The Infinite Banking Concept

[Ficklone02]

I was turned on to this idea recently, and have been reading about it thru a book by the founder of this system, Nelson Nash.

Its tough for me to gauge its relevance/effectiveness since I have such little experience with Life Insurance products. Here are my observations from reading the book and various internet searches on point:

1. The products flexibility appears to be its greatest advantage. A permanent whole life insurance product, which when properly funded can provide for a personal banking system. Its called a personal banking system due to the ability to access funds out of the policy for whatever use with little to no expense or tax implications.
2. The product also pays a promised dividend amount each year, with the possibility of additional investment gains to your cash value throughout the year.
3. The policy works well only if you pay back loans taken for yourself against the policy. (this is where it starts to get a little fuzzy for me)


Those are the basics based on limited research. It seems like a good product to me, if your perspective is to use this as a creative way to control your personal financing of vehicles, houses, etc. Since the investment gains don't appear to be great (almost guaranteed though), you wouldn't want this to be your only retirement investment vehicle....stocks, bonds, real estate, etc should separately supplement your retirement.

Looking to see if anybody out there has experiences with this product they can share!

 

[CivEFootball]

Personally not a fan of whole life policies. Terms polices cost a fraction of the same coverage of whole life. Take the saving and go invest yourself. you'll see a higher return on your money.

 

[Ficklone02]

Personally not a fan of whole life policies. Terms polices cost a fraction of the same coverage of whole life. Take the saving and go invest yourself. you'll see a higher return on your money.

That's traditionally what you would do if you needed life insurance, and you don't have a need for that money in the short term. But what if you did? Life can sometimes throw curveballs at you that you don't expect. Can you pull money out of most investments tax free? I think not.

The point of this product appears to be its flexibility for financing, not its exceptional investment returns.

 

[Trice]

That's traditionally what you would do if you needed life insurance, and you don't have a need for that money in the short term. But what if you did? Life can sometimes throw curveballs at you that you don't expect. Can you pull money out of most investments tax free? I think not.

The point of this product appears to be its flexibility for financing, not its exceptional investment returns.

How do you access funds from a whole life insurance policy with no tax implications? I thought you still had to pay taxes on the gains. I had to do this for a small permanent life insurance policy a few years back and that was the case for us, although I don't recall the exact tax treatment (capital gains, etc.).

 

[CivEFootball]

I recommend the "Orman" rule of having 8 months of expenses in a bank account should be enough to cover the "curveball". Its a very hard amount to save up too.

The completely not recommend way would be to take a forgivable loan out of your IRA/Roth and pay it back in the forgivable time.

 

[CyCy]

Typically, the more bells and whistles that you add to an insurance policy, the higher the commission for the salesperson and the higher margin for the company.
I agree with the poster above. The best plan for most people would be to buy a term like policy and invest the difference. The only problem with that would be for people who don't have the financial discipline to invest the difference every year.

 

[JWIL4CY]

This makes no sense. You would buy a high priced life insurance policy which gives you really poor returns just to have a little more liquidity?

 

[Clone1450]

The clear reason for a whole life policy is to protect against becoming uninsurable. If you are diagnosed with can er or something once your term policy expires you will be very hard pressed to obtain new coverage without an insaine cost. I recommend a base line whole life policy purchased at a very early point in life which locks in a low rate and begins growing. This will give you a "backup" plan for the future and always give your survivors enough to cover burial and funeral costs etc which can be rather costly. It wouldn't be impossible to burn through large investments paying for medical treatments etc. and not be insurable for these things leaving your survivors in a pinch.

 

[Ficklone02]

This makes no sense. You would buy a high priced life insurance policy which gives you really poor returns just to have a little more liquidity?

If you're making returns on your policy than it wouldn't be high priced. At that point its just an opportunity cost. The question to me is the age old question of opportunity with risk vs. less opportunity with very limited risk. In return for less opportunity though, this way of financing/investing allows for greater liquidity with less tax issues, and more coverage for your family in the event you pass away.

I think I won't really be able to make a determination on it until I see real world numbers and run the analysis.

 

[DGoodhue]

Life Insurance Professional here... I'm a licensed broker/producer but don't hold a book of business myself. In fact I actually work as a Product Development Consultant and formerly was a Competitive Intelligence Analyst for an insurance carrier where my role was to know as much or more about our competitors' products and services as our own. I have not been in the business nearly as long as some of the old seasoned agents out there but I feel I have enough experience to speak about the concept you are considering. DISCLAIMER: Nothing below should be used as advice. Instead use it as a basis for a high-level understanding. I would suggest you consult with your own tax-professional or insurance representative if you are interested in such a concept. And most of all, I suggest doing some research on your own. And keep in mind, anything that shows up on a website like "scam.com" should be something to be concerned about.

As a further disclaimer - The company I work for does not have whole life products and we do not consider the "infinite Banking" (aka "Becoming Your Own Banker" or "Banking on Yourself") concept a viable one. At least not for the reasons it's marketed.

The basis for the concept is the fact that life insurance can be funded in such a way that allows policy owners to take advantage of the "tax-advantaged" nature of life insurance. Within life insurance you do have the ability to take tax-free distributions up to your basis and then tax-free policy loans to remove any gain. The taxes saved can outweigh the insurance charges embedded into a life insurance product, but only if the product is properly funded. A properly funded insurance product is one funded at a level that still meets the definition of insurance without exceeding maximum premium limits creating what's called a "modified endowment contract". In doing this you have a minimal net amount at risk which translates to low cost of insurance charges.

So essentially the concept is marketed as a way to apply a large amount of money into a policy with the ability to take tax-free distributions when needed. Your earn a decent rate of return (much higher than the <1% that you get in a savings account today) and these loans are made without a loan interest charge or with a very minimal charge... so essentially you're taking a zero-net cost loan from yourself. Sounds great, right?

In order to make it work you need to invest a significant amount of money and especially time. Don't expect to be able to take zero-net cost loans immediately... it can t take 10+ years to create enough gain in a policy to be able to take distributions and loans without severely crippling the policy.

As CivEFootball said above, term insurance is certainly a cheaper alternative allowing you to invest the difference in premium saved and likely earn a better rate of return but that takes discipline as well. Buying a whole life policy locks-you in and creates a funding plan for you. It also locks in the cost of the policy... with insurance products, the older you are when you purchase them, the higher the cost of insurance and higher the premiums need to be to make them work.

CyCy is partially right - generally the more bells and whistles in a policy, the higher the policy charges. The part that I don't find 100% accurate is the comment about increased commissions. More features doesn't necessarily mean more commissions. In some cases it does, but there are also bells and whistles that can be used to lower commissions and increase policy performance. That's why you need to make sure the product you are putting your money into is the most efficient product for the job. That means you should not be paying extra for riders you don't need and if the product offers features that enhance performance you should take full advantage.

If anyone is interested in asking any questions on the concept or questions about any specific product they are being sold, or if anyone wants to discuss additional pros and cons, I'm always willing to offer my point of view.... but I shouldn't offer advice. Feel free to shoot me a message or ask here and I'll do my best to reply objectively.

Keep in mind there are a lot of pros and cons of the concept, it will work for some people and won't for others. As with any insurance product you should fully understand what you are paying for before investing your hard earned dollars for a long period of time and I would suggest speaking with a licensed producer that is not affiliated with the concept before making any final decisions on your own.

*edited for grammar + here is one (of many) source for some additional reading: http://www.cbsnews.com/8301-505144_162-57391839/bestselling-books-financial-promises-dont-add-up/

 

[Ficklone02]

Thx for your comments DGoodhue.

Good discussion. I think alot of it really does depend on what you value. I will definitely follow up with what I decided based on the analysis. In the mean time, I'd be interested to know anybodies direct experiences with this product.

 

[DGoodhue]

One item to keep in mind as you continue your research and analysis -- this is not really a "product". It's more of a "concept" or "funding strategy" that results in a more tax-efficient life insurance policy. The concept works with all types of cash value life insurance products, not just whole life. Any product that offers low charges and zero net-cost loans with a decent rate of return will work. In fact the most efficient product to use may be a no-load or low-load variable universal life product if you're comfortable taking on the risk of the market because there will be more potential for gain, which translates into a lower net amount at risk and higher policy values to use when you need them. Your agent should not suggest whole life as the only type of product to use or suggest only one insurance carrier or product to make the concept work.

 

[Ficklone02]

One item to keep in mind as you continue your research and analysis -- this is not really a "product". It's more of a "concept" or "funding strategy" that results in a more tax-efficient life insurance policy. The concept works with all types of cash value life insurance products, not just whole life. Any product that offers low charges and zero net-cost loans with a decent rate of return will work. In fact the most efficient product to use may be a no-load or low-load variable universal life product if you're comfortable taking on the risk of the market because there will be more potential for gain, which translates into a lower net amount at risk and higher policy values to use when you need them. Your agent should not suggest whole life as the only type of product to use or suggest only one insurance carrier or product to make the concept work.

I agree, I think the fact that its the process of using the banking concept to your advantage is what has my interest peaked. If it was just a simple calculation of saying would I rather have 8% in the market vs whatever this policy offers that would be really simple. But to me it really is more than that. I think if someone just says I can make more by buying term and investing the rest, than they really aren't doing a full analysis on how this product might help in different unanticipated life situations.

 

[Ficklone02]

I recommend the "Orman" rule of having 8 months of expenses in a bank account should be enough to cover the "curveball". Its a very hard amount to save up too.

The completely not recommend way would be to take a forgivable loan out of your IRA/Roth and pay it back in the forgivable time.

I certainly think Suzy is very reputable, but how much is that bank account paying you in interest? This is the very reason why the life insurance is potentially a good idea. In addition to the divy's your policy pays, you have the life insurance death benefit.

On the contrary my finance/accounting background which always tells me to delay expenses/promote income to increase my time value of money says that the delay in time for me to realize the value in the life insurance policy contributions (typically 5-7 years) is a real negative for me.

 

[DGoodhue]

I agree, I think the fact that its the process of using the banking concept to your advantage is what has my interest peaked. If it was just a simple calculation of saying would I rather have 8% in the market vs whatever this policy offers that would be really simple. But to me it really is more than that. I think if someone just says I can make more by buying term and investing the rest, than they really aren't doing a full analysis on how this product might help in different unanticipated life situations.

You're on the right track. Buying term and investing the difference isn't always best for everyone. The stocks/bonds/funds you are investing in will have cap gains/fees/expenses just as the insurance has policy charges. One approach you might take to get started with some analysis of your own: compare the permanent policy to purchasing a lower cost term policy and investing the premium difference somewhere else like your 401(k) or an IRA. For example, I just ran a quote on a New York Life product on myself and came up with a premium of $8700/year. I could purchase the same amount of 30-year term insurance for $700/year. If the investments in the permanent policy earn 8% over 30 years, it is projected to have about $600,000 net of expenses, some of which can be borrowed against tax-free. that sounds great but investing the $8000 different in a Roth 401(k) with the same 8% return (but without insurance charges) would provide about $980,000 all tax-free after 30 years.

One benefit to insurance in this scenario is liquidity... I cant touch that money in my retirement account until I'm 59 1/2 without a penalty. Another is the death benefit that provides added value should I die before I need the money back. Yet another is the ability to fund the permanent policy at much higher levels - there are no premiums restrictions that you might have in a roth 401(k), roth IRA or any qualified plan. That's especially useful if you're in a high tax bracket and you've maxed out all your other retirement plan contributions. The tax advantages of life insurance may be valuable to that person. One clear disadvantage to insurance in this scenario is efficiency... I'm giving up $380,000 in value over a 30 year period due to insurance charges. Another disadvantage is the fact that the policy you own is likely quoted based on non-guaranteed values. make sure when you are analyzing the concept for yourself you obtain quotes using both current and guaranteed assumptions.

This is only one scenario and a small set of pros and cons to consider.

One key thing to remember about life insurance, it's meant to provide a death benefit. Cash value life insurance can be valuable, but it shouldn't be used as a core savings device. You may have more liquidity compared to some other investment options, and the tax advantages are attractive, but it's typically not efficient enough to justify using it like that.