a policy where your annual primium is relatively low, but supplement it with an addition called Paid Up Addition. If things become difficult, you stop contributing your opptional PUA and only pay the primium. Secondly, in a later stage of the policy, your dividend might be substantial enough to cover part, all, or beyond your primium. This should not effect your policy other than slow it’s growth (because now your dividend will be directed to the primium and not to buy additional insurance, the same PUA). Finally, there is an elective rider that basically insures your primium. An additional annual pay will ensure that if you cannot work and pay your primium, this rider will, usually for up to 10 years. This might also include your usual PUA contributions and not just the primium. I’m not sure this will work if you loose your job, but it will if you’ll loose your ability to work in the unfortunate case of injury or illness. So here is the other side: which other insurance will continue and pay your investments for you if you are no longer capable to work?

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Chris S. says February 4, 2014

Regarding the ability to take loans from the policy and pay back the loan with extra interest (interest that the market would normally charge). How is that done? Ex: If I take a loan from the policy and the interest loan is 5%, but since the market is charging 8%. I am supposed to pay back the loan with the extra interest of 3% (8% – 5%).

I realized that when the policy is initially structured, there is the premium + PUAR. In order for the policy not to lapse, the premium must be paid, but the PUAR is optional. Does that mean that if I decide to pay the 3% interest, I would use the PUAR portion that was originally created for this purpose? It is not an extra 3% on top of the scheduled payment of Premium + PUAR, correct? Please help me understand. Thanks.

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    Uri says February 6, 2014

    Hi Chris, you asked two different questions. I’ll try and answer.

    1. When you take a loan you have to pay the interest as it appears in your contract. In your example it is the 5%. This is all the insurance company wants. To practice the Infinite Banking concept correctly, you should pay higher, according to market values (or higher, if you can). What will happen is that your loan will be paid quicker, and because you are paying more than you should, the last one, two or few payments will actually happen after the loan is already paid back in full, so these payments will indeed be addition (Paid-up additions). You can see it as a self-imposed mechanism to pay back your loan, and then pay a little more to your own saving (cash value). That way you captured part of the interest profit that an external lender who would have lender you in market rates would have made.

    2. When you structure a policy you commit to pay a premium. Any payment beyond is a paid-up addition. This PUA can be “scheduled” – that is that you commit to pay it (and your agent can change it for you if needed) or “unscheduled” – that is you pay more when you want and can. The extra payments you will pay when returning a loan in higher rates (ex. 1 above) will actually be unscheduled PUA. You do need to pay attention to the MAC limitations when you start doing so in substantial amounts.

    Hope that helped.

    Reply
Fledgling Self-Banker says February 6, 2014

Hi Dan,

Thanks for your contributions. I would greatly appreciate a scrubbed copy of your spreadsheets if you’re so inclined. They sound like just the tools I have been looking for.

I started my policy just a few months ago and have been looking for a tool that I could use to optimize the cash value of the policy.

As a satisfied customer of several years would you see there being a benefit to a program of perpetual policy loans, almost like a CD ladder, to the cash value of the policy?

I haven’t crunched any hard numbers, but I am thinking, for instance, right now my policy has a cash value of ~$830. If I were to take a policy loan of $800, and payment terms of 10 months $100, would this be an effective method of speeding up the increase to the cash value of the policy? I know it’s only $200 net of expenses, right now, but over time, the loans and payback amounts will grow along with the cash value gains.

As a practitioner, is this a good approach to take? I should mention I have a convertible term policy, also. Would converting some of the term amount be a more effective method?

Thanks for your time,
FSB

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Dan Proskauer says February 7, 2014

Hi FSB

I actually have a sanitized version of that Excel workbook and I am happy to share. However, I don’t want to wear out our welcome on this blog. But I also don’t want to post my email address.

To the blog master – can you please send my email address to FSB and to Lisa and we can continue this offline?

Thanks!

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    Michael Sparks says February 9, 2014

    Dan,

    I would love to get your spreadsheet as well. Maybe we can connect on Linkedin?

    http://www.linkedin.com/in/michaelsparks/

    Reply
    Michael H says March 21, 2014

    Dan:
    Can you send me your Excel worksheets. I am also interested in who you use as your practicioneer, as it sounds like you have some good resources. My email is guitarplayer1969@gmail . com
    Thanks,
    Michael

    Reply
Fledgling Self-Banker says February 9, 2014

Sincerely appreciate it, Jacob!

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Lisa says February 9, 2014

That would be great, thank you Dan

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Chris S. says February 10, 2014

To Uri, Thank you so much for answering my question regarding the PUAR part. You couldn’t be more clear. I have these policies for 3 years now, but just did not know how to maximize them.

To Dan, would also like to thank you for confirming what I suspected all this time. We are definitely not big spenders, we have saved all our lives and have applied all the traditional financial lessons, diversifying in different assets, etc. We have always maximized all our contributions in 401K, IRA, 529 Plan, etc, throughout the years. But we lost money whenever the market crashes. We got frustrated and tired of it. Not knowing where to save the money, we came across this concept and after putting many hours of educating myself on the concept, we decided to move most our savings into the Bank on Yourself. We have to say that we are not in the phase of making any money yet, but we do know that our money will not go down with the market anymore. At this time, we have 1 child in college, with 2 more after. Being in the middle class, we did not qualify for any financial aid. But, the biggest disappointment of all was to learn that in order to take money from any of the plans mentioned above, many rules and penalties apply. In the 529 plans, one should be very careful, to make sure that it would qualify as “qualified expenses”; otherwise, they will be taxed as well. At this time, we really needed to have access to our money in these so called “deferred savings account”. With 1 child in college and 2 more to go, we will not have any extra cash flow for the next 12 years. We feel trapped and betrayed. It is as if our money is “in prison”. We can only access it, if we are willing to pay very hefty penalties. Our biggest regret is that we did not realize this earlier. At this point, limited to contribute more money to our policies given our children’s education needs, all we can do is to maximize all we have in our policies within our budget possibilities, and manage them the best way we can. I would, therefore, greatly appreciate, if you would be willing to share your Excel spreadsheet tools with me also. My email address is chris1now@gmail.com
Thanks for sharing your thoughts and confirming that we are finally onthe right track financially.

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Marc says February 10, 2014

I’ve read the blog and comments with great interest, though haven’t posted.
Dan could I please get your spreadsheet?
mbcatalyst@gmail.com
Thank you!
Marc

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Mike the Merciless says February 15, 2014

Thank you Jacob for this blog. I have learned a great deal. I’ve read it thru twice. I have made notes to myself. I have written down several questions to ask my agent. I feel however, there are a number of issues misrepresented. I don’t think it to be intentional on your part. So, I will list my thoughts quickly as possible.
I am 62 years of age. I am an insurance agent, but not life ins…I am on the health side of insurance sales. I am far from wealthy… probably in the higher end of the middle.
1. With Kyle’s 19 points made, your response to his 19 points, then Kyle’s rebuttal…as you would continually point out…”same with Tax free bond fund”. Are you not aware that your principle is at risk? If interests rates go up, & they surely will, & you need to cash out for whatever reason…buy a car…you may be trading in your shares below your cost basis. You just locked in a loss. Not so with IBC. Interest rates cannot go below 0…they can only go up at this point. Your bond fund, unlike individual bonds, never matures…the fund just buys more bonds as they mature. Your bond share price can go down. Sooner or later it will.
2. You obviously have 100% trust & faith in Uncle Sam. Are you kidding me? This is not a political forum…thankfully. However, this government has proven beyond any question it is not fit with my money. They borrow money with reckless abandon…17 trillion to date. Who can even grasp the size of that number? They continually raise the debt ceiling. They are financially irresponsible. If you & I ran our household as they run theirs, we’d be in bankruptcy. In their case, unlike us poor saps, they just print & print. You have way too much faith in Uncle Sam. I personally would not lend them 10 cents. Just take a good look at their balance sheet. If they were not the US gov, would you lend them your money?
3. If you’d like to know someone who recommends IBC, that is not an insurance agent, I will point you to Tom Dyson. He is the publisher of a financial newsletter called Palm Beach Letter. He refers to the IBC as “Income for Life”. He has written about 25 essays over the last several months about this concept. He indicates he loves it. He says he also has several policies personally. He has no financial incentive in giving this advice…that I am aware of. You can easily find him or the PBL online.
4. I take exception with your thought that commissioned sales people cannot be trusted. I have about 600 senior insurance clients. All that business is Medicare insurance related. I always take my clients’ best interest to heart. Even to a fault. I lose business sometimes because I am honest. I tell the truth. Sometimes the truth hurts. I’ve lost business because of that.
My clients thank me again & again. They know that they have a knowledgeable insurance agent on their side. They also know & consider me to be a friend.
Have you considered that there might be dishonest Alzheimer Researchers. You may be under pressure to publish something. How do I know I can trust your analysis? How do I know you are not just meeting a deadline?
Jacob, nothing personal here. I am just trying to make a point. There are dishonest plumbers, CPA’s, politicians, etc. Life Ins Agents do not have a lock on dishonesty. That is a function of human nature. Getting information from professional people is critical. That’s why visiting with at least 3 agents might be a very good idea. Someone above in this blog made this point. I would want a brain surgeon specialist rather that a primary doc for my brain surgery. Would’t you?
Your point concerning CPA’s not recommending this IBC. I have issues with CPA’s. For 15 years they told me to sock away as much in IRA’s as possible. With recent talk about Gov take over of such accounts. I know that sounds outlandish…even rediculous. I have learned that nothing is sacred with Washington. If it suits their agenda, they’ll do it. I regret the $ I have put in these accounts. I truly wonder if I will ever have the use of it.
As I have recommended my insurance clients to consider the purchase of Long Term Care Insurance, again & again, the reply from my clients I would get is that, my CPA does not recommend it. Oh really? Would that same CPA be willing to sign a statement to that affect. We both know the answer. In dealing with CPA’s both personally & in my business, I have found them to be off base more often than not. The fact that no 2 of them agree on the tax due for any given taxpayer…that should tell you something about CPA’s. This point has been well documented. You can look it up.
5.Lastly, at age 62, having experienced 2 major stock downturns in last 13 years, and a third one looming…I no longer trust the stock market. I can say the same for the bond market. Many financial pundits think that we are in for another major market correction. Read Harry Dent’s take on the matter. You can Google his name. Bonds are in a bubble. The risk of munis is default. We have had record number of defaults in very recent years… I refer to city & county defaults. We have at least 5 States that are on the edge of financial disaster. All these gov entities have unfunded pension & health liabilities. My point here is that at age 62….I feel I have NO GOOD PLACES TO PUT MY MONEY…ABSOLUTELY NONE. Getting 4.5% in this ultra safe environment in a tax advantaged plan seems quite good.
In summary, you make many good points, and thank you again for this blog, but I respectfully & wholeheartedly disagree with your point of view.

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    Jacob A Irwin says February 22, 2014

    Hi Mike, thanks so much for your valuable opinion and perspective.

    You’re correct that a short term muni bond fund is not guaranteed in the same way that FDIC insures bank accounts or that life insurance companies can guarantee principle. However, if the historical return data shows that the fund I referenced didn’t have a negative return in 30 years, it’s good enough for me.

    Reply
      Robert Castiglione says February 24, 2014

      There are over 30 falsehoods mentioned in the various IBCs (Insurance Banking Concepts) advertising and articles to both consumers and agents alike. Here are a few of the most common falsehoods without getting into all the mathematical errors that IBCs make.
      IBC says: A primary concept or principal of IBC is that you finance everything. You either finance by: Paying interest to someone else – a bank, lender, etc. Or when you pay cash you forfeit the interest the money could have earned otherwise.
      Response: False: you do not finance everything. Forfeiting interest is not financing. A person who has cash and pays cash for everything does not go into personal bankruptcy. Financing debt is the one way to get into financial trouble.
      In reality, giving up 1% interest from a savings account can earn more interest by paying off a 12% credit card loan. Why borrow from a life insurance policy from between 5% to 8% when spending is cheaper than financing. Paying cash for an item can save not only financing interest but can also receive a cash discount at the immediate time of the purchase. There are many money strategies in real financial analysis that build wealth without taking financial loans from a life insurance company.
      IBC says: When IBC discusses investment alternatives we must not only weigh the return we will receive but we must also evaluate what we are forfeiting or giving up.
      Response: False: When one is investing, they are not forfeiting. The idea to investments is to get a return on investment that is greater than in a savings account or life insurance policy. Stocks earn dividends, pay no tax on the gain until it is sold, has capital gain tax efficiencies, can be used as collateral for a loan at Libor rates, and it gains ownership share of a corporation. Put options and stop loss orders are just a few of the tools one can use to protect the investment by minimizing the downside loss while maintaining full upside potential.
      IBC says: The Infinite Banking Concept is not about investing, it is about financing, and financing is a process not a product.
      Response: False: IBC is in no way a process. It is a product sale. IBC is only about buying a whole life policy and using the standard options that are contained inside every whole life policy: paying a premium, selecting a dividend option, adding a PUA rider, taking a policy loan, paying loan interest, and paying back the loan with more money than the loan requires. All of these actions are product centric. If one does not purchase a whole life policy, IBC would not have a process. Therefore, it cannot be a process.
      IBC says: Anytime you can cut your payment of interest to others and direct that same market rate of interest to an entity you own and control, which are subject to minimal taxation then you will have improved your wealth generating potential significantly.
      Response: False: IBC is about paying interest to a life insurance company, and in no way are you paying interest to your own self. You may own an IBC whole life policy, but the life insurance company controls the loan and more. The life insurance company determines the loan interest rate, the timing of the loan, the payment of the loan interest, and holds and controls the cash values and death benefit as collateral for the loan. The life insurance company has the control to say NO! to your loan up to six months according to the provision of the contract. As far as taxation is concerned, there are several dangers lurking in the future for IBC life insurance loans, too many to name here. Perhaps another discussion point for you readers.
      IBC says: Financing involves both the creation of and maintenance of a pool of money and its use. When a financing system is combined with an investment system the combination of the two will always out perform an investment system.
      Response: False: To say that by combining by borrowing money from a life insurance company (financing) will always outperform non-leveraged investments is an absurdity. Borrowing money is a cost to the borrower and cannot be profitable if the money borrowed is lost or produces a lower rate of return than the cost of the loan. Investment and borrowing combinations are a dangerous duo and have in the past damaged consumers over and over again. Intuitively, you should know that there is no free lunch. You just don’t get something for nothing. IBC overstates its gains and underestimates its costs.
      IBC says: When the system combines reduced tax liability with a financing engine and allows complete control over your investments there appears to be no other system capable of generating wealth with as much consistency or speed.
      Response: False: An IBC policy does not reduce tax liability, it simply defers it. IBC policies are subject to the same ordinary income taxation if and when it is cashed in. In some cases, the tax deferred treatment of an IBC life insurance policy could be eliminated if the policy becomes a MEC.
      In all of the IBC literature, there is never a complete comparison to expert financial strategies. IBC only compares itself to the worst money decisions such as high interest bank loans at 10% to 12%, below average stock market yield years like 2007 and 2008 while they don’t include 2013 up 30%, and a taxable IRA and 401(k) plan without mentioning possible ways to avoid the income tax on both at retirement time. The IBC marketing strategy is to compare itself to the worst financial moves in order to make itself look good.
      IBC says: The essence of the Infinite Banking Concept is how to recover the interest that you normally pay to a banking institution through the use of dividend paying life insurance, so that the policy owner makes what a banking institution does. And by the way, you have a death benefit thrown in on the side!
      Response: False: IBC is comparing apples and oranges. A high interest bank loan is not a collateralized loan. The bank is taking a complete risk on the borrower. A life insurance loan is a collateralized loan which totally protects the insurance company from the risk on its loans. If anyone would deposit the same collateral into a bank as the premiums paid into an IBC policy to create the collateral, than that same bank would actually have a lower collateralized loan rate than the IBC policy.
      There is absolutely no possibility that a policyholder using IBC will can make the same return on the loans as a banker does. If any one believes that the IBC policyholder can, I have a bridge to nowhere to sell you.
      The primary purpose of any life insurance policy is to purchase a death benefit. Every aspect of the policy is based on an actuarial mortality table and other data. To say that a life insurance policy is earnings with “a death benefit thrown in” is a total misrepresentation of a life insurance policy. Consumers are not well served or informed with such definitions and explanations.
      IBC says: Earnings grow within the policy tax deferred. You are both reducing your tax burden and capturing monies for yourself that a banking institution normally would receive.
      Response: False: IBC does not define what they mean by earnings. Whole life policies do not receive earnings like other financial products do. Cash values are a preset contractual value established by the life insurance company. A life insurance illustration shows that it takes many years before an IBC policy breaks out even over and above the paid in premiums.
      My only hope is that all insurance products and services and can be advertised honestly and with ethical standards for the financial well-being of all consumers.

      Reply
        MikeD says June 6, 2014

        Unfortunately you refer to ibc as a product or a concept related to an insurance policy, when in fact it started from other types of retirement plans that allow you to borrow against your IRA and use that cash as if its yours. If you pay 6% for the loan while your cash still earns 4% you have a net loss of 2% paying for someone to manage the tax protection that you cannot create for yourself. This concept existed before people thought about using a whole life policy as the IBC vehicle. The main concept is that you want to control your cash and keep its water level regardless what life does to your lifestyle (ie surgery, emergency) stock/bonds/partnerships/stack in a company, do not give you a mechanism to use your money therein for these occurances. If you have your money tied up in these things you have much less control to stabalize things when some unexpected happens.

        Investments= Might make a return, if you do your likely going to pay uncle sam, it is an investment because your giving your “cash” to someone else temporarily, it is a risk because you have no control over what they do with your money.

        Cash to a mutual company for an insurance policy is not an investment toward a business or stock or municipality, it is an investment on your own future (ie death benefit, savings plan, retirement account ) and nothing else. You pay a premium to a company to manage it for it. You cannot create your own tax shelter, for example you cannot created your own IRA, you must pay a company licensed to do it. If your paying premiums for an IRA you might as well be givnng it to an account that gives additional benefits for the same dollars you put in. Create an IRA with a bank that has the ability to allow you to use it as an IBC.

        Create a whole life policy to save for retirement with more than 15k per year. Save 100k per year in a whole life policy if you wish, because its an ira without deposite limits.

        Reply
Tanisha Souza says March 5, 2014

I am the owner of a 12-year old Wealth Coaching company. We do not sell financial products. In fact, we are not insurance agents, financial planners, CPAs, loan officers, realtors or any other type of financial services company. We have never received referral fees or kick-backs from these people because we want to remain unbiased coaches for our clients. Because my company teaches and coaches people on wealth strategies, one of the many strategies we have been teaching for almost the entire 12 years is the concept of Infinite Banking.

I’d say that most of the details of how Infinite Banking works in your article are true and correct. Here’s the big point that I feel is missing from your blog. The point of Infinite Banking is not to get a higher ROI than you could get by buying a term policy and investing the rest. The reason is simply to recoup the interest that you would have paid a bank for things you typically finance throughout your lifetime, and do it in a tax advantaged vehicle that can grow exponentially over time.

Let’s face it. We will pay hundreds of thousands of dollars to banks to finance cars, student loans, business equipment, homes, rentals and more over the course of our lifetimes. What could we do if that money was paid to and growing tax-free and safely inside a whole life policy (not subject to stock-market fluctuations) and could be accessed tax-free throughout your life? That’s the premise behind Infinite Banking.

I will say that in my years in teaching this concept, I have yet to meet many competent or informed insurance agents who know how to (or want to) properly structure a whole life insurance policy for the maximum benefit of the insured who wants to use this, most likely for the reasons you mentioned above.

I agree that this strategy is not for everyone, especially people with tight cash flows or lots of pre-existing debt. However, I think that it can be for the average person who is trying to build wealth.

Reply
    Jacob A Irwin says March 6, 2014

    Thanks so much for reading Tanisha and for sharing your valuable input.

    At your company, do you work on an hourly coaching fee structure, or is it commission based?

    As I’ve mentioned before, I don’t really think you can compare whole life insurance savings/loaning to taking a loan out from the bank because with whole life, you are borrowing your own money, not other people’s.

    Reply
      Tanisha Souza says March 6, 2014

      Hi Jacob,
      We don’t coach for hourly fees and we don’t do anything commission-based. We charge annual coaching fees for monthly one-on-one online, telephone and email coaching, workshops and classes.
      I agree with the OPM concept and I teach a lot of that, especially as it pertains to real estate investing. And I agree that this is different. In my view, it’s an entirely different way of thinking.

      Reply
    Robert Castiglione says March 8, 2014

    To Tanisha, Could you answer the following questions for me that wold help explain IBC. At what interest rate are you using for outside bank loan interest to compare to IBC? You say that this bank loan interest will be used over a lifetime. would not a person ever have cash to spend eventually to avoid bank loans? Could you explain why you say life insurance loans are tax advantaged since they are paid back with after tax dollars and the loan interest is not income tax deductible? Fixed life insurance loan rates are between 7% and 8%. Since bank car loans today are very low between 1.5% to 4% and some are income tax deductible, how could worse life insurance rates produce greater results than better bank loan rates?

    You say that the premise behind Infinite Banking is to have “money growing tax-free and safely inside a whole life policy (not subject to stock-market fluctuations) and could be accessed tax-free throughout your life. Could you explain how money is tax free in life insurance and not tax deferred?
    Could you explain how life insurance companies and their reserves to pay dividends are not subject to stock market fluctuations? And lastly, can you explain how life insurance values can be accessed completely income tax free for life? Since this is the premise of IBC and you are a IBC teaching coach, your explanation should be exact and supported by facts please. Thank much.

    Reply
      Mark Marshall says March 19, 2014

      Robert, I would like to take a stab at some of your questions for Tanisha.

      Regarding your reference to “worse life insurance rates”, you are assuming a FIXED loan rate from the insurance company. Your argument would be somewhat true in that case. However you are not factoring in the guaranteed interest and non-guaranteed dividend that would offset the rate.

      The better option is to have a policy with a loan rate tied to an index. That is what I personally have, as do all of my clients. Generally the difference historically is about 1%. As I pointed out in another post, when you finance with a third party you only have use of those funds ONE time and all of the interest is paid out.

      Why not borrow from YOURSELF with interest while EARNING interest on the funds at the same time? Once you pay yourself back, you have FULL use of the funds again and your account has GROWN during the payback period. Where else can this be done?

      Paying cash is also not wise and is somewhat of a myth. If you research “time cost of money”, you will see why. If I have $20k in cash and use it to purchase a vehicle, I have to first consider how long it took me to SAVE that amount.

      For example, if it took me 4 years I now lose in at least 2 ways. First, it will take another 4 years to save it again. As a result, I lose the gains I could have made during that time. The same cash in the right safe money plan EARNS during the entire time and I can borrow the funds from my plan to pay cash for the vehicle in a much more efficient and profitable manner.

      To your point about tax-free vs. tax-deferred, I prefer “tax-favored”. Notice Tanisha said “could”. In my discussions with accountants, they say tax-favored is accurate in this case because the tax basis actually increases over time in a properly designed plan. As long as withdrawals or loans do not exceed the cost basis, then indeed the money is tax free.

      Finally, how is it that mutual insurance companies do not seem to be adversely affected by market downturns? Simple. They run their business extremely efficiently! Can you name ONE life insurance company that went belly up in 2008?

      In fact, it is very rare for a life company to go under. If they do, most if not all states have guaranty associations to pay up to certain amounts for both death benefits and cash values. Generally what happens is that the home state of the company would put it up for bid to be purchased by a competitor.

      Of course, there are no guarantees but life companies are among the most solid in any industry, many with track records over a 100 years. The business model is sound and based on the mathematics of actuarial tables. In other words, they are very accurate in predicting when death will occur. As a result, they have a good handle on assets and liabilities in advance each year.

      I would ask you: how is it that a number of companies who provide these plans have paid dividends each year for over a 100 years?

      Reply
Robert Castiglione says March 14, 2014

For those of you who may have missed the CBS report “Bestselling book’s financial promises don’t add up.” By Alan Roth. You can Google it at:
http://www.cbsnews.com/news/bestselling-books-financial-promises-don't-add-up/

IBC or BOY states that one can build up the cash values in a policy and then borrow from it to purchase cars or any other items. If they pay back the loan principal and interest, and add some extra cash to it and also up front into a paid-up-additions rider, BOY policyholders can recoup every penny of their major purchases.

So Roth and his wife met with a Bank on Yourself authorized representative. I too did exactly the same thing about one year ago. In both cases we were presented with life insurance illustrations. The illustrations I was shown had mathematical errors as well as timing errors. In Roth’s case, he checked it out and the bottom line was he found errors and BOY claims that were unmet.

Determined to verify Roth’s calculations of Bank on Yourself’s offer, he contacted Lafayette Life directly and spoke with top management there. Roth says that they told him,”your numbers are right.” The BOY book’s tantalizing notion of consumers eventually recovering “every penny” they spend somewhere down the financial road fell far short of that promise. Rather, it seems like a pricey way to finance a purchase…

The takeaway? Beware of claims that sound to good to be true and with no specifics or clear proof of it being true.

Reply
    Dan says March 16, 2014

    Actually, this has been pretty thoroughly analyzed here: http://www.bankonyourself.com/response-to-allan-roth-cbsnews-com-moneywatch-review-of-bank-on-yourself.html

    The two second summary is that Mr. Roth was comparing the cost of financing the purchase of a car through policy loans to the act of not purchasing a car at all. No surprise he came to some bizarre conclusions!

    That being said, when I first heard of this concept I was confused by the whole financing concept. The conclusion I have come to after several years of my own experience building policies of this sort is that the option to access the cash value through policy loans creates tremendous flexibility and offers a lot of security – and for some people, can be better source of financing purchases than other options available to them. While I value this benefit, it is only one benefit among a host of others. I would hate for anyone to shy away from thoroughly investigating and understanding this strategy solely due to the confusion over the use of policy loans for financing!

    Reply
Robert Castiglione says March 17, 2014

Dan:
I appreciate your reply. My Roth did exactly what he should have done in his analysis. The claim made by BOY and others is, and I quote from Pamela Yellen: “You can use the money growing in your plan (BOY) to buy things (cars), while your money continues to grow as though you never touched a dime of it (to buy cars).” She goes on to say in her advertisements: “In addition to the three cars we’ve already gotten for free, my husband and I have laid the groundwork to get new cars for free for each of us, every 4 years, for the rest of our lives. ”

The claim made by Yellen and every other authors of the Insurance Banking Concept is that you get everything that you buy for “free”. To test that concept, Roth was exactly correct to compare two identical people, one using BOY to make car purchases; versus another person not purchasing any cars at all. If BOY’s claims were accurate, the results would show that BOY had purchased cars for life and had the same amount of money or more than the other person had without any cars. As the actuarial data clearly shows, BOY does not hold up under certified actuarial verification.

BOY argues against accurate actuarial calculations because it wants to make its comparison only with a person using car loans at very high loan interest rates, such as with credit card loans and non-collateral bank loans. In other words, BOY wants the other alternative to be a worse case scenario. For example, if a person bought cars using a 3% loan interest rate, BOY would be a losing proposition every time. The only way BOY can make itself look good is to have the other person buying cars (or anything else) by constantly borrowing at loan interest rates of 12% or higher.

BOY advocates paying back a 5% variable or 8% fixed life insurance loan at a constant rate of 12% or higher. That extra money paid is “free money” according to BOY because it assumes it had to be paid to the credit card company or bank otherwise.

But if you could borrow money at a lower rate than the life insurance policy charges for its loans, and pay back the lower rate to the BOY policy, then the BOY policy would have an ever increasing debt and may eventually lapse. That means, there is a large opportunity lost using BOY for anyone that could borrow money at low rates such as with paying cash, a home equity loan, a refinance of a mortgage, a personal loan, a 401(k) loan, a collateral bank loan, a margin loan, an interest free lease, cash discounts, or other strategic financial moves available in the marketplace. Having only one source
or concept (all your eggs in one basket) is never a good idea because laws, taxes, rates, personal situations and employment options can all change.

In regard to your other remarks about your own policies, you are not accessing your cash values when you borrow for your BOY policy as you claim. Your cash values are locked up and held by the life insurance company as collateral for the loan. If you read your life insurance policy contract in the loan provision section, it clearly states that you can borrow money from the life insurance company and they will hold your cash values as collateral for the loan. You have debt on your balance sheet when you take a life insurance policy loan. You did not access your cash value otherwise you would have no debt. The only way to access cash value is to surrender the policy and lose the death benefit.

Loans of any kind do not offer financial security. They give up security. Unpredictable things in life can happen to make loans come back and bite you. We do not hear of a person who had no loans at all ever going bankrupt As far as flexibility is concerned, you also lose flexibility wit the BOY concept. Loans bind up flexibility, it does not increase it. Only cash gives you flexibility and cash values are not liquid or flexible. You can never get your cash values unless you surrender your policy. At death, you lose all your cash values to the life insurance company. They will only pay the death benefit to your beneficiaries, and keep the cash values. If your cash value are yours, then how does the life insurance company have the right to keep them at your death? The reason is that the cash value is never yours to use. It is owned by the life insurance company as either collateral against loans or collateral against the death benefit. Only upon the surrender of the policy and the loss of all of the benefits will you be able to access your cash value.

Whole life insurance is an amazing financial product. Its use can certainly improve the financial condition of anyone who owns it. But the “Banking” concept takes those benefits away by turning the policy into an inefficient one because (1) Lowering the death benefit of the base policy is a major mistake. (2) Adding term life insurance adds an unnecessary cost that never gets recaptured. (3) By increasing cash values it runs the risks of the policy becoming a MEC, which would be a disaster for the policyholder. (4) The complexity of the policy’s calculations and administration is time consuming, stressful, and dangerous. (5) Loans are not a safe way to handle life’s purchases. There is the ever present danger of over using loans. (6) Loan interest rates could go higher making the policy even more inefficient. (7) Life insurance loans could become income taxable under the law. It has been discussed already in Congress. (8) When the inventors of the “banking” concept in their books and advertisements make mathematical errors and use hyperbole which cannot be supported, then one must be cautioned not to trust the concept itself. (9) Given an honest and ethical comparison, the banking concept loses under any legitimate scenario compared to other methods and strategies available to consumers in today’s marketplace.

You say that you were confused when the concept was first shown to you. Now you say, ” I would hate for anyone to shy away from thoroughly investigating and understanding this strategy solely due to the confusion over the use of policy loans for financing! ” you admit there is much confusion. Why is that? Easy to answer. There is no validity to it and any legitimate analysis would show it true costs.
I can tell that you are an intelligent and nice guy. In all of your threads, you are professional and polite. I respect that in a person. But are you sure you are doing the right thing for yourself and your family? If there was a better way than BOY, would you want to know about it? If the answer is yes and you are open for improvement, then I think that you should take a little more time and research this issue with experts in the field of personal finance and not just those that sell BOY.

Reply
    Mark Marshall says March 18, 2014

    Hello Robert. I see that you speak strongly against safe money plans and I appreciate your passion. However, I believe you have some misconceptions about how these plans work. My first question to you is if you have read either of Yellen’s books? I just finished reading the latest one and see it as very much fact-based. The math is sound when understood in context.

    First, in my arguments I will be referring ONLY to an over-funded dividend-paying life insurance policy obtained from one of only a handful of companies who customize plans for clients. In addition, these companies provide non-recognition loans only with VARIABLE interest rates.

    Just as in any industry, there are many different choices. Not all are good. You may surprised to know that some of the more well known companies mentioned in Jacob’s article do NOT provide the best options.

    In addition, many of my colleagues have NO IDEA how to properly structure a safe money plan for clients. In my case, I work with a professional association that has been in this industry for almost 20 years with thousands of clients. If this concept was as bad as it is portrayed here by some bloggers, this association would have disappeared long ago.

    Here is a simple counter argument to your claim that car loans from these plans are not good or do not work as claimed. First, interest rates from third parties are always based on credit worthiness and ability to repay. Second, the lowest rates for vehicles generally come at the expense of not getting rebates. In other words, I either get the rebate OR the lowest rate and not both.

    With my safe money plan I have something that I have not seen discussed: LEVERAGE. I can go to the dealer with cash and get the best price. Then I borrow the money from my “bank”. The insurance company lends me THEIR money, using my cash value as collateral.

    I also do not have to BEG for the money or PROVE anything. All I do is make a request and the money is sent in a few days.

    As an “honest banker”, I then calculate the monthly payments for the loan as though I had borrowed from a third party. If I am really savvy, I will actually pay HIGHER than market interest since it is in my best interest.

    While the loan is outstanding, I am paying SIMPLE interest to the insurance company once a year. In other words, I only pay interest on the amount outstanding at the end of each year. With a third party, I am paying AMORTIZED interest. That means, I generally pay a DAILY interest rate, calculated monthly based on the CURRENT outstanding balance. This is no different than paying a mortgage.

    With my personal plan, my interest rate is tied to an index. Generally, if that rate goes up, so does my dividend on my cash value. To be clear, this is NOT guaranteed but has plenty of history behind it. In my case, I use a company that has paid dividends for over 100 years and the “delta” or difference in the loan rate vs. the dividend has generally been about 1%. Remember, as a mutual policyholder, I am FIRST in line to receive benefits. It is NOT in the insurance company’s best interest to mess with me!

    I ask you now–all things being equal–where can you get net 1% loans for ANYTHING today? In addition, are you familiar with a concept known as “velocity”?

    While I am repaying the loan, at least two leveraged events are happening. One, my cash value is still growing and COMPOUNDING. Plus, as the account is repaid, I have instant access to those funds again. Please explain how you can do this with a third party loan.

    With an amortized loan, I am paying compound interest to the bank. With a safe money loan, I am EARNING compound interest on my cash value while I repay the loan. If I then pay myself higher than market interest, I do even better.

    Your argument that taking out too many loans can be problematic is partly true. If the plan is reviewed with an expert advisor on a regular basis, the client will be warned about any borrowing issues. However, we all have free will. If we make the conscious choice to be foolish, that is on us.

    Worst case is we lapse the policy. If so, shame on us. However, if I am irresponsible with “street credit”, I can hurt my future chances to obtain credit. This cannot happen with a safe money plan.

    Another aspect to consider is gaps in employment or even disability. If I lose my job and cannot make my car payments, here comes the repo man! Again, this cannot happen with a safe money plan that is properly managed. The car is already bought and paid for. If I miss a few payments, there are no negative consequences and no mark against my credit.

    Worse, if I am disabled when I try to make any large purchase, who will lend me the money? This is another advantage of a safe money plan.

    Finally, one could indeed make the claim that financing cars this way is “free”. Why? Simple. Think “compounding”. I am further ahead with a safe money loan than with a street loan. The math is simple.

    Anyone is free to debate my explanation. All I ask is please present FACTS and not opinions. Let’s learn together.

    Reply
    Dan says March 18, 2014

    I think you may have misunderstood something. I did not intend to imply that having or taking loans provides security. What I said was that having the *option* to easily access funds (using cash value as collateral) provides security. I firmly believe that to be true. I am as much against debt-funded consumption as you appear to be and fully appreciate the risks inherent in debt.

    Compared to many other places where wealth can be stored and grown, over-funded Dividend Paying Whole Life offers an easy way to access funds without the risk of locking in losses (i.e., forced sale of equities or bonds at a bad time), without requiring someone else to grant permission (i.e., attempt to initiate a mortgage or HELOC in a hurry), without losing money to penalties (i.e., cashing out funds from 401K), and without requiring a rigid repayment plan (i.e., personal loan), etc. Not saying it is “my” cash value, I definitely understand that it is a loan from the insurance company using cash value as collateral. That doesn’t change the fact that if one has cash value, it is easy to initiate that loan and get access to funds in the event money is needed for whatever – hopefully good and thoughtful – reason or purpose.

    I agree with you that there are more efficient (i.e. cost effective) sources of financing available to many people. On the other hand, the policy loan rate may be the best one available to others – it totally depends on individual circumstances.

    I agree with you that the focus on financing in IBC (dating at least back to Nelson Nash if not earlier) may be over-stressed and and can distract from the many other benefits that are also critical to making this strategy such an attractive option. When I said, “confusion”, that’s what I was referencing. Because like you, I am also an analytical person, I was “confused” by the stress on financing when I could readily identify other sources of financing – available to me – that had lower costs. I was also “confused” by the assertions about recapturing cost of purchases since that doesn’t immediately make sense, I’ve never found such a thing as a free car! Fortunately, I was able to set that aside (since if you don’t want to use policy loans you certainly don’t have to!) and see all the other benefits as well.

    If you are using the financing aspect alone to evaluate this strategy, I am not surprised at your conclusions. I understand the concerns you are raising about various assertions. I think there is a point that the folks making the assertions are trying to make about efficiency (rate arbitrage) and the fact that paying interest cost back to a mutual insurance company makes the company stronger which in turn benefits the policyholder. As stated earlier, I have also struggled with understanding the intended message, but I am not throwing the baby out with the bath water over that and would suggest that nobody else should either!

    I am both experienced and well read in personal finance and our family uses or has used many of the other things you alluded to in your post. I have had extensive experience in the stock market, with mutual funds, with government sponsored plans (IRA, 401K, 529, etc.), with annuities, whole life and with straight term insurance. I minimize my mortgage rate through appropriate refinancing and we have a very low rate HELOC. We intentionally separate equity from our home and keep it safe in other places (at a cost lower than the return made in those other places). We live below our means and do not finance our consumption through debt. I use short term policy loans from time to time to manage cash flow, but I also use the HELOC for that purpose. I am very confident in saying that what we are doing is meeting or exceeding expectations for our family, including using Dividend Paying Whole Life as one of the key repositories for the storage and growth of our wealth and in some other creative ways.

    I am under no illusion that I have learned everything there is to know and am always looking with an open mind for new things that could complement (or even replace if appropriate) strategies we are using today.

    And with that, I’ve said my piece and will step back. No need to reply point by point. 🙂

    Reply
Mark Marshall says March 18, 2014

Jacob, this is an excellent blog. Full disclosure: I am a college planning consultant and a licensed life insurance general agent (non-captive). Over time I plan to read through all of the replies here. My primary concern is that there is a great deal of misinformation in some of the responses.

In my experience, I find this is due to a lack of understanding of the infinite banking concept. Honest debate is appreciated but only when it involves facts and not opinions stated as fact.

In my case, we have a dual responsibility in our practice. Most of our clients have waited until the last minute to fund college. As a result, their savings choices are severely limited. Using what we call a “safe money plan” with permanent life insurance as a vehicle just so happens to be the ONLY way to address this specific challenge.

Speaking of challenges, I challenge anyone to devise a better plan for SAVINGS than the safe money strategies. Many naysayers compare it to INVESTMENTS. That is a false argument at best. Truth be told, their is NO downside to a safe money plan. Whereas the ONLY guarantee with investments is that you can lose some or all of your money!

There are TRADE OFFS with infinite banking but they are all good. This is not my opinion but is based on experience with my own plan. Life insurance companies are in business to MAKE MONEY! That is a GOOD thing. As a mutual policyholder, the company is beholden to ME and not to stockholders. I am FIRST in line for benefits.

As time allows, I hope to be able to bring another voice to this blog and clear up some of the common misconceptions. Anyone is free to disagree. However please do not “confuse me with the facts”. Math does not lie. People do. Let’s have a productive conversation and learn together.

Reply
Robert Castiglione says March 19, 2014

Hi Mark:
Your reply to my email was quite interesting. I would like to respond point by point, not with opinion, but with facts.
When you say “I believe you have some misconceptions about how these plans work,” I believe you are barking up the wrong tree. I am probably more familiar and more qualified to speak about these plans than anyone else in the United States. I have spent years studying, researching, analyzing, witnessing, and attending actual training sessions of IBC by IBC teachers.
I have read most of the books on the subject – “Becoming Your Own Banker” by Nelson Nash, “Bank on Yourself” by Pamela Yellen, “The Ten Truths of Wealth Creation” by John E. Girouard, “Safe Money Millionaire” by Brett Kitchen and Ethan Kap, “A Path to Financial Peace of Mind” by Dwayne Burnell and some others. What do all of these books have in common – mathematical errors, hype, misconceptions, and no proof.
The Insurance Banking Concept is not fraudulent or against any insurance laws. However, many of the largest life insurance companies in the industry will not support, endorse, or allow it to be sold by their sales representatives. The life insurance companies that do allow it have reported they are receiving more policy holder complaints than with any other sales method.
Now let me address your arguments:
Mark says: “First, interest rates from third parties are always based on credit worthiness and ability to repay.”
Bob replies: That is why third party lenders are able to offer cheaper loans than the life insurance company. Today, lenders charge 1.5% to 3.5% while life insurance companies charge about 5% to 8%.
Mark says: “Second, the lowest rates for vehicles generally come at the expense of not getting rebates. In other words, I either get the rebate OR the lowest rate and not both.”
Bob replies: Car dealers have inventory and want to sell cars. They will offer tremendous deals on loan interest rates for leases or loans. I negotiated my car interest loan rate this month down to less than ½ of 1%. Life insurance companies will not give a lower interest loan rate because the dealer wants to sell cars. I am in control, insurance banking concept is not in control.
Mark says: “With my safe money plan I have something that I have not seen discussed: LEVERAGE. I can go to the dealer with cash and get the best price. Then I borrow the money from my “bank”. The insurance company lends me THEIR money, using my cash value as collateral.”
Bob replies: There is no leverage with insurance banking concept. Anyone can pay cash for a car by getting a cheaper loan rate from the dealer, real bank, or other lender through negotiation of the rate.
Mark says: “I also do not have to BEG for the money or PROVE anything. All I do is make a request and the money is sent in a few days.”
Bob replies: A life insurance loan is a collateral loan. With whatever lender you choose, if you give them collateral too, you will not have to beg or prove anything. The life insurance has no risk to lend you their money. The have your money (cash value) locked up in a vault somewhere.
Life insurance companies have the contractual right to delay a car loan for up to six months from the time you request it. You might as well wait for next year’s model to come out by then.
Mark says: “As an “honest banker”, I then calculate the monthly payments for the loan as though I had borrowed from a third party.”
Bob replies: How honest are you when you do not quote a rate lower than the life insurance company rate? Keep in mind that we are looking for the best plan not one just better than the worst plan.
Mark says: “If I am really savvy, I will actually pay HIGHER than market interest since it is in my best interest. While the loan is outstanding, I am paying SIMPLE interest to the insurance company once a year. In other words, I only pay interest on the amount outstanding at the end of each year.”
Bob replies: The life insurance company is holding your money as collateral in an account. It is no longer your money, it is theirs.
Mark continues: “With a third party, I am paying AMORTIZED interest. That means, I generally pay a DAILY interest rate, calculated monthly based on the CURRENT outstanding balance. This is no different than paying a mortgage.”
Bob replies: Third party loans come in many types, rules, rates, payments and penalties and not as you describe.
Mark says: “With my personal plan, my interest rate is tied to an index.”
Bob replies: You have no control over your own interest expense rate. The rate is not guaranteed and you have no way to truly know your outcome over the life of the policy.
Mark says: “Generally, if that rate goes up, so does my dividend on my cash value.”
Bob replies: There are no such guarantees regarding dividends. Dividends may not go up when loan interest rates go up. Even if they did, they may not go up in the same proportion or as fast as the indexed loan interest rate does.
Mark says: “To be clear, this is NOT guaranteed.”
Bob replies: It is not clear to consumers when you say one thing and then take it back.
Mark says: “but it has plenty of history behind it. In my case, I use a company that has paid dividends for over 100 years and the “delta” or difference in the loan rate vs. the dividend has generally been about 1%.”
Bob replies: The words -“generally been about” – are not very reassuring. It would be helpful to see the actual side by side numbers, you know, just the facts.
Mark: “Remember, as a mutual policyholder, I am FIRST in line to receive benefits. It is NOT in the insurance company’s best interest to mess with me!
Bob replies: The life insurance company employees receive benefits before you do. They get their insurance benefits, their retirement benefits, travel expenses, and more. Actually, policyholders are last in line to receive a return of their premiums. Lenders to the insurance company come before policyholders.
Mark says: “I ask you now–all things being equal–where can you get net 1% loans for ANYTHING today?”
Bob replies, I hope you are not advising your clients that they are receiving a net 1% loan. That is untrue. Dividends are not guarantees and cannot be used as a part of the loan calculation rate. Even if the dividends were paid, and I believe that some dividend will be paid, that has no bearing on the interest cost of the loan. A dividend will be paid whether you have a loan or not.
Example: Person A has no loans and receives a dividend of $500. Person B has a loan and owes $600 of interest. He takes his $500 dividend to pay the loan the loan interest plus $100 out of pocket. He is out $600 dollars
Mark asks: “In addition, are you familiar with a concept known as “velocity”?”
Bob replies: Yes, I was the first person in the life insurance industry in 1973 to ever use the term “velocity.” I have taught the concept of velocity of money to thousands of agents across America and Canada.
Mark says: “While I am repaying the loan, at least two leveraged events are happening. One, my cash value is still growing and COMPOUNDING.
Bob replies: Cash values do not grow in a compounding fashion. Cash values are a preset contractual amount printed in advance in your policy the day you buy it. There is no compounding going on.
Mark says: “Plus, as the account is repaid, I have instant access to those funds again. Please explain how you can do this with a third party loan.”
Bob replies: I believe you are confusing collateral loans with non-collateral loans. That is like comparing apples and oranges. If my savings account at a bank has $10,000, I can borrow up to $10,000 without credit or any problem. As I repay the loan, that money becomes available to be borrow again.
Mark says: “With an amortized loan, I am paying compound interest to the bank. With a safe money loan, I am EARNING compound interest on my cash value while I repay the loan. If I then pay myself higher than market interest, I do even better.
Bob replies: False, false, and false on all three points. Loan interest does not compound, cash values do not compound, and you cannot do better by paying more interest unless the loan rate that you are comparing is much higher than the life insurance loan rate.
Mark says: “Your argument that taking out too many loans can be problematic is partly true. If the plan is reviewed with an expert advisor on a regular basis, the client will be warned about any borrowing issues. However, we all have free will. If we make the conscious choice to be foolish, that is on us.
Bob replies: People in our society have a propensity to spend. If you tell them that they are borrowing at a net 1%, and then everything that they buy “is free”, then you are opening up the door for runaway spending and an insurance policy destruction.
Mark says: “Worst case is we lapse the policy. If so, shame on us. However, if I am irresponsible with street credit”, I can hurt my future chances to obtain credit. This cannot happen with a safe money plan.
Bob replies: Borrowing money is never a prudent financial strategy. It is a cost no matter how you look at it. It is speculative and when things go bad, they realty go bad. I have seen policy loans create policy lapses. It is a fact that policies with loans have a higher lapse rate than policies without loans.
Mark says: “Another aspect to consider is gaps in employment or even disability. If I lose my job and cannot make my car payments, here comes the repo man! Again, this cannot happen with a safe money plan that is properly managed. The car is already bought and paid for. If I miss a few payments, there are no negative consequences and no mark against my credit.
Bob replies: Remember, you funded or capitalized your collateral upfront with a payment to a PUA rider. That payment could be collateral in any other lending situation too. So there is no repo man, no lost credit, and no negative consequences.
Mark says: “Worse, if I am disabled when I try to make any large purchase, who will lend me the money? This is another advantage of a safe money plan.
Bob replies: Everyone should own life insurance. They should own more life insurance than the banking concept recommends. The philosophy of lowering the death benefit for more cash value is dangerous for consumer. The death benefit is always more important than the cash value. Remember, you cannot get the cash value as long as the policy is in force. And when you die, the life insurance company keeps all of the cash values and takes loans from the death benefit.
Mark says: Finally, one could indeed make the claim that financing cars this way is “free”. Why? Simple. Think “compounding”. I am further ahead with a safe money loan than with a street loan. The math is simple.
Bob replies: No professional and accredited actuary would certify that the cars are “free.” The cars are not free and they cost more under the banking concept than any almost any other intelligent way to buy cars.
When you compare something bad for people against something that is worse, than in that instance, bad looks good. That is the hidden secret and ploy used by the insurance banking concept. It compares itself to only worse case scenarios. But if the banking concept is compared to the best case scenarios in the market place, then the insurance banking concept looks bad
Mark says: “Anyone is free to debate my explanation. All I ask is please present FACTS and not opinions. Let’s learn together.”
Bob replies: Thank you Mark. I have taken you up on your offer to help people learn the true facts about the insurance banking concept. Almost every thought, word, or idea about your support for insurance banking is invalid and not verifiable by actuarial certifications.

Reply
    Mark Marshall says March 19, 2014

    Robert, where do I start? For the sake of bandwidth and eye strain, I will keep it short.

    I am no spring chicken and have met folks like you over the years. It seems to me that you are the type who would disagree with proven facts even if they were right in front of you. That is unfortunate and does not make for honest debate.

    Most of what you say here is your OPINION. Unless I am missing something, I do not see many FACTS. When you say “I am probably more familiar and more qualified to speak about these plans than anyone else in the United States”, do have any FACTS to back that up or is that your opinion of yourself?

    If, in fact (pardon the pun), you have a better solution for the wary consumer, then please present it at the BOY site and claim your $100,000 prize!

    I am part of an organization (not BOY) that has millions of dollars in premiums in force and thousands of clients. The persistency rate is higher than the national average. That is all the PROOF I need that the concept works. That is “boots on the ground” stuff and not theory.

    In addition, my wife and I have our own plan and it works exactly as it states in the contract. We have had zero issues in any dealings with the company and do not expect any.

    Again, that is all the proof I need, i.e. personal experience. We can all make numbers look the way WE want. What matters to me–and to clients–is what is stated in a contract in one of the most highly regulated industries on the planet.

    If your argument is that SOME agents and companies may misrepresent the concept and the numbers, then we could have some common ground. However, to say flat out that the concept as a whole does not work is flat out false. That is FACT based on my personal experience and that of my clients.

    I wish you well in your mission.

    Reply
    Mark Marshall says March 19, 2014

    By the way, Robert, one footnote. When you say, “What do all of these books have in common – mathematical errors, hype, misconceptions, and no proof.

    The Insurance Banking Concept is not fraudulent or against any insurance laws.”

    That would seem to be an apparent contradiction. Sorry, but you cannot have it both ways.

    Reply
Robert Castiglione says March 19, 2014

Dan:
Thanks for your reply. You continue to be a gentlemen. I try to be one but have a more difficult time because I am the messenger of bad news to all of those IBC people out there who have succumbed to slick marketing folks.
We agree that any kind of loan is not a cost and can lead to over use. The consumers prove that every day with their cravings for things. Any loans that are advertised as a net 1% is misleading and inaccurate as well as dangerous. The net cost of a life insurance loan is exactly the amount the life insurance company is charging for the loan. The Insurance Banking agents and authors play a shell game with consumers. They make believe there is a dividend payment on the loan. There is none. The dividend will be paid whether there is a loan or not. There is no extra goody in there for the loan applicant. He would have gotten the dividend anyway, therefore the cost of the loan is the full interest charge and not a net 1%.
The fact that it is easy to access a life insurance loan does not make a costly loan any better, especially if it is a losing deal versus other available cheaper approaches.
The disadvantages are numerous:
1. It is a variable loan rate. You do not have control over the rate, the life insurance company does.
2. The dividend is not relative to the loan interest. It will be paid whether there is a loan or not.
3. The life insurance loan rate is higher than most other loans available in the marketplace, accept for credit cards and low credit bank loans. No sophisticated borrower would pay life insurance loan interest rates on substantial sums of money.
4. Life insurance loan rates are not income tax deductible. That is too large a benefit for anyone to give up for their borrowing needs. As taxes go higher, the deduction of one’s loans becomes extremely important to the efficiency of the borrowing.
5. The reason insurance banking people fail to tell the truth about the net cost of the loan not being 1% is because they would lose every time in comparison to all other loans available in the market place at better rates. So they play inappropriate math games with the American people by taking the dividend and subtracting it from the loan interest rate.
6. Cash values do not belong to the policyholders unless they cash surrender their policies. That is the only way to get access the cash values (PUA’s are policies). The proof of that is when a person dies, the insurance company keeps all of the cash values. To boot, if you have loans against those cash values, the insurance company takes that amount from the death benefits being paid to the beneficiaries.
7.The IRS is contemplating taxing life insurance policy loans in the future. It has been discussed. If it happens, those people that have all their eggs in one basket will be cooked. Can it happen? Yes it can.
8. The life insurance company can deny payment of loans for up to 6 months. IBC people are not warning consumers.
9. The rate of lapses of policies with loans is higher than those without loans.
10. Life insurance companies expenses go up when all of the notifications and forms are been submitted for policy loans. That is an expense to reserves and future lower dividends for all.

Everything that is going on in the marketplace today has worked against those people that bought into IBC. We have lower loan interest rates than in life insurance policy loans. The stock market has boomed into record performance giving investors huge returns. The estate tax credit has grown to $10,000,000 having a reason to own cash value life insurance become less likely for may consumers. Dividends on life insurance have declined over the last few years. People are living longer making the opportunity costs of the policy to potentially outgrow the death benefit.

Cash value life insurance is a complex financial tool. I am an expert of cash value life insurance. I would not use those policies in such a designed losing strategy. But IBC is not as bad as having loads of credit card debt, term life insurance, and taxable mutual funds all together. But I prefer the best strategies not the bad ones or the worst ones.

I would be more than happy to answer any of your questions and continue the dialogue. It is good for consumers to hear all sides.
Thanks.

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Robert Castiglione says March 19, 2014

Mark:
Errors made by authors and advertisers do not make something fraudulent. It simply makes it wrong. If the authors and the marketeers were to correct their mistakes, that would be an improvement. But if they did. the banking concept would still not meet expectations and fall far short of other available approaches to personal finance.
I know that most people that sell IBC may mean well and not be cognizant of the errors or omissions contained therein. So please don’t take me wrong. Incompetence, ignorance or ineptitude is allowed in America. We are all guilty of those traits at one time of other in our lives, but we try to learn and grow and be better.
I am a strong advocate of whole life insurance and know that cash value life policies and their options are sound vehicles for building wealth and protection, but if one mixes the options together in a bad way and uses inappropriate language to explain it, then they can do harm to consumers unknowingly.

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    Mark Marshall says March 19, 2014

    Robert, now we have some common ground and can continue this part of the conversation. One caution I have given to myself is not to be an absolutist. I am only responsible FOR me and TO my clients.

    As you touche on, those of us in the insurance industry have to carry Errors and Omissions coverage. In other words, we can be held accountable for what we SAY and not just what we DO. I take that VERY seriously.

    Here is what I do know from personal experience: the infinite banking CONCEPT is sound and it works every day for “honest bankers” with good plans. I will personally take guarantees any day over the whims of the various markets.

    Honestly I am surprised that you give so much credence to Wall Street simply because the market is up right now. How quickly we forgot about 2008. In that year, not one of our clients lost a dime in their safe money plans.

    When–not if–the next crash occurs, those of us with these plans would have safeguarded our futures once again. Why not consider spending more time warning folks about the dangers of INVESTING vs. the wisdom of SAVING?

    Right now, my wife and I know EXACTLY how much cash will be in our plan in 10 years. On the other hand, the remainder of her 401k is literally “imprisoned” by her employer. She cannot do any in-service distributions until she leaves her employment. How is that right? Where is the fiduciary responsibility there?

    Speaking of misleading–yet legal–I am sure you know that mutual funds are allowed to use the arithmetic mean instead of the compound annual growth rate when stating “average returns”, right? The difference is stunning, yet legal. My wife’s 401k has had an ACTUAL average return of about 3% per year since 2000. Yet her fund advertises 8%. Big difference.

    Take out the 1% fee and it has not even kept up with inflation! Yeah that’s really going to create wealth for the average Joe.

    I will take my 4% guarantee any day.

    Again, I appreciate your softened tone in your last reply. There are many variables within the concept. In the end, it is the consumer’s responsibility to READ THE CONTRACT before agreeing to the terms.

    In our practice, we actually require it!

    Reply
Robert Castiglione says March 19, 2014

Mark:
Thank you for the reply. I appreciate your comments. First let me give you a background of myself. I think it will help us in our discussions.
I started in the life insurance business in 1970. That is a 44 year history, a long timI have seen many things come and go over those years. I gradated from New York University with a degree in Economics and Finance. As an agent, I led my agency and the company in production and in lives. I was awarded the top award in the company. I have been a speaker on the Million Dollar Round Table. I have been a speaker at over 25 major life insurance companies as well as a paid consultant
to them. I stated my own company in 1980 with over 20 employees and over 4,000 agents. I train, educate, and coach agents on their life insurance and financial careers. I am an expert on analyzing financial plans and life insurance policy illustrations and sales. I have seen it all. I even invented “Be Your Own Banker in 1983, using many of the terms and calculations found in BOY. Most of the authors writing about the insurance banking concept were students of mine.

As an expert, I too am very particular of the words that I use regarding life insurance and other financial services. All of the work that I create gets forwarded to the major life insurance companies for approval, including the ones that you use for BOY. They are clients of mine too. I know the CEO and their top executives well.

When I see error, I need to try to correct it, especially as a trainer and coach. The BOY process is filled with inaccuracies and misstatements and that bothers me as well as it should you. I am not a believer in the ends justifies the means. If the end is worthy, why can’t the means to it be worthy too?
I am more a believer in the means justifies the ends. That is basically how free enterprise and capitalism works best. Please, if you will, read my longer earlier reply to your email again and tell me where you think it was my opinion responding or facts.

I appreciate your belief in BOY. Success rests on on’s belief in what they do. I believe 100% in my work and my comments. I use critical thinking to get to any viewpoint. i want you to know that I have never seen a BOY policy that was best for a client in the long run. I have seen at least thirty. 30 out of 30 bad ones is not a good percentage. I am still looking for the good one, the so called well designed policy that every BOY person says exists.
I do not sell or have a 401(k), term life insurance, mutual funds, annuities, or CD’s. My wealth is in life insurance, real estate, businesses and index private wealth management. They all have done very well over the years. There in no one financial product that can out do cash value life insurance for performance and protection. I like the guarantees too, but what BOY misses is the dramatic but complex velocities of integrated financial planning – Safety with high yield.

We should spend our next replies on the numbers. You say math doesn’t lie. Well I have seen many mathematical presentations in 44 years that lie. There is an old saying that states that “numbers can lie and liars use numbers.” So I don’t have your confidence in numbers so I inspect them carefully. The authors of BOY and the others books out therein the market place all have untruths in them. To the novice, they could go unnoticed, but to a mathematician are easily spotted.

I hope that you take this seriously and give me a listen. Thanks very much

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    Mark Marshall says March 19, 2014

    Robert, thank you for the information on your background for all here to see. I did some research and do respect your credentials. To be fair, I will read your book at some point and then compare and contrast.

    I have to say I am a bit confused since we seem to be on the same side. Yet you paint a very bleak future for the future of the infinite banking concept. For every one of the 30 policies that you say are “bad ones”, we have clients with “good ones”.

    “Good” or “bad” would seem to be more SUBJECTIVE than OBJECTIVE.

    Where we are in COMPLETE agreement is in the use of words. I always strive to be correct and I am sure I make mistakes. However, mistakes go to intent. No hidden agendas here. I am happy to be corrected and will change course if necessary.

    I have to wonder that if the practitioners of the concept are as flawed as you say, then where are the authorities? Where are the damaged policyholders screaming from the rooftops? Why would companies risk their reputation and their assets on such a flawed concept?

    From a cursory look at YOUR concept, it looks like it is very advanced for the common man. Of course, I could be wrong. As I mentioned in another post, my primary market is families with children in high school who have waited until the last minute to plan for college. In these cases, we cannot help everyone. However, for those we can, I see no other option other than over-funded, dividend-paying whole life.

    If there is something better for these folks, please enlighten me. Once again, our group has thousands of clients actually USING these plans just for this purpose and then for future large purchases.

    To show what I mean regarding opinion vs. fact, here is your reply to one of my claims:

    Mark says: “With my safe money plan I have something that I have not seen discussed: LEVERAGE. I can go to the dealer with cash and get the best price. Then I borrow the money from my “bank”. The insurance company lends me THEIR money, using my cash value as collateral.”
    Bob replies: There is no leverage with insurance banking concept. Anyone can pay cash for a car by getting a cheaper loan rate from the dealer, real bank, or other lender through negotiation of the rate.

    To be clear, there is DOUBLE leverage here. Yes, anyone with cash can negotiate. However, where are you factoring in opportunity cost? If I pay cash, I am losing the return I could make on that money. In addition, I now have to start saving AGAIN in order to have the cash for the next vehicle.

    Who has the discipline and/or ability to do that? Good old-fashioned whole life is a FORCED savings plan. That is a good thing in my book.

    Over time, paying cash is better than financing with a 3rd party but my “infinite bank” blows it away! Since I am borrowing the money from my plan, I will still be paying cash for the vehicle and can negotiate the best price. Leverage number 1.

    I then pay myself back at a market rate or higher. For the term of the loan, my total cash value remains intact and earns a return. Yes, dividends are NOT guaranteed but I get 4% guaranteed no matter what. Also, I will go with a 100+ year history for dividends any day of the week. Leverage number 2.

    Once the loan is paid back, I have 100% use of those funds again for ANY purpose. And my cash value is fully intact and can be even HIGHER if I pay myself back at a higher rate.

    Please show me where my math is wrong. Your reply was an OPINION and did not address how these plans work. I am happy to stand corrected if you can show me the error in my explanation.

    Reply
Thomas says March 20, 2014

OK, well this is getting very interesting and informative, but the argument from Robert Castiglione is not sitting well. Having sat through hours of his and his partner L.F. presentations, and heard them personally promote many of the concepts back in the Late 80’s of which sound very familiar to the IBS (not all but many…) I don’t agree with his current seeming reversal. I believe too much of the focus is on the product (IBS) and not the underlying principles which do indeed make IBS successful. It does work when implemented properly. There are too many contradictions to what I heard in those presentations, and the current posts I’m reading here. I agree that without quantifying proof, his current claims just don’t seem to be enough. After reading Mr. Castiglione’s report on the web titled “Creating a WOW Experience With Life Insurance Sales”, I get the feeling that possibly there may be a frustration that implementing the IBS with Permanent Life Insurance is not helping his efforts to help Life Insurance Agents have more lucrative careers. After all, if you structure the policies the IBS way, there would be less commissions due to the IBS ratio of Perm/Term Insurance/PUA, which helps the clients achieve a better cash value position starting in year 1. Vs…not having any cash value the first couple years and having the agent get 50% of the total annualized premium. That would make me mad as well if that were my business…but as a consumer implementing the IBS strategy, I like the upside on my end much better. Further, according to his report, out of 1000 new agents, only 14% survive. No surprise if anyone is familiar with the 80/20 rule…for life insurance, real estate agents, etc, the 80-/20 rule is understandably more drastic. Who knows, maybe if life insurance agents were taught how to structure policies that could produce the positive results that we as implementers of IBS have seen, more would survive? All I know is that I think we can all agree that compounding taxes on compounding interest is not a good thing, and that there is a opportunity cost/loss as a result. The IBS as shown by Nelson Nash is a good framework but certainly not an end-all strategy for everyone, or by itself for folks that use it. It is though a positive part of the wealth accumulation puzzle that I feel fortunate to be using and sharing with others. I also believe the LEAP system is another part of that puzzle…but I can see the conflicting results of that as we are reading here. Recently I’ve purchased several foreclosure rental homes using the IBS strategy, (and yes, it can be tax deductible when taking the loans if you structure the loans properly with your business entity). To have that kind of leverage and be able to buy homes with cash, then be able to refinance them to generate more income pulling out equity from them is not common – I agree…but it works. Then to use the rental income to pay down the loan and still have a positive cash flow – what is wrong with that? I say nothing. But if I’m missing something, please share with better details that all of us can benefit from…otherwise, I think it would be best to agree to disagree and move on.

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    Mark Marshall says March 20, 2014

    Thomas, thank you for the sensible post. One suggestion: please space your paragraphs. One long one is tough to read!

    It is refreshing to see an actual practitioner of a safe money plan. Your application in buying properties is perfectly sound and fits within the design of a good plan. Of course, you know that from actual experience as opposed to theory or opinions.

    I completely agree that infinite banking as a concept is NOT a be all and end all. However the concept DOES work, all things being equal.

    As an agent in the field with a practice that helps families up against the horrendous cost of college, I can say that I sleep well at night knowing the difference I can make with our clients. Regarding the whole reduced commission challenge, that is a GOOD thing because it clearly demonstrates that we are not out to line our pockets.

    Ironically, I would say many agents do not make it in this side of the business in part due to the “too good to be true” attitude of many consumers. In my experience, it sometimes takes our clients an extra measure of time just to understand the concept and then to implement it.

    Others do not qualify for one reason or another. Still others buy into the Wall Street propaganda at their peril.

    Another reason for failure could be that the agent just does not do a good job explaining the concept properly. We all have an obligation to become masters of our trade.

    Thanks again for the post and continued success with your infinite banking plan!

    Reply
Chris S. says March 20, 2014

Hi Thomas, Mark Marshall, Dan

I completely agree with all of you. I would say that I am still new to this concept since my policies were set up in 2011, but I can’t emphasize enough how wonderful it has been to be able to sleep well at night, without the stock market volatility and see the policies grow. I am thrilled that all those, including me that are benefiting from this concept are letting others know that this is definitely a valid concept worth looking into it. I have purchased a real estate property for rental borrowing from my policy, but still don’t know how to make it deductible. If Thomas or Mark Marshall or anyone willing to shed some light to help me, I would greatly appreciate it My email is chris1now@gmail.com Thanks for all the wonderful posts.

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    Mark Marshall says March 20, 2014

    Chris, thanks for chiming in as yet another practitioner of the infinite banking concept.

    Opposing viewpoints are helpful but I have learned to always go to the source when making important decisions. In my case, I am fortunate to be surrounded by a support group of coaches who are WAY smarter than I am and who have direct contact with some of companies who provide these plans.

    Of course, I am a practitioner myself.

    With that in mind, Chris, you need to get tax advice from an accountant. If it were me, I would contact my agent who set up the plan and see if he or she has any accountant contacts.

    Hope this helps.

    Reply
Thomas says March 20, 2014

Sorry for the long post – it was late and I couldn’t help but address some conflicts of interest or the competitive nature of what was being posted.

I will not address the tax deductibility issue directly since I am not a CPA qualified to address that on this forum…but I will say that one should consult with a professional into how the loan taken out can be redirected as a loan to a business entity.

What I’ve found is that folks like to be shown how the process can work for them directly vs just reading about it…and being forthcoming on how to use the strategy whether an agent or not should help develop strong goodwill. I believe that is an issue with the way Perm life insurance is sold currently the typical way.

I’ve also found that the underlying principles do not have to just be used with Perm life insurance and can successfully be used with other financial tools…e.g. I would much rather pull out equity from my home that is doing nothing but reacting to the market conditions and put it in a sound financial tool that is liquid, safe and getting some kind of return – although the return is the least important part of it…if I have access to it and can use it somewhere else to increase my income, that is the key part.

As I’ve learned from my Missed Fortune days…as long as I have the cash build up to pay off the increased debt to have the liquidity and safety I need, I feel debt free and I’ve achieved greater leverage for growing my bottom-line.

Regardless of the tool used, if one goes into this without doing their due diligence, or not handling the loan debt in the proper manner, or is not disciplined to follow the framework for the model, this could be a problem and not something I would recommend to a newbie.

Rather than debate which program/system/tool is better, my model includes taken the best from all the qualifying models to create a more flexible model that can better accommodate my individual needs, or for more individuals trying to see how it can work for them. And, to present options for how to use the model – whether for buying real estate or doing owner financing, buying gold/silver, cars, etc…

So, I don’t believe this is a either/or situation, but rather a both/and. Forums like this are helpful for folks to get info from all angles as they do their research.

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Robert Castiglione says March 20, 2014

Hi guys:
We are really starting to get somewhere for the benefit of the readers, consumers, and agents. We have an articulate group debating an important issue that can affect the lives of thousands of people. A real debate is only as good as the knowledge of the debaters and their and willingness to share supporting information. The only winner should be the audience not the debaters.
The debaters need to present their facts and trust that their facts will support their side. The temptation to belittle the other side should be avoided for which such talk only shows a lack of understanding and confidence in their own facts. This is applicable to both sides.
I know that you are all advocates of IBC. You have made that clear. I know that you use IBC yourself and say that it is working now and your clients seem to be happy with it . I know that you have been trained by IBC people and have several books and literature supporting your beliefs. Going forward, I hope that we can resist these restatements and provide real supportive information for your beliefs.

Please try to respect my viewpoints and I will try to respect yours. I admire when people have a strong belief in their product for I have a strong belief in mine too. My objective is seeking the truth and accuracy of the methods we both use, and not whether they sell or not. I doubt if you will have an argument with that as our goal since you all seem intelligent and fairly open to improving your lives as well as your clients.

In response to just a few of the negative comments you all have made about me, I want you to know that I can take anything you say. It does not bother or upset me. That is because I am 70 years old, retired, very wealthy, and have a loving family. I am not a salesman. I have no stake in IBC or anything else at this time. I am only interested in correcting wrongs, that I have tested to be wrong, that is being used in the insurance industry. I care about the life insurance industry because it has been very good to me. I feel that I should have to give back to it for as long as I live.

Let me now state my position so that we can proceed to address these points:
1. IBC’s use of words and terms in marketing and advertising misrepresent and mislead consumers
2. IBC claims of being the best way to build more wealth are exaggerated and unreachable
3. IBC cannot add additional money supply that makes consumer purchases become “free.”
4. IBC itself has an opportunity cost in its own method rather than savings opportunity cost.
5. IBC is not fraudulent because IBC uses the functions of an approved life insurance policy.
6. Most insurance companies do not approve of IBC because of its errors and long term dangers.
7. Insurance companies using IBC claim more complaints than with other sales systems they use.
8. There is no leverage or velocity being used in IBC according to the definition of both terms.
9. Having “all eggs in one basket” opens up high risk due to potential tax/insurance changes
10. Most important, from all of the above, is that the math used in IBC is incorrect.

I am not evaluating IBC as compared to another system. I am evaluating IBC to see if it can stand on its own merits as advertised and meet its claims and promises made to consumers.
I look forward to our debate and evaluation of the facts and I praise you for your professional participation and concerns.

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    Mark Marshall says March 20, 2014

    Robert, I can only speak for myself here. The main issue I have with the majority of your talking points is that they are ABSOLUTE. By your comments, you are basically saying “I am right and everyone who disagrees with me is wrong”. That hardly leaves room for debate.

    I will address some of your points above.

    You say:”IBC’s use of words and terms in marketing and advertising misrepresent and mislead consumers.” Please provide a couple of examples and the source.

    You say: “IBC claims of being the best way to build more wealth are exaggerated and unreachable.” Who says it is the “best” way? It is certainly ONE way. In our group, there are many clients who have built substantial wealth with the concept.

    Once again, you make a sweeping general statement here. I personally know a practitioner who is using his safe money plan to invest hundreds of thousands of dollars in apartment complexes. In fact, he is the one who first introduced me to the concept about 2 years ago. I only wished I had found out about it years ago.

    You say: “Most insurance companies do not approve of IBC because of its errors and long term dangers.” This is a perfect example of an absolute statement with no facts to back it up. There are over 1000 life insurance companies in the US. How could you possibly know this?

    You say: “Insurance companies using IBC claim more complaints than with other sales systems they use.” Which companies? And why is this a problem? Insurance companies are not generally known to provide the best customer service or be the best communicators.

    Agents can be a big part of this issue as well. It is up to the companies and the agencies to make sure agents are trained properly in the concept.

    You say: “There is no leverage or velocity being used in IBC according to the definition of both terms.”
    Really? From dictionary.com for leverage: “the use of a small initial investment, credit, or borrowed funds to gain a very high return in relation to one’s investment, to control a much larger investment, or to reduce one’s own liability for any loss.”

    My friend mentioned above who introduced me to the concept would beg to differ. He uses his POLICIES (plural) to leverage his investments on a regular basis.

    From dictionary.com for velocity: “the rate of speed with which something happens; rapidity of action or reaction”.

    As I pay back a policy loan, I have immediate use of those funds again. Sure looks like velocity to me.

    You say: “Most important, from all of the above, is that the math used in IBC is incorrect.” There you go again, Robert, with another absolute statement. The only math that matters is what is in my CONTRACT. That math MUST be correct by law.

    I live by an old adage that has served me well over the years: “Don’t confuse me with the facts!” So, if you would care to respond here with FACTS, I for one am all ears.

    Reply
Chris S. says March 20, 2014

Hi Mark,

Thank you for your suggestions. Unfortunately, when I asked my accountant about it, he told me that interest paid for loans from life insurance are not deductible even if it is for purchasing rental real estate. I thought to myself, my accountant is probably not familiar with loans from life insurance, which is not uncommon. I then, asked “my coach” who set up the policy for me if he would know someone. He was kind enough to recommend me an accountant to me that is familiar with life insurance, but for some reason, the person just never bothered to reply. My coach has been trying to find someone else, but no luck. After reading so much about this concept, I just know that it can be done. As I have said previously, I couldn’t be happier to have found out about IBC. My only frustration so far is not knowing how to report this expense to the IRS, making it a deductible expense. It has been almost 3 months that I have been trying to figure out about this, searching non-stop on the internet, reading more books and articles on this concept. And, when I read Thomas’ recent post about applying the loans to rental real estate on this site, I was hoping that Thomas or someone will be able to give me some guidance. I realize that all of you are so more knowledgeable than me and so willing to share your positive experiences which makes reading this blog a real learning experience for me. I just wonder how people do it and of course I would assume full responsibility if I decide to use it as a deductible expense on my tax return. At this point, without help, I might just have to give up since I cannot hold my tax return much longer. Thanks.

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    Lisa says March 20, 2014

    Hi Chris, I attended a workshop given by Teresa Kuhn who is my advisor and just so knowledgeable on the concept. Nelson Nash was as the workshop as well as a CPA (can’t remember his name) who was very knowledgable on using insurance in a tax deductible concept…

    If I am buying property for example (and have done several times) I go to the bank and ask them what the interest rate would be if I purchase XYZ. They come up with a number then I ask if they will print those numbers for me. I take it home add 2-3 % because there is always a variable on what banks charge you.

    Then I write up the paperwork my self , who I am borrowing the money from and at what interest rate. I set up my monthly payment, which is automatically debited from business to my personal then to Life Insurance co. I write this in the documentation as well. File it in my official papers, just like any loan you would get at the S&L, Bank etc, on not quite as legal looking:)

    I have used this several times and I get no complaints from my CPA. I just document everything and I am essentially Bank of Lisa:). I can find out the name of the CPA if you need it. I think a couple of years ago he charged $75/hr for telephone conference.

    Not a lot of help but maybe it will give you some ideas

    Thanks
    Lisa

    Reply
Thomas says March 20, 2014

Hey Chris – I’m assuming your accountant is a CPA…if not, ask a CPA…but ask them specifically about the deductibility if you structure a note from you (from the insurance loan proceeds) to your LLC purchasing the rental property.

My understanding is you are correct that it will not be deductible to you as the owner of the policy and using the same name as owner of the property. When I mentioned business entity, again you need to ask specifically based on creating a loan from you to an entity like an LLC…that is how I would ask the question.

Don’t feel bad if they don’t know…I’ve gone round and round many times with my previous CPA who is old school and firmly believes that a mortgage MUST be paid off to be mortgage debt free…he also thinks it is too risky to separate out equity in a side fund…I totally disagree but again implementers of this strategy are the very few who are disciplined enough to make it work…as my CPA said – he acknowledged that it could work, but most of his clients would “screw it up”. He’s probably right. I will say that finding a good CPA/tax professional is worth the time and effort!

Reply
Robert Castiglione says March 21, 2014

Mark:
I believe you have misunderstood my reply. I was establishing a general position for moving forward for our future debate. Rules are the only way for intelligent people to have a constructive and valuable discussion.

My points were not meant to be absolutes but rather my stated position about IBC which I am under the burden to prove and intend to state the facts for my position. Your position is to see each proof one at a time and agree or disagree by using your facts and proof.

We are trying to find out the truth. Your statements about clients being happy and wealthy on IBC are not facts but just statements. They are not proof of anything. For example, a person who robbed a bank successfully may be happy but I do not think it is a correct approach to making wealth. That is not to say that IBC is like robbing a bank. I was just trying to make a point. You would have to show the numbers of how much premium he paid and what money he now has in his policy.

I will be using real numbers from the experts of IBC to prove the points I have made.

Please read my position reply again and see if you agree to the terms of proceeding.