Monday, March 22, 2010

Infinite Banking and Bank on Yourself: Scams or Wise Investments?

A friend was considering buying into "Infinite Banking" or "Bank on Yourself", which is a sort of whole life insurance policy that allows you to borrow on your own money once you're fully vested. At first, it seems like a really cool deal: why borrow from a bank when you could borrow from yourself, paying yourself interest rather than the bank?

But the more I read, I determined that some of the supposed benefits were largely illusory. Yet, the fascinating thing was that, after reading for hours on the subject (and I was always good at Math and consider myself pretty good at personal finance and investing - hey, I wrote an entire book on it!), there was still a mental cloud that hung over it. It's sort of like those mathematical puzzles where Sally buys something, sells something, then something complicated happens and you know you're applying all the right equations, but in the end the numbers always come out wrong. When your mind tries to retrace the steps, it gets lost in sort of a fog.

But in this case, the fog eventually cleared for me. Here are my conclusions that I shared with my friend. Feel free to interact if you're considering this. But you may want to go straight to the Kiplinger site, where a ton of interaction is going on. You can read people arguing pro and con, and eventually you, like my experience, might see the fog clearing up.

Here's the Kiplinger discussion, which any person considering "Infinite Banking" should carefully consider:

http://forums.kiplinger.com/showthread.php?t=10496&page=3&pp=15

During the first pages of the discussion, many of the comments are positive toward Infinite Banking, but as people delve into it more, you find more and more negatives. So make sure to keep reading. This is a ton of money you're considering putting into this, so study it carefully. Remember Solomon's warning: "The fool believes everything he hears."

So here are some of my red flags, concerns and questions I'd ask for someone trying to sell me this policy:

Questions, Concerns and Red Flags

1) What is the name of the insurance company you'd be using? I’d like to see how it’s rated. Here's an authoritative source for rating insurance companies:

http://www3.ambest.com/lh/default.asp

But even if it’s rated excellent, that’s lots of money tied up in one company. If that's where most of your savings is going, you're putting a lot of eggs into one basket. Is it insured by the FDIC? If so, up to what level? What happens to the money if the company goes broke? (Just before Enron went belly-up, it was still given the highest ratings. People didn’t know what was going on inside until the very end.)

2) The Websites for these groups immediately start explaining why Dave Ramsey and Suze Orman are against them, saying stuff like “They don’t understand these policies.” Well, from what I’ve read of Suze, although I don't always agree with her, she's pretty thorough on things, particularly insurance. I’d want to know precisely why Suze and Dave are against this. If you don't understand their criticisms, you don't know both sides.

2) Some are saying this isn’t anything new, it’s just being marketed differently. So, if it isn’t new, then why did the others stop doing it? Maybe it’s something that sells well when the economy is looking bad and everyone is scared, but nobody wants to get in when things are going well.

3) Why aren’t the major insurance companies selling this? Are they? I’d like to see what the big insurance associations say about them.

4) The way this is being marketing looks more like hype than solid information. Look at Pamela Yellen's book, Bank on Yourself in Amazon. So it has almost 100 reviews, and a significant percent are five star. But any author can get lots of associates and friends to write five star reviews, particularly if you're selling a product and have other product sales people under you who have a vested interest in making the book look good. But a significant 12% of the reviews are only one star. I often see this in financial books that have some good stuff in them, but also some crap. Lots of five-star fans, but also a significant portion of one-star critics saying, "This is crazy!" Read these one-star reviews carefully.

http://www.amazon.com/Bank-Yourself-Life-Changing-Protecting-Financial/product-reviews/B003156AXW/ref=cm_cr_dp_hist_1?ie=UTF8&showViewpoints=0&filterBy=addOneStar

My Bottom Lines

1) It’s a type of whole life insurance policy. Don’t get it unless your main reason for doing it is to give money to a loved one at the time of your death. Even then, make sure that it’s a good policy compared to other life insurance policies. Example: how much of all that money you’ve saved actually goes to your beneficiaries in the end?

The vast majority of financial counselors that I read say to buy term insurance (which is much less expensive) and invest what you save, until you've saved up enough to be self-insured. If you're 55 years old and you've got lots of money saved up for retirement, you just need to insure the difference between what you've saved and what your loved one would need if you died. So you need less and less life insurance as you go through life. After you've got enough to retire, you probably don't need life insurance at all.

2) The concept of “being your own bank” and “infinite banking” seems largely illusory. I got fascinated with it and was up till 1:00 AM trying to understand people’s arguments back and forth in this regard. When I woke up the next morning, I suppose my mind had been working on it during my sleep, and it seemed clearer to me. I think the quote at the end of this post will show clearly that, if you need to borrow money, in most cases, you’d be better off just finding the lowest cost loan than borrowing from your own money in your insurance policy.

As an aside, I'm in the habit of saving up and buying things, so that I've never made payments on depreciating assets like a car or furniture. Don't borrow on a depreciating asset. And don't borrow on an appreciating asset unless it's absolutely necessary. Borrowing is sometimes a necessity (a medical emergency or to buy a house), but never safe. Even if you're borrowing from your own insurance policy, "the borrower is the lender's slave." There are consequences if you don't pay it back, and you need to know precisely what those consequences are.

3) In what cases are smart people justifying buying one of these policies. Only in limited situations. Some who argue for the wisdom of such a policy are saying that “it’s not a substitute for your retirement, but if you’ve already got a great retirement set up, and if you’re currently making a high salary, so that you’re not likely to default on your payments, then it may be a way to further diversify the assets that you want to go to loved ones at your death.”

4) Some say that they weren’t saving anything for the future, and this is forced savings, like when you have to make your mortgage payment each month. They say it works for them, but it seems pretty expensive to me. You're paying tons of money for the policy that could be growing in a low-cost mutual fund. And if you’re an undisciplined spender today, then might you also over borrow from your insurance fund and get in trouble trying to pay it back?

5) I’d want to know exactly what happens if you can’t keep up your payments, or if you borrow from it and can’t pay it back on time. And can those rules change over time?

6) I’d want to know exactly how the 5% (or whatever) growth per year works. What is the rate based on - how well the company’s doing? If so, what if this type of policy goes out of favor and new people stop putting money in? Will the percentage increase drop?

7) I'd want to see an exact comparison, all costs considered (taxes, service fees, etc.), of how the money you'd put into a policy like this would stack up against a fairly conservative investment in stocks, bonds and cash equivalents at a respected firm like Vanguard.

8) Some people are talking about paying up these policies with the equity in their houses or using this as their retirement plan. This would be a huge step and makes no sense to me at all. What if this company goes belly up? Again, you've got a lot of eggs in one basket. Sure, stocks and bonds and banks and real estate can be scary. But that's why we diversify. If my stock mutual funds are diversified between thousands of companies, then the worth of all those companies could never drop to nothing, except in an Armageddon scenario. And in an Armageddon scenario, say goodbye to your insurance and the FDIC as well. If you're looking for Armageddon, get your life right with God (for your long-term outlook) and invest in guns and knives (for your short-term outlook).

A Comparison of Banking for Yourself (from your insurance policy) and Borrowing from Your Real Bank

I'm just slightly revising one of the posts from the Kipplinger discussion group. The important thing here is to keep your eye on how much the transaction is costing you out of pocket over time. I think you'll see that in all three cases, you're spending the same amount to borrow the money. Banking for yourself is in reality giving you no real benefit that I can see over taking out a traditional loan.

Example 1: Using CASH for purchase. $10,000 account earning 5% interest.

I take out the $10,000 and make purchase. It is no longer earning 5%. So, after 1 year, I have lost $500 in interest, correct? Well, lets say at the end of the year I put back the $10,000 + $500 ($10500). So, it was as if I never took money out in the first place because I added $500 out of my pocket to make up for the lost interest. The opportunity cost of using the money was 5%, but I made it up by "charging myself" 5%.

This transaction cost me $500 out-of-pocket and I now have $10,500 in my account.

Example 2: Commercial loan. $10,000 at 5% interest

I take a 5% loan from a bank and leave my $10,000 in the bank, still earning 5% interest. At the end of the year, I pay off the loan in full for $10,000 + an additional out pocket $500. My bank account earned $500, but the loan interest cost me $500. The opportunity cost of using this method was 0, but the interest cost of using this money was 5%.

This transaction cost $500 out-of-pocket and I now have $10,500 in my account.

Example 3 (Infinite Banking): Policy loan for $10000, current loan rate 5%

I take a 5% loan from my policy and make my $10,000 of cash value collateral, still earning 5% interest + dividends. At the end of the year, I pay off the loan in full for $10000 plus an additional out of pocket $500 to free up my collateral. My cash value earned $500, but the loan interest cost me $500. The opportunity cost of using this money was 0, but the interest cost that I needed to pay to free up my collateral was 5%.

This transaction cost $500 out-of-pocket and I have $10,500 in my account.

Also, I should mention, I can borrow money on my home equity loan presently for much less than 5%. And some car loans are at 0%. If I "borrow" from my cash account that's getting pitiful interest, like my Money Market fund, then my out-of-pocket opportunity loss would be only about 1% over a year. My point? Even if you had an "infinite banking" account to borrow from, in many cases you'd be better off borrowing elsewhere.

The bottom line? What benefit was it to me to borrow from my insurance policy?

59 comments:

Danny said...

I appreciate your thoughts. I found your post because I am still undecided on the Infinite Banking concept. There are some extremely intelligent people (with no vested interest) in support as well as dissent. After reading your post, however, there are some things I think readers should consider. I have written my response in a way that each item is a response to your outline, without reprinting your entire post. Also, It is necessary to break the response into multiple comments on your blog.

On “Questions, Concerns and Red Flags”

1) The FDIC insures banks rather than insurance companies. Insurance companies are actually insured by reinsurance companies. (I could be wrong and the FDIC might cover insurance companies, and if you could document it, I would appreciate it. Never want to assume I'm all knowing!) I am fairly certain about this (a brief explanation http://en.wikipedia.org/wiki/Reinsurance). Also, to know the difference, a solid understanding of fractional reserve banking must be had. The purpose of the FDIC is to insure the 90% of your money that the bank is allowed to invest elsewhere. An insurance company is regulated differently than a bank, and is unable to operate on the same fractional reserve system.

2) I really like that rather than simply siding with Dave Ramsey and Suze Orman, you encourage people to understand their point of view. They are both very intelligent with great knowledge to offer. They should never be written off. However, we also need to remember they both have a particular brand to protect, and that supporting anything that could dilute that brand would be counterproductive for them. They have to toe-the-line, if if they drew the line, for continued success.

3) Are you so certain that others have stopped using the infinite banking concept (for reasons other than a lack of discipline or financial setbacks)? I am asking if you have information that people have been educated beyond the concept of infinite banking and have stopped the practice, and if so, what is your source?

It is very likely, in my opinion, that your statement regarding the momentum of the product is carried by the success (or lack thereof) of other strategies. Of course, when the economy is strong, there are declines in the interest of conservative financial strategies (which infinite banking is). Those who change with the wind will be seduced to promises of greater returns, only to hold on too long and lose them in the next downturn. Those that learned the lesson will maintain a conservative approach for life, and continue to thrive, slowly but surely.

4) Great advice to read closely the negative reviews as well as the positive! Otherwise we are guilty of just hearing what we want to hear.

Danny said...
This comment has been removed by the author.
Danny said...
This comment has been removed by the author.
J. Steve Miller said...

Thanks for your comments Danny!

Hotwired said...

My biggest concern, without delving into the analysis, is how the book is written. This may seem harsh, but the language style seems to target people with lower intelligence. This "delivery" has been called "hype" by many, but honestly, I think it turns off the typical saavy investor, causing him or her to scratch their heads and say, "what kind of idiot does she think she's writing to..?"

Veracity Financial Insurance Brokerage said...

Great questions.

I would use this list of questions and interview a hand full of people who claim to understand banking with whole life. Everyone of these questions has a good answer if you are willing to step outside the box. I will address 1 of them now.

What companies have these policies and why don't the big guys sell these?

The big companies do have these policies. Some of them openly promote the concept and others are quite about it. A few just don't let you refer to it as banking. Each policy is designed different and you need to look into that before you buy. I will now list the majority of the companies that I know can produce one of these policies. I would suggest that you do your own research on the good and the bad of each policy. I know everyone of these companies can do it and I also know the details of each one. You can do that by calling a rep or straight to the home office. I will now list the company and it's 2009 Comdex Ranking (I will explain at the bottom of my comments). In alphabetical order...

AUL ?
Guardian 98
Lafayette Life 97
Mass Mutual 98
MetLife 95
Mutual Trust ?
New York Life 100
Northwestern Mutual 100

A few questions yo may ask about the policy would be:

How flexible are my premiums?

How is my cash value effected when I borrow against it?

If I lower my premium, what underwriting etc. must I go through to raise it up again?

How soon can I borrow against my cash value?

How much can I access?

Is it a participating policy?

Is it Direct or Indirect Recognition and how does that effect me?

What is the dividend crediting history? (this can be very deceiving based on the policy and mortality costs)

How long have you been in business?

I am hopeful that this post will be helpful to some. You will also need to find a good insurance agent who understands these questions and can help you through the initial set-up. This is just a start of the questions I would ask. If you have any other questions, you are welcome to email me at veracityfinancial@gmail.com

I would also suggest checking out http://infinitebanking.org they have a whole list of agents and their websites for you to interview some of them.

Here is the description of Comdex Ranking...Good Luck

Comdex rankings are a composite index on a scale from 1 to 100 that seeks to show where a company stands in
comparison to other ranked companies. The ranking is calculated based on ratings issued by A.M. Best, Standard
& Poor’s, Moody’s Investors Service and Fitch. A company only needs to be rated by any two rating agencies to
receive a Comdex ranking. Comdex rankings are assigned to individual companies rather than company groups.

Veracity Financial Insurance Brokerage said...
This comment has been removed by the author.
Veracity Financial Insurance Brokerage said...
This comment has been removed by the author.
Brent said...

Steve,

I am the proud "owner" (starter) of that thread you reference on Kiplingers. If you don't mind, I'd like to say a few things about this "unheard of" financial strategy.

I started that thread back when I wasn't sure what I had actually bought and everyone around me was telling me what a sucker I was.

The most important thing I've learned over the past 3 years is that this is not a scam. I could go on and on about this strategy, but right now, I'll address my favorite topic of the day: Dave and Suze.

God love 'em, but I'll bet you dollars to donuts they don't know the in's and out's of this strategy. Dave says as much when he repeatedly claims "they keep your money when you die." First of all this is wrong for ALL whole life policies because the beneficiary gets more than what was paid in. But we know what Dave means - you get the death benefit but not the cash value.

Ok Dave, fine, we can argue about that later.

Right now, let's look at MY policy. So they keep my money when I die, huh? Let's take a look... The face amount of my policy is $390,000. One year and $12,000 in premiums later, the death benefit was $448,000. Notice how the death benefit increased by more than the premiums paid. Had I died at year 1, my wife would have received $390,000 PLUS the $12,000 I paid in PLUS... (do the math)

After the second year, I'm in for $24,000 in premiums and the death benefit is now $484,000. Do the math.

3 years and $36,000 later, the death benefit was $520,000.

Finally, 5 years and $60,000 later, my wife can kill me in my sleep and collect $595,000! That's the original death benefit PLUS everything I paid in PLUS another $140,000.

That whooshing sound? That's the air blowing out of Dave Ramsey's argument.

There are LOTS of other reasons why I love my policy and would never consider cashing it out.

I'd love to discuss them with you.

"Infinite Banking" is not some scheme that will make you super wealthy. But you will get solid returns that will never go down.

Before I go, let me throw out this little hand grenade...

The growth in these policies may rival that of traditional and Roth retirement accounts.

Don't believe me? Didn't think so.

Brent said...

Steve,

I am the proud "owner" (starter) of that thread you reference on Kiplingers. If you don't mind, I'd like to say a few things about this "unheard of" financial strategy.

I started that thread back when I wasn't sure what I had actually bought and everyone around me was telling me what a sucker I was.

The most important thing I've learned over the past 3 years is that this is not a scam. I could go on and on about this strategy, but right now, I'll address my favorite topic of the day: Dave and Suze.

God love 'em, but I'll bet you dollars to donuts they don't know the in's and out's of this strategy. Dave says as much when he repeatedly claims "they keep your money when you die." First of all this is wrong for ALL whole life policies because the beneficiary gets more than what was paid in. But we know what Dave means - you get the death benefit but not the cash value.

Ok Dave, fine, we can argue about that later.

Right now, let's look at MY policy. So they keep my money when I die, huh? Let's take a look... The face amount of my policy is $390,000. One year and $12,000 in premiums later, the death benefit was $448,000. (That's some interesting math, Dave.)

Finally, 5 years and $60,000 later, the death benefit is $595,000! That's the original death benefit PLUS everything I paid in PLUS another $140,000.

That whooshing sound? That's the air blowing out of Dave Ramsey's argument.

xxy47 said...

There are two things that people who tout Banking On Yourself etc are forgetting: fees and risk.

Whole Life Policies, under any name (Variable Life, etc), have crushing premiums, especially during the first few years of the policy. Almost all of the first two years premiums go toward agent commission. So getting enough money into the account without overpaying is very difficult for the first 5-10 years. Overpaying into the account will allow someone to borrow against it a little quicker, but can't you do that outside of your policy anyway, without the very high "management" fees? As more and more money goes into the account, it may seem that insurance premiums are going down, but in reality they are going up: it's just that more money earned by interest is being diverted pay off the premiums. This will be masked by the fact that you're earning more interest on your ever-increasing principle, but you could do the same thing in the real world and keep more of it yourself. Yes, you will be tax unless the income is sheltered in IRAs, Muni Bonds and the like, but the money you're earning in the life insurance policy will eventually be taxed as well.

And how do these insurance companies make their money? Do they Ponzi Scheme it, or do they invest it? If they're following the law, they're investing your money, and they're investing as aggressively as they possibly can to increase the yield for you and their stockholders. Aren't they doing what you would do on your own? So I don't understand how these invested premiums are completely and magically safe.

The other thing to consider is risk. I'm not only talking about the risk of an insurance company going belly up and taking your life saving with you (like AIG almost did in 2008). I'm talking about the "borrowing from yourself" risk. Debt = Risk, and there's no way around it. Let's say you borrow from yourself to buy a car. You are obligated to pay that money back. But then something happens and you lose your job and can't pay it back. Think it can't happen? Listen to Dave or Suze sometime and you'll see why they're against debt. There are often stiff penalties for failure to pay back, and you could lose the policy. I'd look at those penalties very carefully before signing up for one of these loans.

Listen, there are no magic bullets out there for a completely safe and high-yield financial vehicle. These insurance companies are in business not for the welfare of mankind but to make money, and they make a lot of it. Why else stay in business? So if you do decide to invest this way, just know that your premium is paying for someone's BMW, and bolstering the stock prices for the stockholders. It may be worth it to you if you have no saving discipline, or you are very skittish about the stock market and want someone else to pull the trigger, but otherwise you are better off avoiding the fees and keeping the money yourself, and saving up and buying things with cash.

Brent said...

I love posts like xxy47's because they're so easy to refute.

Let's get started...

"Overpaying into the account will allow someone to borrow against it a little quicker, but can't you do that outside of your policy anyway, without the very high "management" fees?"

You can keep $50,000 wherever you like, but only a whole life policy has that money doing double duty: It's liquid AND it supports a death benefit. Flip it around for a second. If you had $50K in a whole life policy supporting $500K of insurance, you could cash that out and put the $50K under your mattress, but why? You've got the $50K either way. Leave it in the policy (or if you don't have a policy get one) and now you've got a death benefit as well.

"but the money you're earning in the life insurance policy will eventually be taxed as well"

Wrong. The beneficiary does not pay tax on the death payout. The only way you'll pay any tax is if you withdraw more from the policy than you paid in. Policy loans are not considered income.

"I don't understand how these invested premiums are completely and magically safe."

I'll tell you how. You are contractually guaranteed a certain level of performance. Beyond that are the dividends. Everyone loves to mention they aren't guaranteed. But no one ever mentions that many companies have paid them every single year including during the Great Depression.

"...AIG..."

Dude, you really need to educate yourself about what happened at AIG.

"Let's say you borrow from yourself to buy a car. You are obligated to pay that money back."

Hang on, I need to go bang my head on the desk.

Ok, I'm back.

Uh, no, you're not obligated to pay the loan back. Go ask Dave Ramsey. And no, there is no risk of policy lapse in a B.O.Y. policy because the life insurance company won't let you borrow enough for that to be a possibility.

"There are often stiff penalties for failure to pay back."

We're talking specifically about Bank On Yourself/Infinite Banking policies. What kind of policy are you talking about? Not only are there no stiff penalties, the ins co doesn't even expect you to pay it back. When I took out a policy loan last year, the ins co didn't send me a payment schedule or little payment coupons or anything. They don't care if I pay it back or not.

I really wonder sometimes... Why do people go online and post stuff that is patently false?

xxy47, do you think anyone was actually helped by your post?

I mean, all humility aside, it's a good thing I'm here. Otherwise, no one would really know the truth about these kinds of policies. I'm the guy with the inside information. I have one of these policies. I've seen how it works.

In a couple years, I'll hit the break-even point (my cash value will have caught up to what I've paid in). At that point, I'll have around $750,000 of insurance.

Now riddle me this: If you have $750,000 of insurance and a cash value equal to basis, what is the cost of the insurance?

Did you answer "nothing"? If you did, go to the head of the class.

You're welcome.

Veracity Financial Insurance Brokerage said...
This comment has been removed by the author.
Veracity Financial Insurance Brokerage said...

Dear xxy47,
Let me fix a few of your uneducated comments:
1. "Whole Life Policies, under any name (Variable Life, etc), have crushing premiums, especially during the first few years of the policy."

Response...
You would never use variable life in this context. I have seen policies with as little as $1,000 per year going in for the entire length of the policy. That doesn't seem like a "crushing premium" for most people.

2. "Almost all of the first two years premiums go toward agent commission."

Response...
An average producer will make about 20% of the first years premium. She will continue to make about 2% of the annual premium for 10 years-ish.

3. "So getting enough money into the account without overpaying is very difficult for the first 5-10 years."

Response...
A well built banking policy will have 50-70% of the premium back in it's cash value in year 1 and more and more of the premium will show up in the cash value every year. It gets better as it gets older.

4. "but the money you're earning in the life insurance policy will eventually be taxed as well."

Response...
If you take out your money correctly, you will not be taxed. You can take it out as a withdrawal of basis, which is not taxed because it is your original premiums. You can borrow against the cash value, which is not taxed either. Current law says that the death benefit is not taxable. The only way you would pay tax is if you surrendered (canceled) the policy and received more than your input. You would show the gain as income in that year. But why would anyone ever cancel a policy when you could turn off the premiums and have it pay for itself for the rest of your life and have access to the cash and still carry the death benefit?

To be continued...

Veracity Financial Insurance Brokerage said...

Continued...
5. "And how do these insurance companies make their money? Do they Ponzi Scheme it, or do they invest it? If they're following the law, they're investing your money, and they're investing as aggressively as they possibly can to increase the yield for you and their stockholders. Aren't they doing what you would do on your own?"

Response...
The industry says that less then 1% of all term insurance policies ever pay a death claim. It also states that only 10% of all cash value type policies ever pay a death claim. Term is an obvious answer, people outlive their policies and that's why they are so cheap. Cash value policies come off the books because people are sold universal life that ends up lapsing in their 60's 70's and 80's because the insurance cost sky rocketed and ate into their cash values and now they have no cash and a huge annual premium just to keep it in force and they can't or don't want to afford it. Traditional whole life policies (not banking built WL policies) come off the books mostly because people buy them and get in over there heads and can't afford the premiums in future years, so they have to cancel them. They also get into them 3,4 and 5 years and realize there is hardly any cash values and get discouraged and quit. I would suggest that having these lapses occur would be a great business model for someone to make a nice steady profit. And of course they invest part of the premiums to get gains. Mutual companies are very conservative in their portfolio's. They also are very liquid...look into a companies Liquid assets to invested assets ratio. In 2009 the best ratio (for a company that has banking type policies) was 76.3% in liquid assets. The best ratio for all companies was 87.1%. As for stockholders, Mutual companies don't have stockholders. The policy owners actually own the company. So their investment strategies are to improve the dividend paid into our policies. There is no way the average person could invest like they do. Unless you were one of the wealthiest people in the world and hired a team of full-time traders just for you.

6. "I'm talking about the "borrowing from yourself" risk. Debt = Risk, and there's no way around it. Let's say you borrow from yourself to buy a car. You are obligated to pay that money back. But then something happens and you lose your job and can't pay it back."

Response...
When you borrow against your cash value, you are doing just that. They use your cash value as collateral for the loan. So if you had 100k in cash values and borrowed 80k against it and never paid back your loan, then canceled the policy 2 years later, you would get the 100k minus the 80k borrowed plus the interest accrued for the 2 years. If you borrowed money every year at retirement time and never paid it back, then died, your beneficiary would get the death benefit, minus the loan plus accrued interest. The death benefit will always be larger than the cash value until age 121 (they will be the same at age 121). So in other words it would be impossible to ever walk away or die and have any money left owing to the insurance company, because your loans are based off of YOUR cash value. FYI, you are not required to ever pay back a loan or tell the company you will pay them back in a certain time or a certain amount. YOU set the terms and they can always be changed by you because YOU are the bank. I am not promoting never paying back loans, but just telling you how it works. There are NO penalties or fees associated with loans, just the interest.

To be Continued...

Veracity Financial Insurance Brokerage said...

Continued...
7. "there are no magic bullets out there for a completely safe and high-yield financial vehicle. These insurance companies are in business not for the welfare of mankind but to make money, and they make a lot of it. Why else stay in business?"

Response...
You are right about 1 thing in all of your comments..."no magic bullets". There are very few things guaranteed in life but if I had a choice to have my money with one of these mutual companies that has been around since before the stock market, I would choose the insurance company over any other corporation or entity. I am glad the insurance companies are in business to make money. I wouldn't send my money to anyone who told me they were in business only for me. I say let's play by the insurance companies rules on OUR PLAYGROUND.

At the end of the day, if you continue to try to get out of debt by paying cash for everything (Dave Ramsey Follower), you will end up as a 50 something year old with no debt (yeah), but you will also have very little in retirement assets. I believe you still have increasing expenses as you age even if you have no debt. Ask your Grandma.

xxy47, I would suggest you do a bit more homework next time before you make these completely wrong matter of fact statements about things you obviously have little to no familiarity with(the internet is a great place to do some research). You may want to call up a banking agent and have them educate you, then you could call Dave Ramsey and Suze Orman and educate them. When you talk to them I would ask that if you follow their advice like everyone gets 12% returns on mutual funds every year since Adam, will they fund YOUR retirement if their advice doesn't work out?

For anyone who is seeking clarification on banking with whole life for the purposes of finding truth in order to make a good decision please email me @ veracityfinancial@gmail.com
Please don't contact me to fight with me about your philosophy versus mine, I don't have time for closed minded individuals.

FuzzyLime said...

Steve,

I really appreciate your illuminating the Bank on Yourself (BOY) method. I am examining it myself as a possible financing vehicle.

Question: under your 3 examples, could there be a flaw in your characterization of Example 3?

Example 1 - use your own money - clear

Example 2 - borrow from a 3rd party - also clear. You pay the banker his due.

Example 3 - borrow from your own BOY account. You also pay interest - BUT TO WHOM?

Is it not yourself? In other words, you make your 5% internal to BOY and also pay 5% interest - but into BOY as well, right? In this case, you would not be "out of pocket" so much as passing your own interest payment from, say, your left pocket to your right pocket, right?

Therefore, under BOY, would you not be getting $1,000: 5% internal BOY return plus your own $500 you are paying to yourself in interest?

I'm still learning here, but isn't this one of the big points of BOY: that we get to earn from ourselves what we heretofore have been giving the bankers??

Just wondering, and thanks.

J. Steve Miller said...

FuzzyLime,

It was back in March when I did this analysis, and yes, re-reading it, I think example #3 is a bit unclear the way I worded it. My conclusion, and the conclusion of several people on the other discussion I referenced, showed that in all three examples you had to pay $500 out of pocket and ended up with $10,500 at the end of the year. If I'm wrong and Bank on Yourself leaves you with $500 out of pocket, but $1000 ahead at the end of the year, I'd like to see their Math.

Brent said...

"If I'm wrong and Bank on Yourself leaves you with $500 out of pocket, but $1000 ahead at the end of the year, I'd like to see their Math."

That math is hypothetical and I'd say exaggerated. It is possible for the policy to be credited at a rate that is higher than the loan rate, but I doubt by very much. I'd say for purposes of this discussion, assume they are the same, making policy loans "wash loans".

When you have a policy loan outstanding, you are the one responsible for funding its growth.

It's a very neat strategy. I recently realized another use for it - property taxes and Christmas money. All year long, I'm putting away money for taxes and Christmas. It amounts to about $15,000/yr. Until now, I've just been putting it in an earn-nothing savings account. Next month, I'll start putting into my policy and then when Dec '11 rolls around, I'll do a policy loan.

What do I really get out of doing this? I get better growth out of that $15,000 and I get additional insurance. (The $15,000 is all PUA.) If you have a significant amount of liquid cash, (I'd say $15,000 meets the threshold.) it doesn't make sense to keep it OUTSIDE the policy. You have the money either way, but when it's in the policy it buys more insurance and it grows faster than any savings account around.

And let me throw another use out there for you: car insurance, specifically comp/collision. When you have enough in your policy that you can replace your car, you should drop the comp/collision part of your car policy and send that amount to your life policy instead. In all likelihood, you won't total your car, but you will "pocket" what you were sending to the car insurance co. And now THAT starts to grow at 4-5-6%

Ok, I'm on a roll... Here's one MORE use. I just refi-ed my house using a HELOC from a rental property instead of a traditional second lien. The second lien would have cost me 7.5%. But the HELOC is only 3%. So I pay only what the HELOC requires and the rest I send my life policy in the form of PUA's. The combined amount (HELOC + Life policy payment) equals what I would have been paying had I gotten a traditional 2nd lien.

Those are 3 real examples of ways you can keep money in your pocket, have it grow at an unheard of rate, AND support a death benefit.

What a ripoff ;)

goodlux said...

I won't reiterate what others have written here, other than to say:

#3 could be the best deal. with the third loan option, you are getting life insurance "for free"...you don't have to pay term premiums, the CV is supporting the policy. So in your example, you must figure in what you would have spent on term insurance for the year in the other examples. So if you would have paid $200 for term insurance in examples #1 and #2, you would only have $10300 at the end of the year.

If you want a great site with technical details about how these policies work, with real data:


http://r0k.us/insurance/vp/

Don said...

I started a BOY WH policy a year ago, using LLIC (Lafayette Life Insurance Company.)

What I was not aware of and wish I had known was that my max funding to my LPUA account (my banking portion of the policy) is reduced by 6% to purchase additional paid up insurnace. This is what increased my death benefit and funded my "Personal Bank." All funds added to the LPUA 6% goes to purchase additioanl paid up insurance. So I put in $7,748.38 and was expecting to borrow out of that 93% but the 93% was actaully based on the $7,748.38 minus 6%. Giving me access to only $6,780 of the funds that I put in to the account. This was in my first year.

The loan principal is paid back on the front end of the loan and the interest is collected on the backend. So at the end of the loan I expect a letter asking me to send in the 2% of the interest on the loan to the Insurance company.
At least this is what I understand so far.

I have been researching this alot as well but have not seen this posted any where before so hopefully it helps others who are still researching to shed some light as well.

Don said...

Brent said "Ok, I'm on a roll... Here's one MORE use. I just refi-ed my house using a HELOC from a rental property instead of a traditional second lien. The second lien would have cost me 7.5%. But the HELOC is only 3%. So I pay only what the HELOC requires and the rest I send my life policy in the form of PUA's. The combined amount (HELOC + Life policy payment) equals what I would have been paying had I gotten a traditional 2nd lien."

This confuses me Brent what was the goal and reason for refi on your primary home?

To lock in a lower rate or lower your mortgage payments?
Cash out equity?

..and you off set the cost by taking a 2nd loan on a rental (assuming it's cashflowing enough to pay the 2nd leans note.)

How can yo put more funding in to PUA's?

I am under the impression there is a max you can load in to the LPUA? In my case it's $7,748.38 with LLIC.
I only get one LPUA account that I can increase but not add additional LPUA's to my policy.

I'm pretty sure we have different policy's and I may be mixing up terms trying to get a grasp of how all of this works.

Thank you for sharing what you have learned.

Brent said...

I wanted to refinance my primary residence to get out of PMI and take advantage of historic low rates. I didn't have 20% equity in the house so I would have had to have taken out a second lien at 7.5%. I had 2 other options though. I could have taken out a policy loan at about 6%. Or I could write HELOC check against a rental house and pay 2.99%. Using 3rd grade math, I determined that I would rather pay 2.99% than 6 or 7.5.

My point is that sometimes there are better options than using a policy loan. But if you borrow from someone else, you leave that amount available inside your policy if payment flexibility ever becomes important to you.

With regard to your question about loan interest. Here's what you can expect: If you take out a loan (say on the anniv of your policy), then you pay nothing on that loan for the next 12 mos, you will get a bill for interest from the insurance company on the next anniv date. The amount of interest on the bill will be simple interest. $10,000 borrowed 12 mos prior at 5% will generate a bill to you today for $500. If you choose not to pay the interest, it will be added to your loan balance and the NEXT anniv date, you will be charged simple interest on $10,500. So interest is actually compounded annually.

Don said...

cool, that makes sense. It is cheaper to borrow at a lower interest rate when it is available.

The loan interest on the policy makes sense now.

Is it true that the more you borrow and pay your self back the faster and larger your account LPUA (personal bank) will grow. My understanding is, that is the only way to put in additional funds in to the policy in the form of payments and interest on a loan to prevent it from MEC'ing.

Another option would be to take out another policy. But taking out another policy means having to make premiums and fund a 2nd LPUA account.

How is this infinite bankiing? of does the Bank on your self model work if your the one paying in to the account and paying your own interest and the interest to the insurance to borrow your own money?

Brent said...

"Is it true that the more you borrow and pay your self back the faster and larger your account LPUA (personal bank) will grow?"

The short answer is yes.

The long answer is: It depends on how you pay yourself back. When you start making payments back to the life insurance company, you will have the option of saying how much is going to pay off the loan and how much is going to purchase PUA's. If you decide that all of your money is going to pay off the loan and none of it is buying more PUA's, then your policy will NOT grow any faster. Your policy will only grow faster by buying PUA's. But realize that for any given payment schedule, the more that goes to PUA's, the less there is to actually paying off the loan. However, if you assume that, on average, the policy grows at a rate equal to the loan's interest rate, then it's a wash. So don't just devote that whole payment to the loan. Take a little longer to pay it off and use the difference to buy PUA's.

"How is this infinite bankiing? of does the Bank on your self model work if your the one paying in to the account and paying your own interest and the interest to the insurance to borrow your own money?"

Sounds like you're saying "How does this all work? I'm paying interest to borrow my own money."

Say you had $50,000 in a savings account at a bank and you wanted to buy a car. Say that the bank would lend you the money to buy the car so you wouldn't have to withdraw the money from your savings account. Let's say the savings account paid 5%. Let's say the loan interest rate was also 5%. (Let's also say that the IRS doesn't tax you anything on the interest your savings account earns :)

Would you be paying interest on your own money? Or would it be more accurate to say that you are funding the growth of your own savings account? After all, if you left that account alone and didn't take out the car loan, then the bank would be the one funding the growth of your savings account.

However, you DID take out that loan, so whatever interest you pay the bank effectively passes right through to your savings account.

That's exactly what's going on with these policy loans: You fund the growth of your own policy when you have a loan outstanding. When you DON'T have a loan outstanding, you are letting someone else grow your policy for you.

Of course...

1) The IRS DOES tax you on interest earned, so you'd have to bump up the rate your account earns to offset

2) No savings account ON THE PLANET* pays these kinds of rates.

3) When you die, your beneficiary only gets what's in the savings account.

A whole life policy pays a considerable amount more.

*Let me know if you find a savings account that pays 7%

Don said...

Cool thank you for your post and explanation. I have been looking for that 7% savings account but no luck yet.

My plan or goal is to:
1) Continue to pay my premium yearly.
2) Max my LPUA yearly
3) Borrow out the max I can for the year and repay it back in 2 years.
The 2nd or 3rd years stretch out the payments to 3 or 4 years.

Eventually I would like to have enough Loan Value to pay off my house and make my mortgage payments to myself instead of the bank. Hopefully in less than 10 years.

Don said...

My priority on payments will be:
1) Premiums first
2) Max out the LPUA
3) Loan payments then interest

Patrick said...

I'll give you a 10,000 foot view as to why I've been using this concept for the past 9 years. At some point in time, an individual runs into a financial problem such as forced unemployment or credit issues. The whole life insurance policy allows me to use my dollar over and over again without penalty. The cash value built up allows me to take a loan within 2 days; try getting a bank to do that, and allows me to finance whatever I want whenever I want. In addition, with my policy if I can't make the loan payment nothing happens; you won't get that type of generosity from a bank. It's just deducted from the policy if I die an untimely death. I will have to continue paying interest and if I want I can have the yearly dividend pay the loan interest.

Now back to the point of financial problems; I'm sure it begs the question from some of you that if the person is unemployed how will they make the monthly premium payment. For me, I'm never so over spent that I couldn't make that payment as I have reserves saved in other places. In addition, when my policy hits the 12 year, I can have the dividend make the premium payment for the life of the policy. Lastly, how many whole life insurance policies lost value during the market downturn like a 401K? Answer: NONE! When my value of my wife's 401K dropped 50% the value of my policy remained the same as the day I bought it. Just remember there is a cost to everything in life and certain trade offs. Bottom line for me, I love the flexibility I have with my money without having to pay taxes or a early withdraw fee if needed; try that with a 401K when you're in a bind.

Brent said...

"The whole life insurance policy allows me to use my dollar over and over again without penalty."

No. You put a dollar in, borrow that dollar out, give it to someone and then replace with ANOTHER DOLLAR ...that you have to WORK FOR.

And "without penalty"? Oh, really? What do you make of that bill that comes once a year for interest? That check you write isn't payable to you - it's payable to the insurance co. If the interest bill is for $1000, but the cash value went up only $800, what happened to the other $200 (I think you know.)

Geez! You people - put the cool-aid down! The strategy is sound but statements like this are going to turn off a lot of rational people. I mean, who would really believe that the same dollar could be used over and over again to buy this thing and then that thing?

bswath said...

I am new to "BOY" in that I started two policies this past year (one for me and one for my wife). I have a good understanding of how it works, but have one question for those of you who are actively using BOY. Can it be used as a replacement to funding a 401K? I am no longer contributing to 401K, but to my BOY policy instead. I did not do this blindly, but based on the following:
1) I will fund the max PUA for a period of 20 years. (This is approximately the same as I would put into my 401K and supplemental savings).
2) I modeled an annual dividend of 4% (average)
This will allow me to pull approximatley $120K/year tax free from the policy come retirement age, if I do nothing but this. On top of this I can use the money along the way in the form of loans, I don't have to worry about tracking various segments of the stock and commodity markets and I don't have to worry about the tax rate in 20 years (at least not yet anyway).

So is it not adviseable to use the BOY strategy as a retirement strategy? And if so why not?

Thanks for the time!

Mark Freeman said...
This comment has been removed by the author.
Mark Freeman said...

It seems to me that if you have an employer match available on a portion of your 401(k) contributions, you should contribute just enough to the 401(k) to get the maximum match from your employer. Otherwise, you are leaving money on the table.

And if you have the option of making the 401(k) be a Roth, even better. No tax deduction now, but your withdrawals (and the earnings on the investments) are tax free.

Beyond that, putting the rest of the money into a BOY policy seems reasonable.

Brent said...

Why do this instead of traditional retirement account?

Well, maybe you think your WL policy will peform better than whatever market-based investment you choose.

Or maybe you can afford to not take risks with your money.

Maybe you don't care if the market does better than your policy. You'd rather have the locked in gains that will (in my opinion) not keep pace with the stock market.

I bet the majority of people will answer "That's not me" to all of these questions. In that case, keeping plugging money into that retirement account.

But still look at one of these policies as a place to put what would otherwise go into a savings account. Save up for cars inside one of these policies. Save up for expensive vacations inside one of these policies. And think about all the other big ticket items you'll need to save for throughout your life and consider saving for those things inside one of these policies.

Here's the real advantage to these policies: You're going to have big ticket expenses in your life regardless. You're going to save up and pay cash for them regardless. But when you save in one of these policies, you are also getting a death benefit, essentially for free.

Mark Freeman said...

Brent, what you say makes perfect sense to me. In my case, I'm about 50 and have all my retirement funds invested pretty aggressively. It is time to start slowly diversifying into more conservative investments. Not by actually moving any of the existing money, but by putting new contributions into something other than equities and equity funds.

One option is to put new contributions (over what my employer will match in my 401(k)) into a policy, so I can use the CV to back loans for major purchases, pay it back, repeat, etc. before I retire, and then withdraw money or take out loans I'll never pay back as needed in retirement.

I could also just buy bond funds, but then I don't have any use of that money until I retire.

Does this seem reasonable? I'm only talking about $10-15k or so per year that I'd normally just put into my Roth 401(k) and my wife's Roth IRA (she doesn't work, so it's capped at $5-6k per year of contributions).

Brent said...

Mark, I definitely think it could be a good thing for you.

pm said...

I am new to the BOY concept also. I wanted to know if anyone could tell me if I start my whole life BOY policy with $20,000.00 how much of that $20,00.00 should go into the PUA? I am also putting in 1,800.00 a month, how much of that should be applied to the PUA?

Thanks

MarkW said...

PM,

This is something you'll want to speak with a financial planner who knows the ins and outs of your personal finances. Additionally, don't just talk to your Uncle who got a degree in finance - you'll want to speak with someone who has been additionally trained to structure these policies correctly. It will make all the difference in the world.

I've got some more details on how to find folks who have this training if you're interested.

pm said...

Mark W,

Thank you Mark W I will be very interested in those contacts. Also, I would like to know if you have any personal experience with the infinite banking process.

Thank You

docscott said...

something as an added benefit from where I sit, since it is an insurance policy, it is untouchable by creditors. especially important to poeple in high risk positions/proffessions

moneycoachco said...

Steve, in reading your questions about infinite banking, I decided to answer just your first question. After my response I realized it was much longer than allowed on your blog so here's the link to my blog: http://moneycoachco.wordpress.com/

moneycoachco said...

Hey Steve, love to see your sincere questions about infinite banking, so I'm responding to a couple of your questions about banking on yourself & whole life insurance. The name of infinite banking as it's known as is only <15 yrs old, so most have never heard of it, don't know how it works, just plain don't understand it, or simply dismiss it because of what people on TV and radio like Dave Ramsey & Suze Orman. So on my blog here at http://moneycoachco.wordpress.com/category/whole-life-insurance/

Matt B. said...

I appreciate your comments on Infinite Banking, as I believe all critical thought is important when we are searching for the truth.

I did want to respond briefly to your calculations at the end of the article. Yes, on the surface, it appears that all 3 approaches achieve the same result. However, what you do not take into account is the difference between compound interest and amortization.

For instance, say I take a $10,000 loan and pay it back at 5% interest over 5 years. In the end, I will have paid back the original $10,000 plus an additional $1322 in interest. If, however, I were to use the $10,000 in my account as collateral for a $10,000 loan (account also earning 5%), I will pay the $1322 in interest but EARN $2762 over that same 5 years.

This is the basic idea behind Infinite Banking, and it doesn't even take into account the death benefit guarantee. Hope this helps clear the "fog."

JC said...

I've been studying this concept for quite a while now. I've talked to many agents. Here's the #1 trap in 'BOY'.

Not all agents is doing it in a way that serves you the best. Even agents who promote this.

Agents use this as a promotional tool to sell pricey WL policies. They are driven by commission. It's that their fault, they have to eat too.

Here's what I found. The premiums on a WL with PUA have different parts. There's the base part which buys the death benefit. This part of the premium, the agents get full commission on. The other part, the PUA, they also get a commission on but on a much smaller scale.

Example: Say you pay a premium of $10,000 to a WL policy (death benefit is irrelevant here, the whole point of 'BOY' is Cash Value growth), half of which is the cost of insurance and the other half is for PUA. Say commission is 50%. I don't for sure, could be more could be less. I have heard it to be close to 100% for some companies. The agent will receive 50% on the first $5000 (the cost of insurance), and 50% of approximately 4% of the PUA part.

Commission on base = 50% x $5000 = $2500
commission on PUA = 50% x 4% x $5000 = $100

Total first year commission is $2600.

Now if they structure the policy and $8000 goes to WL and $2000 goes to PUA, then the total commission is $4040.

Commission on base = 50% x $8000 = $4000
commission on PUA = 50% x 4% x $2000 = $40

See the difference. Sure you will probably get more death benefit here in this scenario. But the true crust of the 'BOY' is the PUA and the CV.

You got to be vigilant and make sure your money is going to work for you.

The best policy is a blended policy where it is a combination of WL and Term. The premium is lower than a straight WL, however the death benefit will not grow until years into the policy, but more of your premium will go toward PUA. I've made a comparison of this with one of the companies that does both. Both start out with the same premium and same death benefit.

Here's how it compared.
$500,000 policy, 40 year old male, non tobacco
$15000 annual premium

WL policy after 10 years
death benefit: $696000
total premium paid: $150,000
Non guarantee CV: $154,000
Guarantee CV: $119,000

Blended policy with $400,000 term and $100,000 WL after 10 years
death benefit: $550000
total premium paid: $150,000
Non guarantee CV: $172,000
Guarantee CV: $127,000

Funny thing is after 20 years
WL policy after 20 years, the blended policy is better of the two.

death benefit: $852,000
total premium paid: $225,000 (15 yrs)
Non guarantee CV: $373,000
Guarantee CV: $272,000

Blended policy with $400,000 term and $100,000 WL after 20 years
death benefit: $886,000
total premium paid: $225,000
Non guarantee CV: $400,000
Guarantee CV: $247,000

And another caveat to 'BOY'. You better be in good health and non-tobacco. Because anything will drive up insurance cost and leave less for CV.

Unknown said...

"but the money you're earning in the life insurance policy will eventually be taxed as well."

xxy47,

You are absolutely wrong on this point. When you borrow money from a life insurance policy it is no different than if you borrowed money from a bank. A bank loan is not taxed as income and neither is a loan from a life insurance policy taxable. The death benefits from a life insurance policy are not taxable to the beneficiaries, either.

Unknown said...

"And "without penalty"? Oh, really? What do you make of that bill that comes once a year for interest? That check you write isn't payable to you - it's payable to the insurance co. If the interest bill is for $1000, but the cash value went up only $800, what happened to the other $200 (I think you know.)"

Since you are borrowing from yourself, you are also repaying yourself. The interest you pay on the loan does not go to the insurance company, it gets credited back to your account to make up the lost interest that the insurance company stopped paying you on the money you withdrew.

Unknown said...

What JC said above is true. I did some research and a blended policy turns out to be the best deal. You can blend for either higher cash value/death benefit or for lower premiums. Blending puts most of the agent's commission to work for you immediately so the value in the policy builds faster. Agents won't tell you about this kind of policy because they don't get paid as much to sell it to you. You'll have to search online for 'blended term whole life policies' to find an agent who will sell such a policy to you without giving you a hassle about it. There are agents out there who have a lot of experience in that area and know precisely what riders to add to the policy to get the best results for you that saves you money.

Rob Dahlager said...

Steve, I like your train of thought, but would encourage you to do more research. Here are some thoughts on a couple of points you make, not necessarily product specific, but around the logic:

Going belly up: insurance companies do not rely on new policies to guarantee their returns. That is a ponsi scheme. Remember what the insurance companies do with the premiums after they pay business expenses and maintain reserves - invest it. Like banks, they would not guarantee a return unless they have guaranteed returns that are higher. Which brings me to my next point.

Borrowing from yourself vs a bank - the math in your example works. The difference is that you pay $500 to the bank versus paying $500 to yourself. Now, if that money IN THE POLICY is guaranteed at a high rate than what you would pay a bank, you are correct. But you will not get that from any bank investment and it is very, very rare that it would go down like that. It is all about spreads. You can also charge yourself any rate you want, so that plays a factor into the decision.

Repaying the loan - in many cases the loan is never repayed. That is the beauty. It is can value and it is you cash ... Paid with after tax dollars so there is no tax effect were you to take that same money out of investments, you would have to pay capital gains tax.

This is often a tax shelter - these products are returned based products paid with after tax dollars that grow at an interest rate when the gains are tax free. That is the beauty. You do have to pay premiums, but it is less than the taxes you have to pay if it was treated as a regular investment.

Dave and Suze - remember they deal mostly with average Americans that carry a lot of debt and are looking for a way to be smart with money. Cash in the bank while (beyond the rainy day fund) while carrying debt at a significantly higher rate simply is not common sense. But we are never taught that. I would bet if you talked to them about what they do with wealthy and debt free customers, whole life is definitely a part of the mix for the tax benefits. I have never heard a decent financial advisorrecommend ONLY infinite banking or whole life. That also is not common sense.

So like anything else, it is a balance and infinite banking does make sense once your house is in order.

PokerKing said...

Hello everyone!
Wow, nice blog.
I've been in financial services 15 years now and thought I knew pretty much every sound financial concept for making and saving money. After reading the book by Nelson Nash, my eyes were opened. It took reading that book for me to realize that all my previous beliefs about money and financing came from the programming and brainwashing that WallStreet and the BANKING industry bestow on us every waking moment. I handed the book to my wife who has been in the business longer than me and after reading it said, "why haven't we been doing this all our lives?".
We have been giving that book to as many of our business clients as possible . Most get it, some don't. It is a major paradigm shift in thinking about where money resides. I believe that those of you that like to trample on things you don't understand, should tune into the Dave and Susie shows. They will tell you what you want to hear.

Firoz Khan said...

best way to make money :-best way to make moneyearn how to make money at home online each and every month from home in your spare time so visit Lockinyourspot.com for all the best passive income opportunities fully tried and tested.

Zoey Goetsch said...

First, I am not a proponent of Infinute Banking since I use strategies for my clients that are cheaper, more flexible, and loans you don't ever have to pay back pay you make interest, pushing up your cash value, along with a comprehensive plan which provides liquidity, inflation protection, and tax free lifetime income, and it is probably not right for most people, and there are other types of insurance that are cheaper, more flexible and provide higher returns without any downside. You can't miss a payment in whole life which can be a problem.

However, it should be noted that Suze and Danny are not liable for the information they provide; they are not licensed and not accountable should their advice not pan out for you, and this is why they are entertainment spokespeople which is how they make their money and do always remind you to talk to a professional. They make their money from speaking engagements and their own branding. They provide a lot of useful information but their are some gaps and misinformation in their approach, and one plan doesn't apply to everyone by basic financial planning law.

Also, polices are covered under multiple re-insurance companies who also have reinsurance. But the department of insurance of each state provides the guarantees should a company ever go under (via payments made to them by insurance companies...insurance agents aren't supposed to tell you this by basic state insurance law when they give a policy which is why it is a less known fact.)

Also, insurance companies have to have 3 times in reserves of the policies that they write, and the better ones hold 6x that in reserves.

As far as the FDIC goes it is very limited and they can take 10 years to fully pay back your money, and the interest is not guaranteed by the FDIC; the coverage is limited (and your money isn't keeping up with inflation which means with taxes your are getting a negative return and losing buying power the longer you keep your money in the bank.

So, I'm not a fan of either strategy listed in this article as there are better strategies available that better serve my client's needs. Any good advisor/planner knows this. There are a lot of myths rolling around with loudspeakers, but let the truth be told.

greatriffs said...

Zoey,

I think you should give us some of those "better" strategies you mention. Also, the FDIC does not insure these types of accounts.

Jackson Garrett said...

Great article although on your your third example when you say you use the infinite banking system to lend your self 10,000 paying the insurance company 5 percent and earning 5 percent after 1 year you have earned 500 dollars interest in your infinite banking system so the next year you will get interest on 10,500 dollars and lets say you have paid off half of the 10,000 dollars you borrowed to so you are paying interest on 5,000 dollars. So year two you are earning 525 dollars interest and you are paying 250 dollars interest.

It is the compounding interest that works for you and the interest you earn is tax free. If you are borrowing interest of your self you may as well pay your self 8 percent...

You do raise a good point when you say what happens to your money if the insurance company goes bust...

I wrote an article on my site if you want to have a look...

Carmen Johnson said...

thanks

harveyandruss said...

Wirehouses and presumably some RIAs allow you to borrow against investment holdings in much the same way,that is, it never has to be paid back (no term limit). So you could borrow and pay back in much the same way. If you withdraw small amounts for income that are below principal invested, they would be income tax free, but if above it there would be income tax consequences. Any borrowing against WL never has to be paid back, it's just taken off the top of the death benefit. You are obligated to pay premiums like clockwork, but once paid up, it's a self perpetuating machine. This is why it is sometimes called a rich man's Roth. No limits on how big if you have decent health.

Tim McCarthy said...

Hi I was looking for some honest conversation about it, amazing how many outrightly dislike it so much as to offend and assault anyone in favor of whole life.

I wanted to pick up anything new that I don't know but haven't read every post here yet, it is a long blog.

I have a big policy Lafayette Life, another for my Wife, I am owner, at Mass Mutual. The MM policy seems unique, it starts 100% term and each payment converts that premium amount from term to permanent to become 100% permanent at 10 years. I also have a $2000 annual which is 50% of annual premium going into a PUA for this policy.

Besides self banking, the obvious use of PUA for me is to reach a higher CV sooner and make the policy self sufficient such that I do not need new income to complete the premiums.

I am funding this MM policy with two small pensions that I just started receiving, that I decided to use the tax free WL instead of annuity for my Wife's policy. As she is younger than I and will need to use her policy for income after I am gone.

My Lafayette premium is approx.
$450 permanent, $150 convertible term, and $900 PUA. Once capitalized where I want, I will convert the term to permanent and reduce PUA to a lower level.

I don't usually see a lot of discussion about how to use convertible term to boost death benefit which boosts CV and MEC limits.

Now there is the usual idea to pay for cars which I need, after ch.7 bankruptcy I would have high interest rates and need WL personal banking for cars. I am on plan to pay my first car off in next Feb being 13 months into it. I am real excited to stop the auto loan interest from going out or at least reducing it to 1-2% and free up this car payment cash flow going out for better purposes that will produce income.

I did one small policy loan and cleared off high interest credit cards already and repayed 1/2 the policy loan with the other 1/2 taking a few more months of scheduled payments, saving good money on interest.

The whole process really teaches me to hate wastes that could go into my policy or other income producing assets, and changes my behavior in favorable ways.

After Job loss, dissability, new job with relocation, divorce, remarriage, irs bills resulting from an incompetent divorce attorney, staring over at a late age,I see now that if my old 401k was in WL instead, I would have been secured and saved, where I have completely lost the old 401k by using it to pay for these hardships, after tax and penalties.

That is a value of this not talked about and not thought about by younger people, financial security from a substantial WL CV.

Now I was talking to my Infinite Banking coach and he is not recommending me to begin another policy yet, and instead to build up liquid cash, but at my age I also want to get approved for another policy the early the better as health can change.

I don't beleive in putting into 401k as I learned what happens to it in hardship and I don't want govt strings into my money and life, and I don't trust what they will do with future taxation. I do put some in 401k for the purpose of the company match.

I am thinking of a third policy next year once I have the liquid cash recommended and annuity with the same company, maybe Guardian.

By next year I will be approaching the N.Nash concept of most of my disposable income going into this.

These are the major points of advantage I see.

Except from litigation ( depending on state ).
Tax free, this is a big one vs IRA.
Guaranteed.
Large CV.
100% of premiums paid back to me at about 7 years making the permanent death benefit free.
Important way for me to pass on what might be my last 5-10 years of labor, to my three children, new wife, and step daughter a legacy.

Now 401k can't be ignored and still has a role but only due to company match, if not for company match I would not do "qualified".

My examples and thoughts also illustrate an intention to diversify over three mutual companies and possibly more in the future.

Comments or advise ?

Tim

Tim McCarthy said...

Zoey, it would be nice to learn about these other products, can you elaborate? I will be in position to look for another vehicle next year where I was planning a third policy and annuity.


Zoey Goetsch said...
First, I am not a proponent of Infinute Banking since I use strategies for my clients that are cheaper, more flexible, and loans you don't ever have to pay back pay you make interest, pushing up your cash value, along with a comprehensive plan which provides liquidity, inflation protection, and tax free lifetime income, and it is probably not right for most people, and there are other types of insurance that are cheaper, more flexible and provide higher returns without any downside. You can't miss a payment in whole life which can be a problem.

Anthony C. said...

A bunch of my business owner friends are getting into this. I think for regular people it probably doesnt make sense. However for the wealthy it might. Im the skeptic and still doing research.

As I understand it here are some benefits for high net worth individuals

1) you should think about this as an alternative to savings/cash, not as an alternative to put in the stock market. If you are still trying to build wealth and need high returns this doesnt make sense. Bank on yourself seems like a good alternative to cash. If you are sitting with 10 million in a savings account and want higher returns but still have the safety of cash this could be good.
2) can borrow against it. Even though it is tied up in a policy the point is you can use it as if it were sitting as cash
3) protected from lawsuits. If you have $10m sitting in a bank account and you incur some liability all that cash is available. If it is in an insurance policy it is not available
4) if you are passing on more than $10m in assets to your heirs it is a way to do it tax free.
5) 5% or better returns

The_Joneses said...

I just signed up for a Lafayette life Whole Life "Patriot 100" plan. Does anyone have experience with this? I am reading through the documents, which I probably should have done before signing on, but I am feeling some "buyer's remorse" right now and just emailed my agent the following misgivings.

Looking at the guaranteed assumptions, i am calculating that in the first 10 years I am losing $7,500 and am making only 1K a year up to year 20, 3K a year by year 30 and 6K a year by year 40, after you deduct all that I have invested. And that is not guaranteed! If I look at the guaranteed side, I stand to only make 60K in 40 years. For some reason, I thought this was much a better investment that what I am seeing now. I know the interest rate could increase over the years, but it could stay the same or get worse, for all we know.

Also, I read that if I borrow against the policy, their is an "adjustable rate" that is subject to change at an unspecified rate "with no cap." I don't think I am comfortable with this. When you explained the policy to me, I do not remember hearing this important information. It makes me think I would never want to borrow from this plan which was a major reason why I was interested in it in the first place.

I assume their is a "cooling off" grace period for the buyer of these plans but I can't find it in the documents. Can anyone reassure me that I can get a full re-imbursement for this plan? And can anyone tell me if I am justly or unjustly concerned?

2Smart4youEasyMoney said...

OBVIOUSLY YOU FAIL TO UNDERSTAND... IM TIRED OF READING ARTICLES OF PEOPLE JUST SHARING THERE THOUGHTS THEY KNOW NOTHING ABOUT.
JUST TO ANSWER YOUR LAST PARAGRAPH AND STATEMENT YOU MADE A DECISION ON.
YOU CAN TAKE A LOAN FROM YOUR POLICY AND DONT HAVE TO PAY IT BACK. MONEY WOULD JUST BE DEDUCTED FROM YOUR DEATH BENEFIT.
THEREFORE IF YOU HAVE A MILLION CASH VALUE AND 2 MILLION DEATH BENEFIT. 1. LOAN 500,000 DONT PAY IT BACK NOW DEATH BENEFIT REDUCES TO 1.5 MILLION. THE MONEY STILL THERE. cash value still growing with dividends more loans more money. The statement of infinite banking if you pay back you never run out of money !!!