Bank on Yourself/Infinite Banking...

What does everybody think about it?

(Or has this been covered elsewhere?)

Um...what is it?

Sounds very "schemey." I doubt the average is anywhere near that number. After taxes, you'd wind up with only pennies and belly-button lint.

http://www.cramgroup.com/infinite_banking.htm

"The average American is paying out 34.5% of every disposable dollar toward interest."

"Dot org," so it must be good!

http://www.infinitebanking.org/

Sounds like repackaged equity maximization, but in a new package that you can buy in book or seminar form. Wash down with Kool-aid and call me in the morning.

(...I guess it hasn't been :) )

Take a WL policy (or some other cash value policy), overfund it right up to the MEC limit and use the cash value to finance big ticket items that you would normally go to the bank or HELOC (or whatever) for.

In a little more detail...

You get a WL policy from a mutual insurance company. You add a PUA rider to the policy and overfund just up to the point where the IRS takes notice (the MEC limit). Since it's a mutual insurance company, your policy is earning dividends. Take the dividends and reinvest them (use them to buy additional PUA's). In about 5-6 years, the dividends you're earning are enough to cover the premiums. So you don't have to make premium payments anymore if you don't want to. This 5-6 year period is called the "capitalization phase". (You're capitalizing your own financing entity.)

Once the capitalization phase is over, go buy a car (my example). But don't finance through the dealership - finance through the WL policy. Take out a policy loan or withdraw CV and use that to pay for the car. Then figure out what the payments would be at 10% interest or so and make those payments back to your policy. The "pitch" is that in doing so, you're recapturing the purchase price and the interest that would normally go to someone else. (If you ask me, there's a *little* truth-bending going on there, but I'm just letting you know what the pitch is.)

Anyway, when you're done making payments, your policy has even more money in it to go buy another car or whatever.

Now, truth be told, this is actually something I'm doing (I'm not *selling*, just doing :) ). And I've been going back and forth with myself - Did I fall for this or did I happen to make a half-way smart move even though I'm an insurance ignoramus? The theory sounds ok but I look at my CV and it's about $10,000 less than my basis after 2 years. So that sounds bad.

And then I hear Suze and Dave say all of these policies have $0 CV in the first 2-3 years, and I think "Mine's got way more than $0". So that's *not* bad. And they say "...and none of these policies do as well as their illustrations predict." Wrong. Mine did better after the first year and better after the second. So Suze and Dave are 0 for 2.

And finally, the company I own gets to write off the premiums. So once the CV finally does catch up to basis, that will equate to about a 10% return if I would have taken salary and invested it.

Still, I don't know. I've got a lot friends and family giving me "that look" when I tell them what I'm doing. All I know for sure is they know less about insurance than I do.

TIA

Sounds very "schemey." I doubt the average is anywhere near that number. After taxes, you'd wind up with only pennies and belly-button lint.

http://www.cramgroup.com/infinite_banking.htm

"The average American is paying out 34.5% of every disposable dollar toward interest."



Dingo, taxes on what?

Nevermind, I understand (a little slow today)

Sounds a bit complicated.

I could, say, buy life insurance for when I need life insurance.

I could save up cash to buy a car, or finance at the dealership (they have some incredible 0% deals right now, not 10% -- even so, I financed my Hybrid at 4.5%).

I can keep my investments separate from my loans and separate from my life insurance.

I like life nice and simple.

I could save up cash to buy a car...



Definitely. And for people like me that prefer to pay cash over financing, the question becomes: What's your piggy bank - where are you going to put your money while you're saving it up? If you put it in a savings acct at a bank, you basically earn nothing. If you do ING or something, you earn a couple percentage points after taxes but nothing outstanding there either. You could put it in the market in anything from ETF's to as risky as you want. The issue there is we're talking about *savings* not investment money; savings by definition should be there when you need it. Savings is that money between your personal checking account and your long-term/don't-touch-till-65 investments. (I guess what I'm trying to say is that savings shouldn't be put at risk, imo).

The alternative presented by the Infinite Banking folks is to make your piggy bank a participating WL policy from a mutual insurance company. Your money is safe, the CV grows in all markets - good, bad, and ugly. And should the worst happen - you die - your wife or s.o. will get a lot more than the CV.

So I thought about it from another angle... Let's say I walk into my bank and I ask them about opening a savings account. They tell me they have a savings account that is guaranteed to pay 3%, and over the last 100 years, it's actually paid between 4% and 7%. Then they tell me all this growth is not subject to cap gains tax or any other tax. And finally they tell me that when I die, my wife won't just get what's in the savings account, she'll actually get 5-10 times that amount. I'd be all over that.

What's wrong with this kind of thinking?

What's wrong with this kind of thinking?

Nothing at all, if you understand it, and believe a word of it.

For me, it makes my brain hurt something fierce.

If Suze and Dave are on board, then I am on the fence, at best!

Seriously, from this earlier thread (http://forums.kiplinger.com/showthread.php?p=28393#post28393), it looks like IMO, Price and Joseph said it was not a bad plan, but there were many better routes to take.

If this works for you (and it sounds like your results have thus far gone beyond your expectations), then go for it. Everyone has their own plan, and yours is much better than what many, many Americans are currently doing, which is nothing.

Seriously, from this earlier thread (http://forums.kiplinger.com/showthread.php?p=28393#post28393), it looks like IMO, Price and Joseph said it was not a bad plan, but there were many better routes to take.

If this works for you (and it sounds like your results have thus far gone beyond your expectations), then go for it. Everyone has their own plan, and yours is much better than what many, many Americans are currently doing, which is nothing.

They do mention there are better, cheaper options but they never say what those are. I know about mutual funds, ETF's, and your basic ING-type savings accounts and the savings account down at my bank. If there are other options, I'm all ears.

Thanks

There are bonds, which include (but are not limited to):

Savings bonds (EE and I (and now-defunct and/or no-longer-issued E, H and HH))
Treasury Bonds/Notes/TIPS
Municipal Bonds
Corporate Bonds

There are Futures, Options, Commodities, Currencies, etc., etc., etc.

Most importantly, there are books and websites that offer detailed information on all of these investments you and I mentioned, and many more!

The bottom line is that if you are happy with conservative (4-7%) tax free returns, then there are NO opportunity costs to leveraging your cash/bond equivalents into a higher death benefit/accessible cash account. I think most would agree that the argument against whole life is that you may get better returns elsewhere.

Suze Orman is a great example of hypocrisy. She often preaches the better market returns, yet ~95% of her net worth is invested in government treasuries and fixed interest bonds. A whole life will undoubtably outperform Suze's very own portfolio. She has also stated publicly that she has a bonafide estate issue, which can most efficiently and effectively be remedied by the use of an Irrevocable Life Insurance Trust (ILIT) using a whole life insurance policy. Even a rookie planner is aware of this. In short, she has preached herself into a conundrum. Also, she will undoubtably tell you to have 3-6 months emergency funds outside the market in safe, conservative accounts. What do suppose the opportunity costs of holding $25k or so in a bank account for 30 years are? This same emergency fund could be supporting a death benefit of a couple hundred thousand dollars while still remaining liquid for emergency use.

Think of this way. You can invest in bonds, CDs, or online banking and recieve no death benefit. Or, you can contribute to a whole life policy and recieve the same returns, better tax treatment, and a permanent death benefit. It really is this simple. Also, it's important that loans taken are usually a net zero interest rate. The loans are structured as such to avoid taxation on growth, nothing more.

When you dig deeper, most complaints against whole life are generated by individuals who were placed into a non-par policy or universal life (which is NOT whole life) and then they equate this to all whole life policies. The remaining majority cashed out early for a loss and then place the poor results on the plan itself. Most Americans, perhaps more than any culture, act and respond primarily to immediate gratification to their own detriment.

If you like it and value it, you have done the right thing.

Think of this way. You can invest in bonds, CDs, or online banking and recieve no death benefit. Or, you can contribute to a whole life policy and recieve the same returns, better tax treatment, and a permanent death benefit. It really is this simple.


That's what I've been trying to tell people! :)

All I get is the disapproving head-shake.

Suze Orman is a great example of hypocrisy. She often preaches the better market returns, yet ~95% of her net worth is invested in government treasuries and fixed interest bonds.

I don't know that it's necessarily hypocritical. She doesn't preach to people who are as filthy rich as herself. She preaches to people who don't have two nickels to rub together. If you have very little money and want to build wealth, you have to be more aggressive.

She's sitting on a fat fortune, and she wants to play it ultra-safe in boring investments. If she were starting over from zero, I have no doubt that she'd take her own advice, and invest aggressively! But at this point in her life, she has no need to.

I agree Puck. I guess my point was that she could use a whole life with no opportunity costs to preserve her estate as she passes it to her life partner. If she went to an estate planner, they would absolutely recommend that she do such.

I also agree with the fact that her target audience are typically turning the corner from debt-ridden, to net zero, to beginning investor. And these people do need to be more agressive and there in fact instances where a whole life can absolutely adversely effect accumulation plans, especially for one with limited assets. In practice, they seldom have an emergency either. I think they are better fit for someone who has enough cash flow to diversify across a wider band of investments.

Although I am not familiar with the "Infinite Banking" approach, this way of managing a life insurance policy is something I have toyed with myself over the years. I have had a variable universal policy (VUL) for about 14 years now. During the early years I paid premiums into it every month, but have backed off considerably from that in recent years -- only now making a few payments per year. The cash value is presently more than adequate (about $15K) to support the cost of insurance and adminstration deductions ($100K face value), and I monitor it closely so that I can rev up payments again if necessary during a market downturn or whatever.

Given that I feel the fundamental purpose of life insurance should indeed be just that, I think my current approach is probably "okay" in that I am adequately mangaging the cash value to support the death benefit. Yet I continue to wonder if I should be trying to make more out of this policy by funding it to the max and than taking loans -- as in the Infinite Banking approach -- to fund major expenses or even other investment activity outside of the policy. The logic of this strategy is of course that I can access profits from a market investment tax-free (although there is loan interest expense that should be paid promptly, else it could pretty much wipe out the tax advantages). On the other hand, being a VUL, such an approach is always risky due to market swings -- that is have a large outstanding loan during a market drop might risk collapse of the policy.

Anyway, we could project entertaining "what if" scenarios all day long. I guess the question I would like some feedback on is am I under-utilizing this policy?

Thanks

This article helped me to better understand the program... https://www.nuwireinvestor.com/articles/be-your-own-bank-51057.aspx
On the main website they also have some interviews with people in the industry who talk about the program. I'm considering opening one of these myself now.

Title 26, Section 264(a)3 states explicitly that, if you remove equity from your home and reposition the borrowed funds into cash value life insurance with the idea of borrowing from it, the interest is NOT deductible.

Now what?

Using your HE to consolidate your credit card debt isn't deductible either. "Intent" is an extremely elusive animal and realistically home equity interest is habitually deducted when there is no warrant for it.

In regards to Infinite Banking, a friend of mine in "the industry" says a UL or VUL works much better than a WL. Either way, it just sounds like a self-sustaining life insurance policy to me.

I think the UL/VUL/WL statement is much too vague. The problem with any UL/VUL is that they can become much more unstable when they are leveraged than a whole life and over the life of the insured will become increasingly expensive. It could be the equivalent of having the bank "call" your loan note. I have nevr seen a whole life collapse, but I cannot say the same for UL/VUL as I have witnessed several in my not-so-long tenure.

BTW, "infinite banking" is a decades-old concept. Some genius just decided to name it something catchy and market his expertise on this phenominally exciting revelation. This has been one of the primary strategic uses of whole life for about a century now.

Title 26, Section 264(a)3 states explicitly that, if you remove equity from your home and reposition the borrowed funds into cash value life insurance with the idea of borrowing from it, the interest is NOT deductible.

Now what?

I wish I was a lawyer 'cause I can't understand all that. But it seems to me if I take out a HELOC, the interest is deductible (I live in TX). Who's to say that that money didn't go to lifestyle while I used my regular income to go to this life ins policy?

Aside from that, anyone considering this plan should pay attention to the illustration the life ins co. provides. In my case, the cash value catches up to the cost basis at around year 10 - not the greatest. But there are a couple things that are encouraging about my plan.

First, because of my age and health, my plan is scheduled to be self-sustaining after the 5th year. So pay for 5 years and then for the rest of my life I don't have to pay any premiums if I don't want to and I've got permanent ins (to the tune of about 500K).

Second, my actual's are beating the illustrations (take THAT Dave&Suze !).

Here are some hard numbers...
When I first bought my policy the CV was projected to be $8,500 after the first year and $14,500 after the second year. But by the time the end of the first year came around, the actual CV was just under $10,000 and the CV projected for the end of the second year was now around $15,500. Now I'm at the end of my second year and guess what my CV is... $16,500.

Of course CV all by itself doesn't give you the whole picture. In the interest of full disclosure, I should tell you I pay just under $1,000/month for this policy. So when you compare CV to cost basis, I've got a ways to go before I catch up. And according to the illustration after year 1, that's about 8 years from now (or 10 years into the plan). Of course, my illustrations have shown themselves to be pessimistic, so I don't think it's unreasonable to assume I'll get to the break even point a little sooner.

Also, when I bought the policy, the death benefit was 400K. Now, 2 years later, the death benefit is 500K - presumably that's owing to the PUA's I purchase every month and the dividends that get used to buy more PUA. (Half of the $1,000/month is in the form of base premium, the other half buys PUA's)

All in all, I'm happy with what I've got. I have a wedding to pay for next year and by that time, I imagine I'll have at least $25,000 to tap into.

As I see it, the beauty of this plan is that once you're done with the "capitalization phase", all that money that was going to pay premiums is now freed up. Freed up for what? Well, for that new car (or whatever). You take out a policy loan and then use that "freed up" capital to pay back the loan. Once the loan has been paid back, your policy has funds available to borrow again. And the cycle repeats.

So the way they describe it, the cycle is:
capitalize, borrow, repay, borrow, repay, borrow, repay, etc. and they tout this as an alternative to both financing and the save-up/pay-cash strategy. But in actuality, what you're doing IS the save-up/pay-cash strategy because during that initial capitalization phase, you're merely saving up for your first big purchase. Still I find it much easier to make myself save when I do things this way vs the traditional stuff-money-into-a-piggy-bank way. (And that's what I'm using this policy as - a piggy bank, a savings account for big ticket items)

Now, if I were actually using a piggy bank or INGDirect, my wife would get what's in that account and that's it. But since my piggy bank is actually a life ins policy, my wife will get a whole lot more than what's in that "bank".

And to return to the thought of using HELOC money to fund one of these... Even if you could deduct the interest, I personally don't like that idea because it takes so long for the CV to catch up to what you pay in. If you throw interest on top of that - geez, seems like it could take 15 maybe even 20 years for CV to catch up to your "out of pocket".

I tend to agree that the use of home equity is unwise to fund a policy for most people who simply want cash reserves. However, behold the awesome power of using this concept for estate planning; create a liability where there was once an asset (home equity) and transfer it to an irrevocable life insurance trust (ILIT). It is a great to reduce your countable assets while turning small gifts into very large ones outside of your estate.

i really .. really love life insurance!

shhhhhh ... dont tell anyone!

The main problem I have with this strategy - or I guess the way they "sell" it... You get this presentation in a pdf doc. It's about 40 pages long. You have to read 25-26 pages of "rah! rah! Infinite Banking!" before they spill the beans and tell you the vehicle is a par WL policy. And no sooner do they do this than they put up a big red stop sign (literally!) and say "Wait - I know what you're thinking..."

They then proceed to completely discount the life insurance (death benefit) you're buying and focus almost entirely on the cash value. The only mention they make of the life insurance is basically "...oh, and when you die, your beneficiary gets the death benefit, but back to Infinite Banking...". They're practically saying "That death benefit is something for nothing."

So if we do as they ask and we just forget about the death benefit we're buying, we're left to look at CV and how it grows. If you look at the illustration, you'll see that it takes 7-10 years for the CV to catch up to basis. 7-10 years and no growth whatsoever.

I'm not one of those BTIR folks, but you can put your money anywhere and do better than that. I used their example of buying cars and if I funded an ING account instead, the interest rate could drop down to about 2% and it would still be doing better than WL for a looooooong time.

So if you need insurance AND you have extra money to (over)fund this thing, this strategy is worth looking at. But what if you don't need insurance. When would this make sense? (I actually bought my policy back when I had no need for insurance.)

Well, the first thing to realize is that you might not need insurance now but you might very well need it in a couple years (that's my case exactly). I'm glad I started my policy in '05. By the time I'm married, I'll be 3 years into it. By my second anniversary, I'll probably never have to pay a premium again if I don't want to. And I'll have about $60,000 of CV to leverage. Had I waited till I got married, my premiums would be higher because I'm older and I'd have less disposable income to take advantage of this strategy.

Secondly, even if you don't need insurance, think about taxes with a long term perspective. Our govt is going to "fix" SS and Medicare by cutting benefits AND raising taxes - you can pretty much bet on it. If you apply this strategy correctly, you will never generate a taxable event - period. If you sock away money in an ING account, there's no telling what kind of tax liability you'll be exposing yourself to; you're at the mercy of the govt. And when you die, there's no death benefit on that ING account.

Thirdly, markets do tank from time to time. And this strategy is about saving/financing, not investing. My rule is investments can go up and down because I'm in it for the long haul. Savings should be safe and if possible, only go up. I don't finance things with my investments; I finance them with my savings

Finally, the thing that makes this work (for me anyway) is that you are much more compelled to save using one of these policies. Are you contractually obligated to fund that ING account? No. What about this WL policy? Yes! And because you're contractually obligated to fund it, you will fund it.

Ok, this is my final finally. To those of you who think this is just a re-named "save up/pay cash" strategy, it's a little different. Because when you really are saving up/paying cash, you know what you're saving up for: a car, a vacation, whatever. But with this strategy, it really is much more like capitalizing a bank. What am I saving up for right now? I don't know. When my "bank" is capitalized, am I going to pull out all of it? (That's what save up/pay cash is.) No, I'm going to "borrow" what I need and make payments back.

A word of advice to people considering this strategy, you need to really think about what kind of premium you can make for the next 5,6,7 years. You don't want to bite off too much (I almost did) and you don't want to go cheap either because your bank just won't have that much in it once you're done funding it.

And if you're thinking about doing this with a VUL type policy, you can, but nothing is guaranteed as I understand it - CV isn't guaranteed and death benefit isn't guaranteed. You're exposed to market risk, your whole policy could implode and you could have a big tax liability. I like to think of WL as the tortoise and VUL as the hare.

(...more brain dump)

If you do happen to read their little pdf presentation, you'll see that they talk a lot about "recapturing the purchase price" of things you buy because when you make payments back to yourself, money goes from one entity you control to another entity you control.

I find this a little deceptive - maybe more than a little. If I'm able to recapture the purchase price of something, it means that something was basically free in the end. With this strategy, you are not "recapturing" anything; you are merely re-funding your bank. (I sure do hate hype/spin like this.)

If I had Mr. Nash in front of me, I'd ask him, "So money never leaves my control?" Obviously not. It leaves your control when you take out a policy loan/withdraw cash value and then go buy something.

I'm in nearly the same situation as bdunklau. I started a "IBC style" whole life policy almost 2 years ago. I jumped in somewhat on faith, not totally understanding the mechanics of WL and how paid up additions work. But I had to do something because my wife is self employed and I work for a small business. We had no employer provided retirment plans and I was not at all interested in IRAs due to their limitations. I had been beating my head against a wall for several years because we made a decent combined income but we were simply not building any kind of savings.

After having lived with the policy for 20 months now and having seen how it works, I can say that the concept by itself is fundamentally valuable, and that WL is a fabulous way to implement it. This turned out to be a long post but I believe in the benefits of implementing a policy like this and I get excited talking about it. (I know nothing about VUL or any of the other cash value type policies... maybe they are even better. But for sure WL has astronomical advantages over implementing a "be your own banker" strategy with any normal bank account.)

First, I totally endorse bdunklau's comment that WL forces you to save. Before we did this we never systematically saved anything in 7 years of marriage. Now we're plunking between $1,000 and $1,500 a month into the policy (it all goes straight to cash value after year 1) and not thinking much about it.

But I think the following are the two most compelling reasons to implement a plan like this:

* all the money the policy will earn over its life is tax free and you can draw it out tax free later in life if you do it right. Even at 5 or 6 percent, this is more like earning 8 or 10 percent in a normal bank account. But WL works more like it has both an interest component and a dividend component. The interest component is just what the cash value would grow to be if you pay the base premium plus any PUAs and never reinvest dividends. From what I understand and from what others here have also said, if you just pay base premiums you can go 20 years before you even break even, and at the end of your life you might have earned 5%. (5% tax free ain't bad, but I think this is why people say WL is mostly a conservative wealth preserver for rich people... for most of us it's silly and quite frankly depressing to think of socking away a good chunk of income into something that does nothing for us and might merely end up a party fund for our kids or grandkids.) However, if you discipline yourself to pay the maximum PUA possible for your policy, all that money goes straight into cash value from day 1, which gives you a head start on the dividends you will earn. If you then reinvest all dividends into PUAs, it creates a snowball effect. I've been told that dividends can represent several more percent of cash value as the policy begins to mature. Now you're talking real money, and all tax free, which ought to make anyone sit up and notice. Nelson Nash, the guy who came up with the IBC brand, wrote in his book that 40 years into the life of one of his policies, it is paying dividends at 8 times the yearly premium, and he spent the first 15 years hardly paying any PUAs at all. Had he maximally "overfunded" it from the beginning.... who knows? I bet dividends would be 15 times premium. But how dividends are calculated is a mystery to everyone apparently.

* The above is nice, but what is even nicer is that within a relatively short period of time you'll be able to capture all the interest you pay to other entities. This alone will make the policy "catch up" to any other acceptably profitable "investment" vehicle rather rapidly. For instance: I am currently adding between 12,000 and 20,000 a year to my policy. I owe 75K on my house. Within 3 years I will have enough money in the policy to completely pay off my house. When I do this, all of the interest payments that I used to pay to the bank now go to me as I pay off the policy loan, and my cash flow hasn't changed a bit. This means that without doing anything different than I ever was doing before, I will be plowing another 5K per year into a tax-free interest and dividend generating machine. Interesting note: in my case, since I paid 5K in base premiums the first year, the interest I capture in the first year of paying off this loan will cover the base premiums I lost in the first year of the policy. Even if the dividends and cash value increases don't cause me to break even, this fact will. But in reality they will probably both happen, so that I'll be well ahead around year 5.

We all know that most people in America are heavily in debt. I have no idea what is typical, but think about your own situation. If you owe money on a house, a couple of cars and some credit cards, you might be paying up to 15 or 20K a year in interest payments alone. If, early on, you had purchased and overfunded a WL policy for just a few years, ALL of that interest could be going back to your own pool of money. Frankly you'd probably never need to invest in anything else for the rest of your life, merely based on the interest income you'd be paying to yourself, and the earnings that interest income will generate. But also I believe that the discipline learned by starting and funding the policy would probably have kept most people out of some of the debt they would otherwise be in. People generally will not be willing to take big risks with their own capital like they would with a bank's capital, and once you get in the habit of saving a good portion of your income and only borrowing from yourself, you just won't have the opportunity to get into foolish kinds of trouble, like too-big-a-house or maxed out credit cards.

But in the end there's still the question of what to do with the capital you've built over your working life. WL policies allow you to draw out your cost basis (the amount of premium you've paid in) tax free, and then after that, you can take out loans and enjoy a nice retirement income, and allow the policy's dividends to repay the loans... Or you can take out more money than the dividends can cover. As long as it's a loan, it's not taxable. The cash value and death benefit will decrease accordingly, but if at that point of life you don't need to protect anyone then why not drain the kids' party fund? Of course, you have to be *somewhat* agressive with funding one of these policies to make it pay off really handsomely down the road, but remember you only have to do it for a few years before it sustains itself.

Of course, the final benefit to all of this is that when you happen to die, tomorrow or 50 years from now, your family is completely protected, and in fact, because those PUAs you kept plowing in over the years buy you a lot of extra insurance, your policy's face value may have doubled or tripled at the time of your death. Every dollar of PUAs I put into my policy gives me $1 of cash in the policy and $10 in extra insurance. If I pay $10,000 in PUAs this year, I have $10,000 more in the policy eligible for dividends, I'm that much closer to paying off a house/car/whatever and capturing the interest for myself, and the face value of the thing went up $100K. That's nice all the way around.

I do have one concern about implementing this concept. For the past few years I've been a bit worried about the status of the US economy and particularly about the dollar. There is a lot of doom and gloom out there if you look in the right places, and I don't discount it out of hand. The US has a lot of problems facing us in the years ahead and they could negatively affect the value of dollars and dollar denominated assets. High inflation or a permanent drop in the dollar's exchange rate will hurt the real value of your life insurance policy. You have to decide how much of your wealth you're willing to place in dollar denominated vehicles. Also, if you were to start a policy like this and fund it out of your income rather than your savings, you have to be sure that you can continue to fund it until it is self-sustaining. If there is a recession or depression you may find yourself in a real problem.

That's all.

IRA limitations... Are you talking about the $ limit you can put in? They're still worth doing if you ask me. I just opened a Roth "single (k)" this year. Max contribution: $15,500. Add another $5,000 for my Roth IRA and I've got over $20,000 put away this year alone that will grow tax-free and be available tax-free when I retire.

The IBC policy, for me, is my piggy bank. My IBC agent tried to talk me into using my WL policy as a complete IRA/401k replacement. That makes me nervous. I mean, take a look at the Vanguard Target Retirement Fund 2045 - double-digit returns for the most part. A WL policy won't come anywhere close to that.

I'm glad to see someone else who's actually doing this and that you're happy with it.

I'm not worrying about a weak dollar too much - mostly because I stink at picking stocks so I'd probably be equally bad at picking currencies. I'm sticking with dollars because that's what the Pizza Hut down the street takes.

Bud, you said after year 1, everything you're putting in goes straight to cash value. Are you sure about that? If that's the way your policy works, you got a better one than I have. All your PUA might go to cash value (that may even be the definition of PUA) but your base premium part... I'm betting a lot of that is still going to fees/commissions/cost of insurance etc

Bud's post was informative and got the point across in a concise, easy to understand manner. Yet, it came across as more of a sales plug than a personal experience. I thought same thing about early year cash values and also the PUA ratio of 10:1 (PUA to dollars). In most cases (unless very young), the PUA ratio is about 3 to 5:1.

First of all I'm not against a good financial planner earning a great living, but here are the facts-
1. Whole Life total first year commission/override is around 130-135% which means you continue to pay first year commissions after the first year. The agent and General agent continue to get a trail that comes out of the policyholders pocket long after that.
2. You ARE paying a financial institution interest. You pay the insurance company the interest. Don't let anybody fool you. Its simply a collateralized loan. Nothing more nothing less.
3. For most middle class folks this would be a HUGE MISTAKE. Most people have limited dollars to work with. Why put those limited assets in an "investment" that doesn't start earning a positive interest (due to internal costs) until the 10th year or beyond?
4. Paying back the insurance company in the way that these "planners" suggest is a pain. The pay back to most insurance companies is not open ended. You can only pay back what you owe. Infinite banking suggests paying back the interest and principal to the insurer. Not easy to do.

Keep it simple. The average person needs to live below their means, buy lots of term insurance, and invest in a carefully crafted mutual fund/ETF portfolio. I speak from experience. I bought the big whole life plan 12 years ago. $60,000 later all I have is the cost basis of the plan. Permanent life insurance is only for business owners or highly compensated individuals with excellent cash flow or retirees that want to use proceeds to pass on their estate. In this case it can be an excellent asset protection vehicle.

First of all I'm not against a good financial planner earning a great living, but here are the facts-

1. Whole Life total first year commission/override is around 130-135% which means you continue to pay first year commissions after the first year. The agent and General agent continue to get a trail that comes out of the policyholders pocket long after that.

2. You ARE paying a financial institution interest. You pay the insurance company the interest. Don't let anybody fool you. Its simply a collateralized loan. Nothing more nothing less.

3. For most middle class folks this would be a HUGE MISTAKE. Most people have limited dollars to work with. Why put those limited assets in an "investment" that doesn't start earning a positive interest (due to internal costs) until the 10th year or beyond?

4. Paying back the insurance company in the way that these "planners" suggest is a pain. The pay back to most insurance companies is not open ended. You can only pay back what you owe. Infinite banking suggests paying back the interest and principal to the insurer. Not easy to do.

Keep it simple. The average person needs to live below their means, buy lots of term insurance, and invest in a carefully crafted mutual fund/ETF portfolio. I speak from experience. I bought the big whole life plan 12 years ago. $60,000 later all I have is the cost basis of the plan. Permanent life insurance is only for business owners or highly compensated individuals with excellent cash flow or retirees that want to use proceeds to pass on their estate. In this case it can be an excellent asset protection vehicle.Your post was a great "other side of the coin". For the most part, you illustrated some things to think about before using this strategy. However, like the poster who said that all of the money goes to cash after the first year and gets a 1:10 ratio on paid up additions (PUA) it seems you have overstated a few facts to make your point.

1. The commission on whole life is the same as term insurance and is in the 50-55% range of first year premium for the major players of par whole life issues, not 130-135%. The only companies that offer commissions like these are smaller sub-par whole life issuers that want to buy broker loyalty/activity. Most seasoned pros avoid them like the plague.

2. Infinite banking (or whatever you want to call it) is comparing the loans directly to borrowing from a commercial institution. You are paying the interest to the insurance company, but they are crediting your collateral account at the same rate as the loan, making it a flush loan with 0-1% net interest.

3. I agree with this statement entirely. You should not venture into one of these arrangements as an investment. Banking is not an investment. A whole life policy can and should be compared to cash equivalents only. Money market, CDs, bonds, treasuries, etc. These will be the returns you realize, so if you want more from your money go elsewhere. Infintie banking is simply a pool of funds that provide you 0-1% (net) loans for any need.

4. I don't even know what this statement means, but if you saying that there is a penalty for prepayment of your loan, it is not true. You can choose to repay nothing (if your policy is healthy), interest only, interest & principal, or lump sums at your choosing.

I also agree that this is only for those with good cash flows and only after primary investment/savings goals have been achieved. You state that after 12 years, you only have your basis of $60000 to show for it...did you forget the $500-750K permanent death benefit it is supporting as well and the fact that will be able to stop making the payments soon? If you had put that amount into a CD earning 4%, you would have about $75000 for a difference of $15000 with NO death benefit. This $15000 represents the ultimate cost (opportunity cost) of your insurance, or $1250 per year ($15000/12). This opportunity cost will continue to disappear as you lengthen the holding period. Up until year 10, you are building equity the average rate of return is sluggish at best. But over the next 10 years, the realized intrenal rate of return (IRR) will exceed the returns of a CD, high-yield savings, bonds easily. Of course this is highly dependent on being healthy when the policy is issued AND having a need/desire to have the insurance in the first place.

I am not in favor of comparing a whole life to any investment and it drives me crazy when people do. It is insurance! It is also a good way to leverage assets that would be allocated to interest-bearing accounts anyway. If the money is going to earn 5% outside of a policy, why would it be a poor decision to move those same returns into a policy that has better tax treatment and is also supporting several hundred thousand of permanent death benefit?

It's very simple. Either you see the value, or you don't. It's not, "I could do better" investing. It's, "I could do the same" AND...

There's no smoke and mirrors...it just is what it is.

Strong takes. Well done.
Couple of things. All the major carriers pay out 120% plus. Remember there are two middlemen- The agent and the agency. Both get paid. Let me assure you that Northwestern, Mass Mutual, Sun Life, Guardian, Met Life, Lafayette Life all pay out at least 120% total first year commission and override. On this there is no debate. You think that motivates the "planners" to sell these things? I think so.
Secondly, I'm glad you agreed that only well compensated individuals/businesses should attempt this. Unfortunately, most of the people selling this concept are selling to people who shouldn't be buying it, such as the working stiff on a $50,000 income who only has 5-10k to invest after expenses if he/she is lucky. This money must be maximized and insurance/savings plans doesn't cut it. These same people will be surrendering these policies in a few years when life throws them a curveball such as a job loss, relocation, a major unforseen expense. Whole life has no flexibility for life's changes.
For the well paid business owner, there is a stronger case for these vehicles. Most of these people are too sophisticated for the Nelson Nash pitch. They buy from Northwestern agents or good independent planners. Be careful on the tax advice as well. Do you think the IRS would look kindly at an obvious tax evasion strategy? My accountant says if it smells funny it is. Make sure your "leasing company" can prove itself.
If you had prefaced your opinions with a minimum income disclosure it would have been more credible. And if its not an investment as you say, then how the heck do you build up enough money to pay off cars? That's some savings account. For most middle class folks this strategy would be a disaster and the agent who sold it to them would be long gone enjoying the spoils of his sales career just when the policyowner needed them most. Once again I speak from experience.
You're right, I do have life insurance. That's why I've sucked it up and continued paying premiums all this time unlike some of my friends who bailed out early, a costly decision. Had I simply bought term and invested the difference, I would've had the same coverage and double the cash. As it is, I only have 375k of DB with the whole life. I needed more insurance so I have 700k of term. This costs me $600 per year for 20 years of coverage.

Last thing. What I meant was Infinite Bankers preach that you should pay back the policy with MORE than you owe in principal and interest to "recapture" opportunity. Their calculations are based on it. Read Nelson Nash's book. No insurance companies will allow this. You have to apply for additional paid up ads each time you want to add more.
The wash loan stuff is a load of crud they have fed you. Just save money in a less costly savings vehicle and pay yourself back with interest. That's all this is. Here's how you do it- Take the 20k you've saved in a muni bond account, pay for a used Camry (or whatever you choose), then begin saving what you would've paid a bank for a standard 60 month note over a monthly schedule and you have become your own banker. Sound easy? It is. Just have a little discipline.

Just for the record, I'm not the least bit familiar with Infinite Banking. I don't know about the plan or who is selling the concept and don't care about it either. This use of cash value insurance is a hundred+ years old. It comes off as a marketing angle to me. The only thing that is irrefutable is that if you take out a whole life policy and stay in it, you will realize about a 5-6% annualized return on your cash and have a permanent death benefit. If you are seeking higher returns and have no need for a death benefit, then go elsewhere because it won't suit your individual needs.

It is NOT for the Joe making $50k a year because the limited growth and inflexible cash flows could/would preclude him from satisfying his primary investment objectives/needs for retirement, etc. I agree that they are often sold improperly as well, putting commission before the mission. This is not always the case though.

It's not tax evasion by any stretch of the imagination. The IRS is well aware of the uses of life insurance. In fact, in 1986 they limited the amount that you could overfund your policy just to limit the tax free use of your growth. After 1986, it became possible to overfund too excessively and be tagged as a Modified Endowment Contract (MEC). The IRS then recognizes your policy as an investment and taxes it exactly the same as an annuity. Once this happens, you cannot reverse it.

You do not have to apply every time for PUAs, unless you haven't overfunded in the past few years. If you do have to reapply, then you definitely own the wrong policy. The major advantage of PUAs is that they are guaranteed paid-up regardless of your health. Most policies allow you to buy PUAs on your deathbed if you wish.

The major carriers pay the seller 50%+ or so, the same rate as term. Believe me...I know. The profit for the company is irrellevent to the seller. A bank will take a 2% spread on your CD money too, does this mean CDs are expensive? Your $100k loaned to the bank in a 4% CD will be loaned out at 6% for an annual cost to you of $2000 (the spread). Your $500k account at your favorite no-load is costing you about 1% or $5000 a year to hold, is this too expensive? If you have a brokerage wrap account add another 1% or so and the same account is costing you $10000 annually. Where does all of this go? The banker, the agent, the broker, the fund family, etc. It's what makes the world go 'round.

A savings account is not an investment and you could easily put away enough to buy a car over time. This is what I am saying, it is more like a banking account than an investment used for growth. It is an interest-bearing vehicle, and not designed for appreciation. It should never be bought or sold as such.

The "wash loan" is simple math. Your collateral earns 5%, they charge you 6% for a 1% net. There is no lost opportunity to recapture because your policy itself was never touched and gets credited interest and dividends as if the money is still in there...except for companies that use dividend recognition and do not credit dividends to borrowed funds...like Northwestern.

I am neither for, nor against any of it. It's just important to look at it objectively without preconceptions or biases. I think everything you have contributed is valuable and provides a very good hindsight for someone who may be getting into one of these situations without fully understanding it. I will also agree that many times, these things are "sold" regardless of proper fit to the detriment of the buyer. This is why the objectivity has been lost by many and a predjudice exists. It is obvious you do regret your decision and that is very important for other readers to see. Perhaps it will save a few that are on the fence from being pushed into one of these plans, but they do have effective place in the financial plans of those who value it.

You are very well versed and knowledgable. It's good to hear your personal experiences, and this thread is definitely the place for it!

So now, let me throw this out... (and I don't know what the "right" answer is).

After year 7, the cash value can actually be withdrawn from the policy - we're not talking policy loans anymore. Now you have a choice: policy loan or cash value withdrawal. First of all, to all the insurance pro's out there, is this correct?

Assuming it is, now you're faced with the question: Do I take out a policy loan or do I withdraw cash value?

This is how it's been explained to me: If IRR is greater than the loan rate, you should take out a loan. If the loan rate is higher than the IRR, you should do a cash value withdraw.

Also, after the 7th year, you have 2 other repayment options as well: 1) you can pay more than the interest they charge you, if you took out a loan and 2) If you withdrew cash value, you can put back what you took out plus an additional $5,000 on top of that.

If you took out a policy loan, any extra you pay back (above the interest they charge you) goes to buy PUA's. And if you withdrew cash value, anything over the amount you withdrew also goes to buy PUA's.

Any smoke and/or mirrors here? :)

I threw this out there because I hear a lot about policy loans but not so much about actually withdrawing cash value.

Anyone out there that can either set me straight or confirm what I just said?

Any gotchas to withdrawing cash value? I guess if I withdrew the max amount of cash value, I'd be sucking the death benefit pretty much dry. (But if I buy into the Infinite Banking philosophy, I'll be building the death benefit back up as I "make payments".)

Hi guys,

When I was writing my first post I realized I was coming across as a salesman. I am trying to promote the idea to some guys I work with so I've rehearsed the pitch in my head many times. I guess I deserve the suspicion based on the way I talked about it. In real life I'm a computer programmer with zero vested interest in shilling for this kind of an approach to WL. You'll have to either take me at my word or decide otherwise. I can't do anything about it. If I come across too strongly, or if it sounds phony... well, I just believe in the concept.

Pricespecter: I went back to my first year end statement and checked my PUA contributions against the death benefit they bought: $6,041.40 in PUAs bought me $49,635.00 in extra death benefit. So I exaggerated, the ratio is really about 8.2 to 1. I came away with the 10 to 1 figure after I received the statement last spring and I've never gone back and double checked it. But according to you the norm is somewhere between 3:1 and 5:1... I don't know why I have a better than average ratio. I'm early 30s, and I had a standard rating.

Bdlunklau: Since I don't have my second year end statement I might be wrong about 100% of premiums going into cash value in the second year. However I have contacted my life insurance agent several times this year to ask about my current cash value and every time I check it sure seems to me like I'm getting 100% of my premiums in cash value. I already had to modify one statement, I hope this isn't the second time... Maybe when February 08 rolls around I'll come back and give an update. The thing that was a bit frustrating to me when I started this was that no one could tell me exactly what kind of results I would get. I just needed to trust the system to work. In a way I'm trying to explain to anyone else out there who is interested how it has worked for me, so far.

DebtFree2007:

2. You ARE paying a financial institution interest. You pay the insurance company the interest. Don't let anybody fool you. Its simply a collateralized loan. Nothing more nothing less.
I do still have some questions about this. My insurance agent told me that New York Life takes about 1.9% of the current 5.87% interest rate, and the rest goes to you. I have already taken out 2 policy loans and they are not at all informative about where the interest is going. (More opaqueness from the insurance company!) They mail me monthly statements that literally say only what the loan balance was at the beginning of the month, how much I paid on it, how much new interest was charged for the month, and what the ending loan balance is. They don't tell you how much of your loan payment went back to you, and how much the insurance company claimed. I have no reason to think my agent lied though. If anyone has anything to add to this, I'd like to know...

DebtFree2007: second comment - the way you "pay extra interest" is simply to increase your PUAs for the life of the loan. At least that's the way we structured it for my two policy loans.

Pricespecter: you said

2. Infinite banking (or whatever you want to call it) is comparing the loans directly to borrowing from a commercial institution. You are paying the interest to the insurance company, but they are crediting your collateral account at the same rate as the loan, making it a flush loan with 0-1% net interest.
Can you explain this differently?

DebtFree and Pricespecter: you both agree with this statement -

3. For most middle class folks this would be a HUGE MISTAKE. Most people have limited dollars to work with. Why put those limited assets in an "investment" that doesn't start earning a positive interest (due to internal costs) until the 10th year or beyond?
I think the biggest selling point to IBC is that even if the policy doesn't originally earn a high rate of return, the entire point of the thing is just a way to discipline yourself to save money. Remember my case - in 3 years my house will be paid for and [most?] of the thousands of dollars in interest I was paying per year to some bank will go to me. Yes this is not a "rate of return". On the other hand it's still a lot more money for me than I otherwise would have had. The high rate of return will come later, on a much bigger pool of money, thanks to the discipline. (And of course you can apply the concept without a life insurance policy, but in my personal experience when you have your money in a regular bank account you spend it without planning on paying it back... not to mention that it doesn't grow tax free and you only earn interest, not interest and dividends.) OK, off the soapbox.

Back to DebtFree2007:

Couple of things. All the major carriers pay out 120% plus. Remember there are two middlemen- The agent and the agency. Both get paid. Let me assure you that Northwestern, Mass Mutual, Sun Life, Guardian, Met Life, Lafayette Life all pay out at least 120% total first year commission and override. On this there is no debate. You think that motivates the "planners" to sell these things? I think so.
As I understand it, the biggest chunk of the agent's commission is off the policy's base premiums. The rule of thumb is that his commission is about 100% of the first year's base premiums. So if you wanted to save $1000 a month in one of these policies, the agent will make 12K off of you. (I could be wrong!) HOWEVER, if you structure it IBC-style, you'd instead buy a much smaller amount of insurance with a PUA rider. In my case, (given my age and health) my base premium is about a quarter of the full amount I can put in the policy per year. So instead of having $1000 per month base premium, you'd have $250 a month base premium and $750 a month in PUAs. The agent makes 3K off you now. You pocket the vast majority of the difference. I am not a life insurance agent - sorry if it sounds like I'm shilling again - but I will say this: if you find an agent who encourages you to structure your policy this way, you're working with a comparatively very honest person.

DebtFree, again:


Unfortunately, most of the people selling this concept are selling to people who shouldn't be buying it, such as the working stiff on a $50,000 income who only has 5-10k to invest after expenses if he/she is lucky. This money must be maximized and insurance/savings plans doesn't cut it. These same people will be surrendering these policies in a few years when life throws them a curveball such as a job loss, relocation, a major unforseen expense. Whole life has no flexibility for life's changes.

I agree with this... in fact I was planning on refinancing the house and using it to pay the policy for the next several years simply for my peace of mind until I found this forum and saw that tax code rule. I still might do it and just not deduct the mortgage interest. You really need to be sure you can pay at least the base premium on these policies in a worst case scenario.

I think you can really see the benefit of doing these policies in retrospect. Like I said before, if you're using 30% of your income to pay off loans and trying to save 5% in the highest possible yield mutual fund in an IRA, I think your priorities were completely messed up and now you're paying for it. Had you disciplined yourself earlier in life to save money in a WL policy you could be paying all of that 30% (minus the cut the insurance company takes, right) to yourself and earning respectable cash value increases and dividends, both tax deferred.

Of course there is no reason at all that you can't also put money in IRAs along with one of these policies. In fact once I get the thing "fully capitalized" I might take a loan on it and drop that in an IRA. Who knows.

My insurance agent told me that New York Life takes about 1.9% of the current 5.87% interest rate, and the rest goes to you. I have already taken out 2 policy loans and they are not at all informative about where the interest is going. (More opaqueness from the insurance company!) They mail me monthly statements that literally say only what the loan balance was at the beginning of the month, how much I paid on it, how much new interest was charged for the month, and what the ending loan balance is. They don't tell you how much of your loan payment went back to you, and how much the insurance company claimed.

I can tell you how my agent explained this to me not too long ago. He said when he takes out a loan, he has it paid back within the year. (He uses it to pay for private school tuition for his kids.) At the end of the year, the ins co sends him a bill for the interest. So in the plan I have, how much would go back to me? Technically none of it. I repaid the loan to the company and I paid interest to the company. And what happened to the cash value in my policy? It kept chugging away totally clueless to the fact that there was ever a loan at all.

The cash value was just used as collateral on the loan. Now in the beginning, loans probably aren't the best use of your money; just pay cash. My agent even agreed to this after I beat him into submission. But after your policy has gotten some traction, there's nothing wrong with policy loans assuming you can pay them back. If they charge you 6% and your cash value is growing at the same rate or better, what's the cost to you?

So in the plan I have, how much would go back to me? Technically none of it. I repaid the loan to the company and I paid interest to the company. And what happened to the cash value in my policy? It kept chugging away totally clueless to the fact that there was ever a loan at all.

When you take out a loan, your cash value goes down, no? Maybe this is just mincing words, but the principle, at least, really does restore your cash value. Or maybe, if you have it correct, the principle on the loan frees that portion of your cash value from being collateral.

Now as for the interest on the loan going 100% to the company... that is a potentially disappointing bit of information. If it is true, then it explains exactly why the IBC method wants you to pay "higher interest" in the form of extra PUAs... it's the way you actually get to keep some portion of the interest you pay. I guess there's a silver lining, in that some portion of the loan interest will show up in the company's profits and the dividends you receive are based on the company's profit for the year.

I'm going to have to press my agent a bit more to figure out what's the deal. Where would he come up with that 1.9% bit?

When you take out a loan, your cash value goes down, no? Maybe this is just mincing words, but the principle, at least, really does restore your cash value. Or maybe, if you have it correct, the principle on the loan frees that portion of your cash value from being collateral.Your cash value in the policy is NOT reduced. It is left to grow with interest and dividends. As you pay off the loan, you are removing the collateral assignment from your uncompromised policy cash values. The cash never come from the policy itself.

The insurance company loans you the money, using your cash values as colateral for the loan. As you pay back the loan, the collateral assignment is removed from your untouched cash values.

This is an important distinction because if they had loaned you the money directly from your policy, the interest and dividends received would suffer. If they used the policy cash values to loan to you directly, it would the same as taking a loan from your 401k. When you borrow from your 401k, there is a negative effect on the growth. For example, if you have $20000 in a 401k and borrow 50% ($10000), then you have just stunted the growth by reducing your growing principal in half. Only the remaining $10000 in the 401k is there to compound. WL doesn't suffer this consequence because of the use collateral assignment. In other words, they use OUTSIDE funds and allow your account to compund as if it was never touched.

This makes the interest payments to the insurance a case of semantics. Of course you pay the loan back to the company (with interest), but you are also compunding your money (with interest & dividends) as if it has never been touched (because it hasn't).

So, if your policy cash values are generating 6% returns, your untouched cash values will continue to do so unimpeded by the fact that you borrowed against them. If the loan rate is 7% (which you pay to the insurance company), than after the loan has been paid in full you have a net interest rate of 1%.

An illustration (1 year only for simplicity). $10000 borrowed. Your policy cash value is $10000.

-You get a loan check for $10000 @ 7%. Your $10000 of cash values still equals $10000 earning interest/dividends @6% (it is collateral only).

At the end of the year you will owe $10700 to pay the loan off. Your cash values in the policy have grown to $10600. You pay $700 of interest (to company) and make $600 of interest (on policy cash values). Collateral is lifted and your NET cost of the loan is $100, or 1%.

Bud,

It sounds like your understanding is about where mine was 6 months ago. So allow me to be pompous and educate you :)

When you take out a policy loan, your cash value does not go down. Policy loans have no effect on cash value. (Take that in for a moment.) Say you have no loans outstanding and your cash value is $20K. Now go take out a policy loan for $10K and call your ins co and ask them what the cash value is now. They'll tell you $20K ...oh, and you have a loan outstanding with us.

As DebtFree said in one of his(?) posts, the policy is collateral for the loan.

A loan is a loan is a loan. In this thread, we're talking about taking out a loan against your WL policy but you may as well fill in the blank. "I would like to take out a loan against the value of my ______________." The value of my house, the value of my life insurance policy, the value of my car (if anybody does that)

Now, this 1.9% spread, where did that come from? Well, I'm betting your agent is talking about the difference between what you're paying for the loan vs what your policy is earning. Sounds like he's saying your paying 1.9% more than your policy is earning. Those numbers are all pretty fuzzy to me when your policy is as young as it is. (I'm guessing your cash value isn't anywhere near your basis yet.) For example, my cash value is a good $7,000 less than my basis right now. So I'm not going to bother with policy loans.

And yes, when your ins co sends you a bill for the interest, it goes to them ...all of it. "Boy that sucks - they lied to me! So much for recapturing..." you say. "Hold on a second," I say. Look 6-7 years down the road. By that time your cash value has caught up to your basis. Now you take out a loan. That interest check you write to your ins co still goes to them, but what's happening to your cash value? It probably went up by the same amount (give or take). If you only pay them the interest they charged you, then you effectively got a 0% loan.

So why are the IBC people saying to pay more? Because you can buy PUA's with that extra "interest". Now, in an earlier post, I mentioned the option of actually withdrawing cash value. In that case, your cash value actually will go down. If you haven't been exposed to that option by your agent, ask him. I like the idea of withdrawing cash value more than taking policy loans precisely because of that interest check that I don't want to write. Even if my cash value grows by the same amount, I'd rather not leverage the policy that way.

On my policy, and I'm guessing yours too, the policy loan rate is variable. I don't like things that are variable. Variable is scary. Variable = what if. What if the loan rate spikes up? What if that happens and then Murphy pays a visit? If I'm leveraged to the hilt via a policy loan and things go really bad, it seems like the ins co could say "Your loan balance is about to exceed cash value and if that happens your policy will lapse and we'll have to call the IRS and report that loan as income."

If instead you just withdrew most of your cash value ...no calls ...no worrying about rising and falling interest rates. When you withdraw cash value, every dollar you put back in to the policy goes to restoring cash value. But guess what... there's a little bit of a gotcha. And this is my big problem with their pitch... When you withdraw cash value, you are giving up dividend earnings. So that part in their pitch about your account growing as if you never borrowed a dime?... Their talking about policy loans, not withdrawing cash value. What about that part where they say "You recapture purchase price and interest"?... There, they're talking about withdrawing cash value, not policy loans.

Or put another way, they're saying "Cake is great because you can have it and you can also eat it."

(if I wasn't so long-winded... :) )

The varibale rate is applied to the interest and dividends earned. It is done like this to keep the spread relatively constant. For instance, X interest rate is Interest/dividends paid + x%. So if your policy is earning more, your variable loan rate will likely increase to maintain the spread. If you policy growth declines, the corresponding loan should also adjust downward.

It is imperative to have a spread on the loan, because that is what makes it a loan and qualifies it as such in the eyes of the IRS.

another considerable drawback here if you take a cash withdrawal (cash surrender value) is that you have to be careful once you begin taking more than the basis. when bdunkalooko (sorry, tough name to get right) says: ""Your loan balance is about to exceed cash value and if that happens your policy will lapse and we'll have to call the IRS and report that loan as income.""

while that is true enough, the same hold true (and is even more likely to occur) if you take a cash withdrawal instead of a loan. remember, anything you take out that you paid in is a wash. no gain ... no loss. but any cash value that is in the policy that is more than what you paid to the insurance company is earnings and will be taxed at ordinary income rates.

however, if you never took the cash in surrender but rather took the cash in loan, there will not be any income taxes assessed as a result of that loan ....

UNLESS ....

as bdunkalooko suggests, you collapse the policy.

this is considerably more likely if you use a variable product like VUL or if you use a "non-investment" grade insurance company. NY Life was mentioned above and if i am not mistaken, they have been declaring profit and paying that to their policy holders every year for about 160 years. dividends are only paid during profit years. that sounds "investment grade" to me.

bdunklau, pricespecter, debtfree: I get it now.

This is why they make such a big deal of ratcheting up PUAs while paying back loans. All that interest really isn't going to you, so you might as well pretend that interest rates are higher than they really are and pay even more so you can "capture the interest".

I had also been wondering if it was true that dividends and cash value continued to accumulate value as if no loans had been taken, but you answered that one as well and it all makes sense.

This negatively affects one core piece of my understanding. I'm sure I was told, or it was at least heavily insinuated, that a good part of the interest paid on loans was going into PUAs. This would have meant that you could swap all of your debt for WL loans and in doing so completely overfund the policy, by merely making the same payments you'd always been making to someone else anyway. You can see how I might be a bit disappointed. The truth is that I'll probably have to maximally overfund the policy for several more than 7 years before dividends cover base premiums and PUAs. It's not the heavenly ideal I was led to believe but it is still serving all the purposes I thought it was, if more slowly.

If you guys believe in the concept, go for it. It sounds like you have really done your own math. All I know is that I've been at it for 12 1/2 years and reality has sunk in over that time. I too believed in this religiously until I really started running the numbers. I have no ax to grind with insurance companies. The math is the math.
Price, no offense, but the 120% commission and override better matter to policyholders cause its coming out of their pockets. Total agency take is 120% or above. I challenge you to disprove this. You will be unable to.
If you want to use insurance as a bank, go to Ameritas. They have commission free life insurance where at least you'll get your cash value back from the start. If something changed in your life you wouldn't take a huge loss. That's the big issure here. You can get behind the 8 ball with premiums when you are paying the agency for the first ten years.
Price, my point on saving in a CD or Tax Free bond account for five years versus a WL policy was not addressed. Do the math. If I started a 5% savings account, taxable or not, until I reached the level where I could buy a car, I could easily do the same process. Put 5k in a no risk or low risk account, buy term insurance, cash in the amount when you get enough to buy a car, and pay yourself back with interest. I've run spreadsheets on it. The amount saved in this method after 30 years is huge. The problem is no one does it. No one has discipline. We need some novel way to make us behave intelligently. I could have a bigger account and more life insurance to boot this way.
The tax scheme that I was questioning was the lease-to-yourself plan. The IRS will eventually shut this down just like it has shut down other schemes. Its a cool idea, but it smells funny.
Lastly, you mentioned certain policies that I may not know of. The possibilty exists that there could be something better that has come along since I started. Perhaps you could share those companies with the forum. Also an illustration of cash values (guaranteed and non-guaranteed) would be of great help. I know life insurance will have an IRR of 5% eventually. My question is how long will it take to get that? I know of no illustration from a commisionable life policy that will have an IRR of 5% in less than 15 - 20 years. Perhaps you can enlighten me.
What I suggest is if you want permanent death benefit then look at Ameritas UL or VUL. THe numbers will blow away any illustrations you can present. Plus they are flexible enough to allow you to minimize premiums to just the cost of insurance if "life happens." I am looking at doing a 1035 into one of these from my WL. If you want to pay commissions, which I have no problem with (some agents really do add a lot of value, just not mine), then I would say that only VUL can pan out in the end because of the investment potential if you do proper asset allocation and overfund the policy.
If you want to maximize your money, make permanent insurance the LAST THING YOU DO. Insurance is for wealth transfer, period. The other things are just perks. Name me one person who got wealthy from using life insurance this way. I even asked this to Nelson Nash and he changed the subject in a hurry. Thanks guys.

A couple of technical things to help you guys on loans and withdrawals.
First there are companies that have 0% spread loans. I have forgotten which companies, but if you need to, I can find out.
Secondly, if you want to take withdrawals, there is no tax consequence as Life Insurance is treated as "FIFO." In other words, you can take alll the withdrawals you want and pay no taxes until you've consumed all the cost basis.
These are some of the positives that I like about life insurance. Once again these are perks not reasons to choose life insurance as a "bank."

You can get behind the 8 ball with premiums when you are paying the agency for the first ten years.

True, you can bite off too much and if that happens you may end up playing a shell game with your money until the "funding period" is over. But at least in the case of my policy, I'm not looking at a 10 year funding period; it's more like 5. I've got 3 to go. "Life" can definitely happen in that time, but if it does, I have a plan B to fund the thing.


The amount saved in this method after 30 years is huge. The problem is no one does it. No one has discipline. We need some novel way to make us behave intelligently. I could have a bigger account and more life insurance to boot this way.


...until the 31st year and then there's no more life insurance.


The tax scheme that I was questioning was the lease-to-yourself plan. The IRS will eventually shut this down just like it has shut down other schemes. Its a cool idea, but it smells funny.


Thou shalt not mess with the IRS. A good accountant will be able to tell if your strategies pass the smell test.

Also an illustration of cash values (guaranteed and non-guaranteed) would be of great help. I know life insurance will have an IRR of 5% eventually. My question is how long will it take to get that? I know of no illustration from a commisionable life policy that will have an IRR of 5% in less than 15 - 20 years. Perhaps you can enlighten me.


No problem, here is my current illustration after 2 full years...

Premium Outlay: $11,715/yr

At the end of the 2nd year,
Total Cash Value: $16,791
Total Death Benefit: $484,415

It's worth noting that after the first year, the 2nd year CV was projected to be about $15,500. And on day one, the 2nd year CV was projected to be around $14,000. So my actual CV beat their optimistic non-guaranteed assumption even after they revised it - I like that.

So now for the illustration:

------------- Guranteed ------------------- Non-Guaranteed --------
------------- CV ------- DB ----------------- CV ----------- DB -----------
year 3: $1,945 ___ $392,194 _____ $25,865 ___ $518,555
year 4: $5,553 ___ $392,194 _____ $37,745 ___ $555,770
year 5: $9,295 ___ $392,194 _____ $50,433 ___ $593,300
year 6: $13,471 __ $392,194 _____ $64,287 ___ $631,180
year 7: $17,801 __ $392,194 _____ $79,081 ___ $669,504
year 8: $22,280 __ $392,194 _____ $94,862 ___ $708,305
year 9: $26,908 __ $392,194 _____ $111,688 __ $747,619
year 10: $31,685 __ $392,194 _____ $129,603 __ $787,489
year 11: $36,607 __ $392,194 _____ $148,645 __ $827,852
year 12: $41,682 __ $392,194 _____ $168,893 __ $868,819
year 13: $46,914 __ $392,194 _____ $190,417 __ $910,406
year 14: $52,330 __ $392,194 _____ $213,302 __ $952,525
year 15: $57,954 __ $392,194 _____ $237,593 __ $994,949

It's important to note that this illustration assumes the $11,715 premium outlay every year. I won't be doing this. Once my policy can support itself (year 5-6), I won't be paying out of pocket anymore. Something else to consider... If my policy out-performed their non-guaranteed assumption after the first year and after the second, I don't think it's a stretch to assume it will continue to do so. In fact, if you've read Franzen's article online "The Visible Policy", he explains that insurance companies deliberately low-ball their projections to keep customers happy (my words, not his)

So what say ye all about these numbers? Specifically, how do these numbers look compared to other WL policies?

thanks,
bdunkalookookolukaluookaki :)

So here's a question regarding withdrawing cash value. Say I have $50K in CV and I withdraw $10K. Then later I put that $10K back. Does the IRS still say I only have $40K left to withdraw tax free? ...Or do I get credit for putting that $10K back?

lets be perfectly clear, while the IRS knows you can borrow against these things (and all the goodness outlined in this thread so far), it does not control in any way the amount you can borrow UP TO THE TAXABLE point. in other words, when certain things happen (borrow too much, collapse the policy, surrender CV beyond basis) then it becomes a taxable event.

so, it is the insurance contract AKA policy that determines how much you can borrow. remember that borrowing will lessen the guaranteed numbers primarily in death benefit. that said, you can borrow up to the amounts indicated in the policy. if you put back the 10K you borrowed, then the money is there again to be borrowed against later. if you TAKE cash value as opposed to loans, then you run into mathmatical equations that effect the policy when you put the money back into the policy. if you have a strong company for your insurance, and you are only putting back in what you took out, you should be fine.

bdunkalooko - two other quick points ...

1. i agree that The Visible Policy is probably the most thorough and insightful analysis of a life insurance policy done outside the catecombs beneath some heap big insurance company's actuarial offices. it is a must read for anyone who is both considering permanant life insurance AND desires to be fully informed about the internal machinations of policy operation.

2. another consideration i would suggest to you is look at the inclusion of this policy into your overall retirement plan. if you are doing what you are allowed with Roths, matched 401k or similar variants, this may be an interesting option to supplement your retirement savings.

using your numbers from above, you may need as much as 300K in other retirement savings to equal the cash available in your policy at year 15. remember, taxes are LIKELY to rise in the future so the other investments may need to be 500K to equal the tax equivalent of 200K you take in a loan. i can only assume the numbers get considerably better the more time you allow it to percolate.

also, i appreciate the effort it took to punch in numbers and get all the columns to align for easy reading ... but i wont be doing that on this next comment.

i just started a whole life policy on my 11 year old son. yearly premiums are at 12K per year. i will stop funding this policy after 10 years. it will then pay for his college (50K). it will provide him a downpayment on his home when he is 28 for 150K. when he turns 60 it will provide him with 75K a year for 20 years to supplement his retirement. all of this and he will still have almost 2 million in death benefit that is permanently paid up when he dies (net of loan repayment).

so, granted i paid $120K but while he gets back almost $2 million in cash (taxable equivalent with today's taxes of $3 million - much more if income taxes raise) and he still has 2 million in life insurance that he can never possibly outlive so his family is secure. personally, i think that rocks!

The truth is that I'll probably have to maximally overfund the policy for several more than 7 years before dividends cover base premiums and PUAs.By tax code, it is impossible to pay up a life policy in less than 7 full years without adverse tax treatment. If you do, it is tagged as a MEC and treated as an investment by the IRS. This is known as the 7-pay rule and is universal for all life policies.

Let me start by saying I'm not one of these BTIR folks. I'm just curious why you chose WL over something that is purely an investment. Would you say your strategy gives up a little on the ROI side so that your son has a permanent death benefit?

And FYI, I have a Roth IRA that I max out and a Roth 401k that I max out and I still have money left to put into this WL policy.

I plan on using this policy exactly as the sales pitch describes - to buy cars, finance a child's wedding, big home improvements - stuff I'd either have to pay for with credit, a HELOC or a money in an online savings account. I don't believe in credit or HELOC's. The online savings account is the only other option that really agrees with me. And that's what I've got with my WL policy; I just have to give up a little time and money on the front end to let the thing percolate as you say.

By tax code, it is impossible to pay up a life policy in less than 7 full years without adverse tax treatment. If you do, it is tagged as a MEC and treated as an investment by the IRS. This is known as the 7-pay rule and is universal for all life policies.

My agent has told me that after about year 5, my policy will be self-supporting if I choose to sell back PUA's to pay the premiums. Does this sound like I'm running afoul of the 7-pay rule since my out of pocket could be zero before 7 years is up?

bdunklau, that illustration looks better than any I've seen. Maybe I should 1035 over there. Any more info would be helpful. If it works like that, could be more interesting.

bee-bop-a-dunko,

yes, i am giving up some ROI as i dont need greater ROI than what i am getting in order to accomplish these stated goals. as price so eloquently stated earlier (in this or another thread), life insurance should not be compared to an "investment" (though in certain cases it may operate as such (VUL for SLIRP).

but in comparing "safe money" options, i get all of what i stated AND i have ensured my son with a SUBSTANTIAL amount of permanent protection no matter what life brings. all of this at 11 year old rates!!! as is commonly understood by most, i am in the business ... so you can believe i have "drank the koolaid" or "i practice what i preach" or "i might actually know a little bit about what i am doing" or "i am lying my ass off so someone i dont know will go buy some insurance from some agent i dont know who represents some company i dont know." its all in the eye of the beholder.

By tax code, it is impossible to pay up a life policy in less than 7 full years without adverse tax treatment. If you do, it is tagged as a MEC and treated as an investment by the IRS. This is known as the 7-pay rule and is universal for all life policies.

Right, all I meant was that I now understand that policy loan interest always goes to the company, and doesn't pay PUAs. "Interest pays premiums" was a big misunderstanding that made all this seem sweeter than it really is, because if it were true you'd literally be able to exchange all your debt to banks for premium-paying on your policy.

It would have been nice for Nash to be a little more clear about the mechanics of these policies in his book. To his credit he does emphasize that you should pay more interest than is required (ie, by upping the PUAs and pretending it is extra interest) but I thought this was only him being super gung ho on the idea. I didn't understand that upping PUAs is the only possible way to "recover" any of the "interest" you pay on loans.

bdunklau, that illustration looks better than any I've seen. Maybe I should 1035 over there. Any more info would be helpful. If it works like that, could be more interesting.

Frankly, I think it will work better than that. I may be overly optimistic but I believe my illustrations will continue to revise upward year after year and that at the end of each year, the actuals will still beat the optimistic projections made at the beginning of the year.

I say this for 2 reasons. 1) I tend to believe what Rich Franzen says regarding life ins companies low-balling their projections and 2) My ins co has the highest possible rating from AM Best, the 2nd highest from Fitch and S&P, and a 98/100 Comdex score.

Still, I'm left with a little bit of an uneasy feeling and here's why...

After year 1, CV was almost $10K and my basis was $12K - a difference of $2K+

After year 2, CV is almost $17K and basis is almost $24K - a difference of $7K. Hmmmmmmm. I've got 2 curves that got farther apart in the second year.

So I try to put myself at ease by looking farther down the road. On day one, the CV was projected to catch up to basis after 11 years. (All these numbers are based on the non-guar assumptions.) On the first anniv, the revised illustration projected CV to catch up to basis after 10 years. On the 2nd anniv, it's down to 9 years. I wonder what my revised illustration will project next Sept after 3 full years and the Sept after that.

And while the numbers I posted assume that I pay $11,715/yr for all those years, I have an illustration at home that assumes I stop after year 5 and sell back PUA's to pay premiums. Obviously I don't have the same CV every step of the way but even when I choose the self-supporting option, the time it takes for CV to catch up to my out of pocket doesn't change.

A lot of people are worried this is some sort of scam and that its just a way to get people to buy insurance. I understand exactly where they are coming from, but the great thing about Infinite Banking is that it has to be understood in order to get into it.

Infinite Banking isn't a product, but a process. Its a way to set yourself up as your own bank and fund your own purchases. The magic lies in the concept, not the tool (policy). The reason that we use a whole life policy is because of its so many advantages...tax advantages, liquidity, growth even as it is loaned out. It really has "infinite" advantages. If it worked better in some other vehicle it would be used. The people who teach about it and are the people who are using it. If there were something better they would be doing it. Life insurance just happens have a bad rep because so many have been taken advantage of. The traditional life insurance policy in which you are paying premiums only is really not a very effective tool, but overfunding and maximizing that policy is. I would advise to learn about it and make an educated decision, you can't be "sold" the concept. You have to understand the concept then realize the best vehicle to make it work is the life insurance policy created to the advantage of the policy holder, not the agent.

___________________________________________________________________________________________
jacobtho http://www.becomingyourownbank.com

Reading the standard pitch about Infinite Banking always reminds me of the old adage: "Reality is a tough sell". The reality of IB is that it does work but the way it works is not as appealing as the pitch. Hence the pitch.

The pitch says that IB is superior to financing and superior to save up/pay cash. The reality is: IB is basically save up/pay cash. The IB-ers just call the first round of saving up the "capitalization phase" and each subsequent period of saving up is characterized as paying back what you just bought.

The pitch says "You'll recover the entire purchase price of items you buy plus the interest you would have paid." Baloney. Say your premiums are $1000/month. You pay till the policy is self-sustaining at which point you go buy a car. To make the math simple, say you decide your payments back to yourself will be $1000/month. Once the car is paid off, you buy another car or something - again your repayment schedule is $1000/month. Hmmmm - looks like your always putting away $1000/month. The only way you can say you're recapturing the purchase price is if you ignore the initial "saving up" period. Well heck, sure, if you want to ignore a 5-figure piece of the puzzle, you could probably come up with any conclusion that you want.

Actually, the people selling IB ignore another valuable piece of the puzzle - the life insurance policy itself. And in doing so completely ignore the tremendous fees/costs you will incur in the first years of your policy. My own agent never said anything to the effect of "You do realize you're buying a life insurance policy right?" All he talked about was cash value growth.

The reality is, you're not recapturing the purchase price of whatever you buy, you're merely re-funding the piggy bank for your next big purchase.

The reality is, you can't ignore the value of the life insurance policy because you don't get something for nothing. Otherwise it wouldn't take 7-10 years for cash value to catch up to basis.

The reality is, IB is a different way of saving up and paying cash for things - it's not some new unheard of 3rd financing alternative.

If the IB-ers were to pitch this strategy using reality, they'd get a lot of people tuning them out as soon as the heard the word life insurance or conservative investment. It's so much more intriguing to pitch this as some never-before-heard-of alternative that "the banks don't want you to know about".

Finally, for the 2 other people out there who are actually doing this :) I'll tell you the strategy I intend to apply going forward: The IB-ers say I should charge myself some exorbitant interest rate. After all it's just coming back to me a future date. And while that's true, you have to remember, the cash value is similar to a bond portfolio - safe but with low growth. Don't "charge yourself" too much interest because all you're doing there is overallocating to the conservative part of your portfolio.

I really don't like the term "Infinite Banking". The term is misleading. If it was really my "bank", I'd only need to meet the Federal Reserve's reserve requirement for any loan I make to myself. I'd love to be able to loan myself $10,000 while only having $1,000 in actual cash.

While insurance policies have many benefits, I don't really see the benefit of borrowing against the cash value, unless that's the cheapest loan I can get. Am I misunderstanding how this works?

Lets say I have a WL policy with a $50k cash value that earns ~7% and I can borrow $5,000 from the insurance company at 7%. Let's say a different lender offers me a $5,000 loan at 5.5%. Wouldn't I be better off accepting that 5.5% loan rather than the insurance company loan at 7%? Or is there some other benefit to borrowing from the insurance company that I'm missing?

The interest you pay to the bank is not recaptured. The interest you pay back to your policy is recaptured as if you never took the money out in the first place and it continued to grow.

For example, you borrow $10000 @ 5%. For simplicity, you owe the bank $10500 at the end of the year. You had the use of $10000 for the price of interest ($500).

With a policy loan under the same scenario, you would also owe your policy $10500, but the $500 would be added to the cash values in your policy, not in the pockets of the bank. So, you placed the cost of the loan (interest) back into your own pocket. You now have $10500.

Are not many factors being left out when comparing IB to CDs and car loans?
Especially if the term ins. is needed in the big picture.

CDs gains will be taxed. Car loans usually have more costs than just the % rate. If you run spread sheets taking all these and lost opportunity costs into account, WL compares pretty well for safe planning, while providing needed ins. on top and providing protection from law suits.

VL and others have annually renewable term in them, but WL has cheaper perm term costs. Right?

So, if you have $10,000 CV and you're earning 5%, you'd have $10,500, not including loan interest. Are you saying that with the loan interest, I'd get an extra $500?

Example:
$10,000 CV 5%
$10,000 loan 5%

$10,500 CV after 1 year, based on just returns (not including the loan interest)
$11,000 CV after 1 year, when paid interest is applied to your account

Is that what you're saying? Because that's a really good deal...

So, if you have $10,000 CV and you're earning 5%, you'd have $10,500, not including loan interest. Are you saying that with the loan interest, I'd get an extra $500?

Example:
$10,000 CV 5%
$10,000 loan 5%

$10,500 CV after 1 year, based on just returns (not including the loan interest)
$11,000 CV after 1 year, when paid interest is applied to your account

Is that what you're saying? Because that's a really good deal...Not exactly. You don't make any money on the deal, you just don't lose it. There is little/no opportunity cost. It's like a 0-1% loan. If you used your own $10000 from a cash account, you would lose the interest generated for the year if you left it in an account earning 5% ($500).

When you take a policy loan, think of your cash value as collateral. It is still intact and earning interest while the money you borrowed comes from the insurance company from a seperate account. You are not actually withdrawing your interest-earning money.

Your original $10000 of cash will generate $500 of interest for the year, while the loan will accrue $500 of interest. When you pay it off, the cash value from the policy is released from collateral having earned $500, while you have paid the insurance compnay $500 in interest for the use of their money.

Your cash value will still be $10500 after you loan is paid back. All the while, you are paying the loan back at your convenience without a scheduled payment and no penalties should you forgo payment. This continues as long as the policy is in force.

Not exactly. You don't make any money on the deal, you just don't lose it. There is little/no opportunity cost. It's like a 0-1% loan. If you used your own $10000 from a cash account, you would lose the interest generated for the year if you left it in an account earning 5% ($500).

When you take a policy loan, think of your cash value as collateral. It is still intact and earning interest while the money you borrowed comes from the insurance company from a seperate account. You are not actually withdrawing your interest-earning money.

Your original $10000 of cash will generate $500 of interest for the year, while the loan will accrue $500 of interest. When you pay it off, the cash value from the policy is released from collateral having earned $500, while you have paid the insurance compnay $500 in interest for the use of their money.

Your cash value will still be $10500 after you loan is paid back. All the while, you are paying the loan back at your convenience without a scheduled payment and no penalties should you forgo payment. This continues as long as the policy is in force.
There must be something I'm just not 'getting'. What's the difference between getting a loan with a bank and a borrowing against your policy, then (assuming you have a policy in both cases)? It sounds like the only real advantage is convenience, not necessarily numbers. If I have a policy with a CV of $10,000 earning 5%, I'm going to have $10,500 after one year, regardless of the lender. It sounds like if I'm able to get better terms with another lender, rather than the insurance company, I'd be better off going with the other lender. Yes, I know there are other costs, like loan origination, closing costs, etc. I'm ignoring those for now. I just want to know, straight up, if the loans were equal in every respect (rate, origination fees, closing costs, etc), there would be no advantage to taking a loan from the insurance company. Is this correct?

This sounds like fancy wording to make it sound like you're getting a benefit, and I'm just not seeing the benefit in the numbers.

There must be something I'm just not 'getting'. What's the difference between getting a loan with a bank and a borrowing against your policy, then (assuming you have a policy in both cases)? It sounds like the only real advantage is convenience, not necessarily numbers...
It's not magic, nor an awesome best-kept secret that no one knows about. It is a cheap, cheap loan source. And you are correct to assume that there is no advantage number-wise to borrowing from your policy if you can get the funds from a bank for less.

The issue is that the bank will never lend you the money under the same terms for 5%.

With that said, the finance costs for a self-financed policy loan will almost always be less than any bank will offer for items other than installment loans for autos, etc. Ask your bank what rate they will charge for a $10,000 loan; but they can't/won't check your credit, you won't tell them what you are using it for and you want to pay it back "whenever" you feel like it (or never) deferring interest and payments without penalties. I'm sure it would be a bit higher than 5%.

...just want to know, straight up, if the loans were equal in every respect (rate, origination fees, closing costs, etc), there would be no advantage to taking a loan from the insurance company. Is this correct?
You are 100% correct. Keep in mind, I am trying to explain the process objectively. I didn't invent infinite banking and I don't explain policies this way to clients. I just tell them they can borrow money at favorable rates and pay it back at their convenience (or never). As far as I am concerned, that IS "Infinite Banking" in a nutshell.

What's the difference between getting a loan with a bank and a borrowing against your policy, then (assuming you have a policy in both cases)?
I think this assumption may negate your own comparisons. I mean the point of infinite banking is that you should have a policy, yes?

My take on cash values being held in a policy is that it should be earmarked for the household "emergency fund". If you are keeping 3-6 months of expenses in a low/no interest account ($15-$20k), you would be better off transferring it into a policy that earns a higher guaranteed rate while remaining liquid and leveraging your emergency savings with hundreds of thousands of death benefit. The opportunity costs of keeping such an emergency fund (which we can all agree is wise) in a savings/checking account are very high over the course of 20-30 years.

I think this is more of an advantage in a long-term financial plan than "Infinite Banking".

I think this assumption may negate your own comparisons. I mean the point of infinite banking is that you should have a policy, yes?
Before hearing about infinite banking, I never even considered a WL policy in my financial plan. I'm not completely sold on the infinite banking concept (I still think there's quite a bit of hype), but I can see situations where it would be useful. However, I am impressed with the legal and tax advantages WL policies can offer. It's something that I'm going to be adding to my plan. Whether or not I actually use the CV for infinite banking is uncertain. I have a very good credit history, so I can get loans pretty easily and cheaply.

I don't like the way the infinite banking sales pitch says that mortgage equity is essentially "dead money". Yeah, you're not making interest on the money, but you're also not paying interest on it (yes, I know that interest is often tax deductible, but not always, like with investment properties). The only way you come out ahead is if you can get a lower rate from you insurance company than you can from your mortgage lender (closing costs and other fees aside). Keep in mind that my questions were more theoretical, rather than practical. It may be that you can easily get better terms borrowing against your CV than you can from a mortgage lender. I try to understand the theory behind a concept first, then I worry about specific instances where it can be applied. It remains to be seen whether or not I can get better terms by borrowing against the CV of a WL policy. I suppose my next step is to start delving into some details by speaking to some insurance agents.

Thanks for your help. I'll probably be coming back to this thread as I come up with more questions.

My take on cash values being held in a policy is that it should be earmarked for the household "emergency fund". If you are keeping 3-6 months of expenses in a low/no interest account ($15-$20k), you would be better off transferring it into a policy that earns a higher guaranteed rate while remaining liquid and leveraging your emergency savings with hundreds of thousands of death benefit. The opportunity costs of keeping such an emergency fund (which we can all agree is wise) in a savings/checking account are very high over the course of 20-30 years.

I think this is more of an advantage in a long-term financial plan than "Infinite Banking".
This is something I can definitely agree with. Most of my concerns were regarding the infinite banking sales pitch. Whenever I hear stuff like that, I'm extremely skeptical. There's no such thing as a free lunch.

This is something I can definitely agree with. Most of my concerns were regarding the infinite banking sales pitch. Whenever I hear stuff like that, I'm extremely skeptical. There's no such thing as a free lunch.You are very wise Lateralus. Although a source of a low-cost funds is important to recognize and a nice resource to have in your overall portfolio, "Infinite Banking" to me is a sales spin...and nothing more. The concept of using your cash values has been in existence for a hundred years. It's just that someone decided to wrap it up in package and name it something catchy.

It's more important to view something with skepticism and FULL understanding than to believe blindly that there is in fact a "free lunch".

Here is an example we sometimes use to illustrate some different options. We also have a video on permanent life insurance (http://www.becomingyourownbank.com/permanentlifeinsurance.html) if there is any interest.

The example is buying a car every 4 years for the next 44 years. 11 total purchases.

Purchase price $15,000

Finance cost is 8%

If you finance the car you will lose $193,000

We just assume leasing is worse- losing more than you would in financing.

Paying cash requires saving just like the Infinite Banking Concept, but you will still be out $165,000.

The other 2 options are putting your money into an interest earning savings account, and a permanent life insurance policy. We estimate the total increase after 44 years in your interest earning savings account to be about 194,000. This puts the interest that you would have paid out to a financial institution back in your pocket.

Because of the way life insurance is structured there are multiple benefits that will enhance the same system used above in the savings account. Tax deferred growth and dividends are 2 of the main advantages. We estimate the growth in the cash values at the end of this period to be about $700,000. The difference comes from tax savings and dividends. Dividends at the bank go to the stock holders whereas dividends at the insurance company go to the policy holders. Over time it can make a substantial impact.

Jake
http://www.becomingyourownbank.com

Believe me Jacob, I get it.

But it's only a cheap and flexible loan alternative. Nothing more and nothing magic.

You have to fund the interest cost back into your policy yourself. It doesn't just appear out of nowhere. To free up your growing money and the interest gained, you have to pay the principal and interest due on the loan.

Your auto example is not really a good one, because you can typically finance an auto for less than the NET interest rate on a policy loan, many times you can purchase an auto for 0% financing.

Infinite banking is nothing new, and it's not that complicated. It equates simply to a very flexible low/zero interest loan.

You may also want to show your calculations to show how you can up with figures such as "ruffly $180,000". Especially if you are going to include to your website. It's Kiplinger's here, not the kitchen table.

Believe me Jacob, I get it.

But it's only a cheap and flexible loan alternative. Nothing more and nothing magic.

You have to fund the interest cost back into your policy yourself. It doesn't just appear out of nowhere. To free up your growing money and the interest gained, you have to pay the principal and interest due on the loan.

Your auto example is not really a good one, because you can typically finance an auto for less than the NET interest rate on a policy loan, many times you can purchase an auto for 0% financing.
This is one situation that I had in mind when I was considering situations where I could get a loan with better terms from another lender. If you have excellent credit, auto dealers will sometimes have 0% financing available (GM has that going on right now (http://www.autoobserver.com/2008/06/gm-launches-0-financing-for-72-months-cuts-more-production.html)). Sometimes, you have rates like 2.9% available. Insurers cannot compete with rates that low.

I have the feeling that infinite banking propagandists would call that -5% financing (or whatever the rate may be), if you could get that kind of loan from your insurer. Their phrasing of terms just seems misleading to me.

You may also want to show your calculations to show how you can up with figures such as "ruffly $180,000". Especially if you are going to include to your website. It's Kiplinger's here, not the kitchen table.
I would also like to see the actual calculations. I have the feeling that they're not comparing apples to apples when they come up with those numbers.

My personal opinion is that 0% financing is not technically 0%. I believe the finance cost is built in and that they would take less if you paid cash, but that's just my opinion. But one of the main advantages that life insurance gives me is the ability to take out all of my cash value, loan it to myself, and still receive dividends. Even though the cash values are gone my policy still grows due to those dividends. (http://www.becomingyourownbank.com) I'm essentially able to leverage my money.

The 180,000 was actually just a rounded off number for ease. But lets say its even double that! Infinite banking still takes the cake. You see, you're missing the whole point of infinite banking. Even if you can get 0% financing for your whole existence you are still out what you would have been out paying cash. You're still negative. We are talking about recapturing the full purchase price plus interest.
This statement does not make sense. It sounds like nothing but propaganda. It seems to me that you're operating under the assumption that if you don't use infinite banking, you don't invest at all. I believe this to be a flawed premise. I want to see you (or any other infinite banking advocate) use the scientific method to prove your case. I'd like to see you compare the numbers, taking loans from various lenders (insurers/dealers/etc), using the same initial conditions. I'd like to see a comparison between loans with the borrower having a WL policy (with a significant CV) in each case. I want to see you prove that the ability to borrow against your CV is as significant a benefit as you make it out to be. In order to do this, you must ignore the returns you get on your policy. You have to prove that the ability to borrow, alone, is a strong benefit.

If you don't understand my reasons for requesting this information, I would suggest you think about my requests thoroughly.

The concept may not be for everyone, but its something worth exploring if you ask me. I would recommend the book, "Becoming Your Own Banker," by Nelson Nash. This at least lays it out clearly and gives good insight. I just think a lot of people hear "whole life insurance" and automatically discount it for what it may be worth.

Jake

Jeepers, where to start?

...you're missing the whole point of infinite banking. Even if you can get 0% financing for your whole existence you are still out what you would have been out paying cash.
This statement is not true, because just like a life policy, your money would still be earning interest in your bank account because you are using someone else's money for the purchase itself. Using simple interest (for simplicity's sake). Your $10,000 in cash held in bank account or CD can continue to earn 5% (just like a policy does) over the course of your 0% loan and you will still be $2500 ahead ($500 x 5 years).

When using life insurance I can take out all of my cash value and loan it to myself. Even though the cash values are not there technically, I will still get a return on that money
The same is true of a 0% loan from any provider. You are using someone else's cash while yours accrues interest.

...because my return comes to me in the form of dividends, and thats not based on cash value but death benefit, so I am essentially getting a double return on my money.
I think you may mean Paid Up Additons, which carry about 2:1 or 3:1 ratio as a death benefit increase. This goes to your beneficiaries, not you. Any outstanding loans + interest are subtracted from your death benefit as repayment of the loan. This may be good for your heirs and estate planning, but this has nothing to do with banking or interest rates because the same is true whether you borrow from the policy or from a bank. The number in question and the conversation is pertaining to CASH and sources of it.

This is why we say that they are our own personal banks, because we are the depositors, meaning we get the growth, and we are the stockholders, meaning we get the dividends. The growth is exponential.
You also pay back interest. The growth is not any more exponential than the accruing interest on the loan, because the growth and dividends are offset by the interest you pay. You get to keep the cash value and growth only after you pay back the loan with interest. Of course, the death benefit will continue increase faster than the net interest paid, but again this is irrellevent to the conversation because you are tiptoeing around why Infinite Banking is a benefit while living when in fact, you could ahieve the same results by leaving your cash value alone and borrowing elsewhere.

I hope you guys might actually take the time to consider and learn about this because it will change your financial future. Fortunately I have taken the time to learn about it, and understand, and I will be forever grateful I did. I use it, and it will do me well.
I'm not ignorant of the benefits of whole life...I own it and fully understand it. In fact, I know it inside and out. I also know the concept of Infinite Banking inside and out. I just want to call it what it is...a source of flexible, low interest money. It doesn't create wealth for you in the present. Any whole life insurance policy can potentially create wealth for your heirs whether you borrow from it or not. The only thing new that Infinite Banking offers is a catchy name for borrowing from your life insurance policy. This has been going for about 150 years. It used to be called a "policy loan".

Those who fail to learn about money and wealth will continue to fail to realize how to create it. I wouldn't always be so closed minded.
Thankfully, I have dedicated my life to learning and knowing about money and wealth and have a very successful consulting business because of it. I'm not closed minded either, I just believe in complete disclosure and transparency especially when presenting concepts to the general public and your typical layman.

Good Luck.
Thank you!

Since you are your own banker, then you obviously know that commercial banks will always seek out the lowest interest rate available to them when borrowing money, while leaving their own cash liquid (even though they could also loan the cash to themselves). As a personal bank, wouldn't it be wise for an individual to do the same?

If you borrow money from a bank at 3% and a policy loan costs 5%, which is the better deal? Your cash values (and death benefit) continue to grow either way.

This statement is not true, because just like a life policy, your money would still be earning interest in your bank account because you are using someone else's money for the purchase itself. Using simple interest (for simplicity's sake). Your $10,000 in cash held in bank account or CD can continue to earn 5% (just like a policy does) over the course of your 0% loan and you will still be $2500 ahead ($500 x 5 years).


Again, I simply believe that the zero percent loan is not technically zero percent. But I understand what you are saying here.


Thankfully, I have dedicated my life to learning and knowing about money and wealth and have a very successful consulting business because of it. I'm not closed minded either, I just believe in complete disclosure and transparency especially when presenting concepts to the general public and your typical layman.


I agree completely about making it clear and making sure clients understand all aspects. I have to disagree, however, that you understand the concept inside and out because if you did you would understand that the concept of becoming your own banker isn't all about life insurance. Its about banking and making money flow back to you. We use life insurance simply because it seems to be the best vehicle for the banking system.


Jake
http://www.becomingyourownbank.com

Isn't it easier to just come right out and say that whole life is a flexible and valuable addition to your overall portfolio instead of wrapping it up in Infinite Banking and trying to make it more grandiose than what many have known for decades?

You wrote: "If you are borrowing from your interest account than you are not earning interest on what you are using. I am not talking about financing and investing the difference in this scenario."

My response: I wasn't talking about using your own money from your interest account. I talking about borrowing someone else's money for zero interest or at a rate lower than you are borrowing AGAINST you policy cash value. My account (cash), no matter where it's loacted is still liquid AND earning interest.

I am also not talking about financing and investing the difference, nor am I talking about term & invest vs. whole life. I am talking about the COST of using ANY pot of money, usually expressed in interest rates. If it is taken from an interest bearing account, it is expressed in opportunity cost. Cost is cost is cost!

I also know that you can use the money for tax-free retirement. I guess what I'm saying here is that Infinite Banking is not news, a breakthorugh, a godsend, nor a new concept that is just to complicated to appreciate.

The PUAs are irrelevent for banking purposes, as they do not add wealth to your household while living. This is purely a life insurance advantage.

Infinite Banking is just another way of saying "Whole life can be a good thing to own."

But have to disagree that you understand the concept inside and out because if you did you would understand that the concept of becoming your own banker isn't all about life insurance. Its about banking and making money flow back to you.I do fully understand. Before you can make the money "flow back to you", you must first collateralize your interest bearing account (cash values). In short, it first flows AWAY from you. In order to have your cash values "flow back to you" you must pay the loan and any interest due. Sooo, the money flows away from you (as collateral) and then after you pay up it "flows back to you." Meanwhile, your cash values are illiquid until you do pay up.

Now if I had taken a loan at 0% to 5% from a bank and left the cash values of my policy intact, it would continue to earn interest and dividends AND STILL BE LIQUID (yours is collateral) while I used someone else's money. The COST associated with the use of the money is the SAME, but I have the added security of liquid cash in my policy!

I'm tellin' ya', I understand Infinite Banking...don't need to read the book. I will continue to call it the cash value policy loan feature of a whole life policy. Not as catchy, but just as good!

...any day of the week (as long as I stay employed ;) ).

How's everybody out there in Kiplinger land?

I started this thread because I bought one of these policies 3 years ago and it's taken me almost that long to get comfortable with what I have.

Unlike price, I'm a layman. So for all the other layman out there, I'm talking to you. There is quite a lot of hype around IB. If you can manage to cut through the hype (price's posts really help you do that), you'll see that there is a real benefit to IB. But sometimes, like I refer to in my title, there are actually better ways to finance things.

I have a 0% credit card that stays at 0% till Jan 2010. I have cash value in my policy that I could use to pay off this credit card right now. My policy loan rate is 6%. Should I pay off a 0% card by going to "my bank" and borrowing at 6%? The IB-ers will say sure, because you'll be recapturing that 6% interest.

Oh really?

When the life insurance co sends you bill for the interest, they don't tell you to make the check out to you; you make it out to them. So how exactly am I "recapturing" the interest? (I'm really starting to hate the word recapture.) Well, you recapture it because theoretically, your policy earns dividends that offset the interest you're paying. The dividend rate can be higher or lower than the loan rate. In my case the dividend rate is less than the loan rate, so it does actually cost me something to borrow "my money". If you want to talk about "recapturing interest", I would only be recapturing the amount equal to the dividend rate.

So as long as I've got 0% money available from Mastercard, it doesn't make any sense for me to take out a policy loan. And guess what? My agent even agrees with me!

You can add all sorts of what-ifs when comparing IB to traditional financing...

What if I lose my job...
What if I'm being sued...
What about the AMT...
What about the kitchen sink...

But first, you gotta start with the simple scenario and then go complex.

The simple scenario is: I owe $10,000 to Mastercard at 0% and that's the cheapest source of money available to me.

Excellent post bdunklau. Concise, easy to understand and accurate.

When the life insurance co sends you bill for the interest, they don't tell you to make the check out to you; you make it out to them. So how exactly am I "recapturing" the interest? (I'm really starting to hate the word recapture.) Well, you recapture it because theoretically, your policy earns dividends that offset the interest you're paying. The dividend rate can be higher or lower than the loan rate. In my case the dividend rate is less than the loan rate, so it does actually cost me something to borrow "my money". If you want to talk about "recapturing interest", I would only be recapturing the amount equal to the dividend rate.

Just to clarify this. The only reason you need to pay interest (http://www.becomingyourownbank.com) is because the life insurance company needs to show the growth they would have otherwise accumulated had they invested your money elsewhere. The life insurance company doesn't keep that money but it is credited back to you. This is why it is considered paying yourself the interest. A lot people actually make a withdrawal instead of loan, and the payments go directly to the policy.

Jake
http://www.becomingyourownbank.com

You can charge yourself 6% 8% 12%, whatever you want, but it all goes back to you (into your cash values). The life insurance company doesn't get that money. Its your money. So you are paying yourself the interest, plus you will still receive the dividends at the end of the year.The life insurance company DOES get the interest payments. It's just because you can leave your cash value intact that it continues to earn interest and dividends. IT IS COLLATERAL. If you don't pay back the interest out of your own pocket, the insurance company tags your cash values for the balance, including interest...and will eventually get it from you either out-of-pocket, or a subtraction from your death benefit.

Policy loans are also not always net zero either (as bdunklau stated). Many times there is a small spread as the interest + dividend rate falls below the interest rate on the loan. Some companies don't even pay dividends on borrowed (collateralized) cash values.

Charging yourself a higher rate of interest is the same exact thing as simply sending in more money out of your pocket. Again, it's certainly not magic. It's also not a wealth builder, it's a cash management strategy. The wealth is being built by you sending in more money...which would happen in any account.

Isn't the same thing if I have a savings account and every time I use cash to pay for something, I put the principal back AND the interest it would have earned?

The only reason you are needing to pay interest is because the life insurance policy needs to show the growth they would have otherwise accumulated had they invested your money elsewhere.
The reason you have to pay the interest is because that is what the insurance company is charging you for use of THEIR money. If you defer payments instead of paying it down it will compound, just like any other debt. If you try to withdraw your cash values, the company WILL subtract the full principal + accumulated interest. Unless you pay it back OUT OF YOUR OWN POCKET.

I agree there are different kinds of insurance companies, some that don't pay dividends. Thats why we use participating policies, and we will get those dividends.

This is sometimes why people actually withdraw the funds and loan it to themselves that way, instead of taking an actual loan, but the difference is minimal



Isn't the same thing if I have a savings account and every time I use cash to pay for something, I put the principal back AND the interest it would have earned?

As I mentioned earlier the tax advantages and the dividends are the main difference. You get them whether you use your policy values or not.

Jake
http://www.becomingyourownbank.com

Ok, let me show you some math:

Example 1: Using CASH for purchase. $10000 account earning 5%.

I take out the $10000 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 $10000 + $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%. Following? Ok.

-This transaction cost $500 out-of-pocket and I have $10500.

Example 2: Commercial loan. $10000 at 5% interest.

I take a 5% loan from a bank and leave my $10000 in the bank, still earning 5% interest. At the end of the year, I pay off the loan in full for $10000 + an additional out pocket $500. My bank acoount 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 have $10500.

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

I take a 5% loan from my policy and make my $10000 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 free up my collateral was 5%.

-This transaction cost $500 out-of-pocket and I have $10500.

Hmm...

You're missing a plus sign in Example 3 -- the loan cost you $10,000 PLUS.

You're exactly right, except one thing. With the insurance policy you still get dividends!

"-This transaction cost $500 out-of-pocket and I have $10500. "

PLUS DIVIDENDS- This adds additional capital to the policy which increases the dividends the next year. The more capital the more growth from year to year.

Jake
http://www.becomingyourownbank.com

Yes! You got it, except one thing. With the insurance policy you still get dividends!

Which is better, no dividends, or dividends?!!!!
Oh good grief. Don't you get the dividends no matter where you borrow? What exactly are we recapturing again?

Sorry, but something's just not clickin' in that noggin of yours.

You're missing a plus sign in Example 3 -- the loan cost you $10,000 PLUS.
Ah, but you misunderstand Puck. I was going to recapture that later! Don't you see???? It's amazing.

"Recapturing" sounds like work. Can't you just hold on to it in the first place, and not let it go and have to go to the trouble of recapturing it? Anyone who has ever had to catch a runaway dog or thoroughbred knows it's just better to keep them fenced in the first place, than to have to go around recapturing them.

Oh good grief. Don't you get the dividends no matter where you borrow? What exactly are we recapturing again?

Sorry, but something's just not clickin' in that noggin of yours.

I guess I don't understand what example you are trying to refer to. I understood we were looking at alternatives, one or the other. Looking at alternatives I would use the policy because the more I contribute the larger my growth and dividends will be. Over time it can have a strong effect. Using the money and paying it back increases the capital, and that increases my growth from year to year.

I understood your alternative of leaving your cash values alone when getting 0% financing, using someone else's money is a great alternative, but the benefit would be that you would be able to put more money into the policy by being charged and interest rate, and then cash value goes up, and death benefit and dividends. I am looking for every way to put money into the policy in order to build it. Over time it just gets better and better the more I use it.

Jake
http://www.becomingyourownbank.com

the benefit would be that you would be able to put more money into the policy by being charged and interest rate, and then cash value goes up, and death benefit and dividends.
You know, I almost didn't have the energy to write this. The interest you pay is not added to your cash values, nor does it have an effect on the death benefit or dividends. It's gone...poof. The insurance company has it. It has "flowed away" from you.

Do you even understand how a whole life policy works?

Do you even understand how a whole life policy works?

(methinks not)

Let me try. Hopefully I won't totally repeat your example.

My policy earns a 5% dividend. I have $10,000 in it. 1 year from now, I'll have $10,500 regardless of whether I took out a policy loan or not. because I have one of these magical, never-before-heard-of (but been around 150 years) life ins policies that pays dividends even on collateralized cash values.

I take out a 6% loan for $10,000. I pay it back over the next year. On the anniversary date of my policy, life ins co sends me a bill for $600 - check payable to life ins co. Over that 12 month period, my checking account will show debits totalling $10,600. But my cash value is only $10,500.

Where did the other $100 go?...

To quote myself,
check payable to life ins co.

I didn't recapture all of the interest I paid now, did I?

I am looking for every way to put money into the policy in order to build it. Over time it just gets better and better the more I use it.


That's the way I used to think. But realize, that what you're doing is overallocating to the conservative side of your portfolio. Depending on your age, you might not want to do that. 50% stocks and 50% bonds definitely doesn't make sense for me. But that's effectively what I was headed for using your philosophy.

I agree with the 0% being an alternative, because you aren't losing opportunity cost, or finance cost. It can be a great alternative, some prefer it one way and others another. I would still make "interest" payments to myself however.

You don't make interest payments to yourself; you make the check out to the life ins co.

Care to reply with something about dividends?

Jacobtho,

I know it sounds like I'm beating you up, but it's because you're arguing using hype. The car example... using the word "recapture"... that's right out of the promotional material used to sell this plan.

The reason I started this thread in the first place was to really understand how the "car example" works and what "recapturing" means.

You can charge yourself 6% 8% 12%, whatever you want

Well, you can't charge yourself less than the loan rate.

And as I understand it, you can't charge yourself more than the loan rate until after 7 years.

Any head nods out there?

Okay, I feel I should just start from the beginning here.

I was under the impression that you all understood the concept.

Solve your problem of "interest":

The concept is becoming your own banker. (http://www.becomingyourownbank.com) You are the banker, you make the stipulations and you charge the interest.

The insurance company charges what they need to distribute back out in interest. They don't care who borrows the money, they just need the growth, so it all goes back to you anyways. Its a wash. You will pay 5% and they need 5%, then it comes right back to you.

But lets say that doesn't happen, and sometimes it doesn't. You pay 6%, and you only get back 5%. You make it all up on the DIVIDEND. I get the impression that this is not a factor to you, but its a huge factor. Its what makes this thing grow exponentially.

The recapturing happens over a period of time. As you use your policy and make payments to yourself your policy increases its values and the dividends and tax advantages kick in.

As for going out and investing, I would rather finance my own purchases, then any money not used in financing can be used to invest. Its safer to finance my own purchases, and the returns are what I pay myself. It doesn't really make sense for me to pay finance cost for debt, cars, etc, and go out and invest my money elsewhere. I have all the investments I need right under me. Then If those are eliminated I can invest elsewhere. If I invest elsewhere I will borrow from myself and pay it back. This will also give me additional tax write-offs because I am paying myself interest on money used for investment purposes.

Everything I run through my bank becomes better, even my investments.

Jake
http://www.becomingyourownbank.com

Ugh, just...can't...go...on...

If I just read your book, sign an application and give you a check will you please stop?

I told you 104 posts ago it wasn't all it was cracked up to be. :p

You pay 6%, and you only get back 4%. You make it all up on the DIVIDEND.

The 4% is the dividend, otherwise, what is it?

He's obviously speaking of the Infinite Banking dividend! It comes back to you and keeps getting better and will change your life and make you wealthy. It's the thing you recapture...and it's amazing!:rolleyes:

The 4% is the dividend, otherwise, what is it?

I'm dying for an answer to this question

My suggestion is for you all to get the book and read it.

I have the book. I've read it.

The title of my post is the title on p.68 There's some interesting math on that page.

The author describes a scenario where a $100,000 policy loan is taken out at 8%. Presumably, this is a wash loan. The $100K is invested at 20%. An after tax return is calculated to be $8,400.

Then the author says that because this investment was financed using the IB method, we can add the $8,000 in interest to the effective yield because that money came back to us.

Well where did that $8,000 come from in the first place?

From my J O B.

I have to work to pay that interest. The $8,400 I earned through the investment is from somebody else working.

Makes a difference who's doing the work.

The $100K is invested at 20%. An after tax return is calculated to be $8,400.
And what would the amazing result be if the investment went south and was -20%? Ouch!

The book doesn't cover that scenario ;)

The 4% is the dividend, otherwise, what is it?

It is interest growth.

Its like putting your money into an interest account at the bank, and instead of the dividends going out to the stock holders they go to you. It would be pretty nice right? Thats effectively whats happening. You are the owner meaning you get the interest and the dividend.

Jake
http://www.becomingyourownbank.com

I have the book. I've read it.

The title of my post is the title on p.68 There's some interesting math on that page.

The author describes a scenario where a $100,000 policy loan is taken out at 8%. Presumably, this is a wash loan. The $100K is invested at 20%. An after tax return is calculated to be $8,400.

Then the author says that because this investment was financed using the IB method, we can add the $8,000 in interest to the effective yield because that money came back to us.

Well where did that $8,000 come from in the first place?

From my J O B.

I have to work to pay that interest. The $8,400 I earned through the investment is from somebody else working.

Makes a difference who's doing the work.

This just showing you that it makes it better because you get an additional tax write off, thats why you effectively earn more because you don't lose on taxes. Your interest on the policy loan is deductible. It has nothing to do with the investment itself.

Ugh, just...can't...go...on...

If I just read your book, sign an application and give you a check will you please stop?


It was an offer to help you be more educated when speaking about the concept. If I were you, I would be learning all I can about all different forms of investments and strategies to be able to bring the best of them to your clients. It works for me.

Thanks for all the discussion, but I would love to answer questions about the concept, not argue it.

Good Luck everyone.

The 4% is the dividend, otherwise, what is it?


It is interest.

... You are the owner meaning you get the interest and the dividend.


So my policy earns interest and dividends?

Care to wager on that?

Are you perhaps talking about the option to withdraw cash from my policy? (which, to all you layman out there, is not the same as taking out a policy loan.)

If you are talking about withdrawing cash, then the "interest" I pay myself comes in the form of re-purchased PUA's if I understand correctly. And while that "interest" does go back into my policy, I will not be earning dividends on cash that has been taken out of the policy.

So you either earn "interest" or you earn dividends, but not both. This is my biggest problem with the IB pitch - that you can have your cake and eat it too.

Jake,

Is the 4% you're referring to the contractually guaranteed growth rate of the policy? If so, I guess you could call this interest.

But when your basis is way above CV (as it is in the early years), is "interest" really the best word to characterize the growth?

My policy is almost 3 years old now. My basis is around $35K. My CV is around $25K. I don't feel like I've earned much interest yet.

Wow, I wonder of the guy is just a troll. He just doesn't quit with the sales pitches. He never speaks plainly, it's all lines from a sales brochure. I wonder if he's so emotionally invested in the concept that he doesn't want to admit to himself that he might have been duped (not that IB is a bad concept).

Definitely not a bad concept. And I never would have bought life insurance if I hadn't fallen for the pitch. But the pitch does border on dishonest.

And that book "Becoming Your Own Banker" by Nelson Nash also likes to play with the truth. He repeatedly compares setting up one of these policies to setting up a business. One example he sites is where you own a grocery store. "Are you going to pay full price like everyone else or are you going to take merchandise out the back door?" he asks.

Another example he uses is people who actually own a bank. He talks about a bank that went insolvent because all the owners were taking out loans at really low interest rates. He goes on to say that what the owners should have done is take out loans at the market rate or even higher.

The crucial error in all of this logic...? If you actually owned a grocery store, wouldn't you have other customers besides yourself? If you owned a bank, wouldn't you be lending to people besides yourself? And if you did own a bank or a grocery store and you were the only customer, what difference would it make if you bought merchandise or loans at the market rate or at some discount?

On the IB plan, you're the only customer of your bank. Boss puts salary in your left hand. You take money from left hand and put it in right hand. Sure, right hand made money, but left hand lost money.

Ironically, the thing that makes this plan work is the one thing they tell you to completely discount - the death benefit!

In fairness to the plan, it should be mentioned (again) that a policy like this flies completely under the tax radar. When used properly, not only will you not pay any taxes, you won't even generate a taxable event.

Definitely not a bad concept. And I never would have bought life insurance if I hadn't fallen for the pitch. But the pitch does border on dishonest.

And that book "Becoming Your Own Banker" by Nelson Nash also likes to play with the truth. He repeatedly compares setting up one of these policies to setting up a business. One example he sites is where you own a grocery store. "Are you going to pay full price like everyone else or are you going to take merchandise out the back door?" he asks.

Another example he uses is people who actually own a bank. He talks about a bank that went insolvent because all the owners were taking out loans at really low interest rates. He goes on to say that what the owners should have done is take out loans at the market rate or even higher.

The crucial error in all of this logic...? If you actually owned a grocery store, wouldn't you have other customers besides yourself? If you owned a bank, wouldn't you be lending to people besides yourself? And if you did own a bank or a grocery store and you were the only customer, what difference would it make if you bought merchandise or loans at the market rate or at some discount?

On the IB plan, you're the only customer of your bank. Boss puts salary in your left hand. You take money from left hand and put it in right hand. Sure, right hand made money, but left hand lost money.

Ironically, the thing that makes this plan work is the one thing they tell you to completely discount - the death benefit!

In fairness to the plan, it should be mentioned (again) that a policy like this flies completely under the tax radar. When used properly, not only will you not pay any taxes, you won't even generate a taxable event.
I agree, the dishonesty is a turnoff. I highlighted a portion that gets under my skin, almost to the point of making me angry. The guy obviously does not understand the concept of fractional reserve banking if he thinks higher interest rates would have made a difference. He doesn't even understand what insolvent means. It makes me want to smack him, literally, because people are reading this crap and will take him as an authority.

All banks are insolvent, meaning, if every customer for a particular bank withdrew all of their deposits at the same time, there is no bank in the US that could cover those responsibilities. The interest rates at which banks loan money will not cause them to go insolvent. They might not make a profit, but that's completely different than becoming insolvent.

You could only compare IB to real banking if you could use fractional reserve lending. Meaning, if your CV was $10,000, you could loan yourself $100,000, but pay interest to the insurance company on only the $10,000. If your interest rate on the $10,000 was 5%, you would have an effective interest rate of only 0.5% on the $100,000. You could loan that $100,000 to someone else at 4% and still have a spread of 3.5% (4.0-0.5), even though you're paying 5% on the $10,000. That is how a REAL bank works. That's how they make a profit. IB doesn't let you do ANYTHING of the sort.

edit: To be more clear on my example. If you were a real bank, you would pay $500 in interest each year on the $10,000 (5%). You would receive $4,000 in interest payments on the $100,000 (4%). That would give you a profit of $3,500.

Keep in mind, banks usually charge a higher rate for money they lend (mortgages, auto loans), than money you lend them (savings accounts, CDs, etc). So their spread is pretty large. And technically, checking accounts (demand deposits) are NOT loans. Banks are supposed to be a warehouse for your money, but they still make loans on those demand deposits. They usually aren't paying any interest on those checking accounts. Actually, they're often charging fees, so their spread is even larger.

Yes, it's quite a racket REAL bankers have going.

I'm glad this thread continued because it's invaluable information.
About 11 years ago my wife and I started WL policies as a combination insurance and fixed-income vehicle. We were already maxing out of 401K and IRAs in addition to having other stock investments.
So, WL sounded like a great fixed income vehicle.

So here's the problem. Everyone has been talking about having the policy become self-supporting after 5-7 years. Well, after 11 years there NO WAY my policy can be supported on the dividends alone. All of our dividends each year have gone towards buying more PUA. In fact there's been an average of 22K worth of additional insurance purchased every year.

But due to the economy there was a 5 year stretch that the dividend %age went down and subsequently the $ amount also did. I find it strange that the amount of insurance purchased didn't counter-balance the rate going down.

Well, the $ amount of dividends is STILL around the same as it was way back in like year TWO !!! It just sounds so different than what everyone is explaining and it's scary. Even the insurance company can't explain it after several phone calls.

Any thoughts? If more information is needed please let me know because it's completely disallowing me from being able to build up an worth the way described.

blastAway,

i am no WL expert, but your experience sounds a little fuzzy. can you clarify a few assumptions that i had as i was reading to make sure the info is all correct?
What company is your policy with? is it a mutual/participating policy (a la NWM, NYL, Mass Mutual, etc.)?
is it a par Whole Life or is a Variable Universal or some other sort of Hybrid policy?

i know for my own NWM WL policy, it likely will not be self-sustaining (= dividends can pay for premium itself) until year 13-14, but even so my plan, if i can still afford it, was to pay into it so that the PUAs and therefore CV and DB will rise more dramatically.

it shocks me that your policy's dividends are still paying the same as year TWO (it also shocked me that you got dividends in year 2 because my policy does not get dividends until year 6). anyways, it made me wonder whether your policy's dividend structure is different from what i am used to seeing which is the PUAs/CV help determine the amount of dividend that you receive.

i encourage you to wait for the pros to chime in on this one, but i can already venture to guess that your policy is structured differently from a traditional par Whole Life policy.

This month as a matter of fact is the end of my 3rd year. And you can bet I'll be right here with my latest illustration.

To blastAway: I don't know your policy, but I'll go ahead and guess that it's not structured like mine. My policy contains a PUA rider and is overfunded to the point that it's almost considered a MEC. Every month, the amount I pay for PUA's is actually greater than the base premium. Base: $450/mo. PUA: $525/mo.

To pochax: It sounds like my policy is a little different from yours too in that, I've definitely been earning dividends all along (although they're pretty small right now.)

Another note about the whole self-sustaining aspect: With my policy, it isn't just the dividends that make the policy self-sustaining; it's the sellback of PUA's. As I understand it, the effect selling back PUA's is that CV and DB probably won't grow much or at all for the rest of my life. But that's fine with me. I'll have an emergency fund of $50K to $60K supporting a DB of a little over $600K.

...that's fine with me. I'll have an emergency fund of $50K to $60K supporting a DB of a little over $600K.
Ahhh...when theory meets reality, you may realize a beautiful thing.

"beautiful" good or "beautiful" bad?

To pochax: It sounds like my policy is a little different from yours too in that, I've definitely been earning dividends all along (although they're pretty small right now.)

Another note about the whole self-sustaining aspect: With my policy, it isn't just the dividends that make the policy self-sustaining; it's the sellback of PUA's. As I understand it, the effect selling back PUA's is that CV and DB probably won't grow much or at all for the rest of my life. But that's fine with me. I'll have an emergency fund of $50K to $60K supporting a DB of a little over $600K.

bdunklau: you are right that it's the PUA sellback that helps self-sustain, but i think since dividends are used to purchase PUAs in my policy (i do not have a PUA rider), to me it's all the same. i think you've been earning dividends all along because of your PUAs. without the PUAs, most WL policies don't give dividends for the first few years (mine probably come later than most at year 6).

I was going to originally post the details but thought it would be a bit much.

So the policy in question is actually much like all being discussed but it's got some riders.

It is with Canada Life.
There is a single PUA rider where we dumped in something like 35K right at the start. This had the advantage of immediate CV and dividend earning power immediately. That's probably where much of the early dividends came from.
Then any dividends received have been recycled back into the policy for additional PUAs.

Over 11 years we have purchased an additional $278,000 worth of insurance (PUAs) but the dividend has been relatively flat. Granted the dividend rate went down about 1-2% since inception but still, you would hope that the amount of PUAs would have improved the dividend.

If to become self-sustaining you've got to put back PUAs then I don't think this ever will be self-sustaining because there's not enough. It all just doesn't add up to anything near what sounds feasible via these other properties. Granted, we're not actively purchasing additional PUAs as some of you are but using the approx $500 per month additional purchase our 35K is like 6 years of doing that... isn't it?

I've been in contact with the insurance company and they haven't been much help. They "think" it's behaving normally but I disagree. It's almost as if the additional PUAs are NOT being taking into account when recalcing our dividend.

In fact, another example, over the past 3 years the dividend rate has been FLAT. Each of those years we've purchased an average of 22K PUAs per. Each year the dividend $$ amount has only increased by $200.

This doesn't make it the vehicle as discussed which is what it could be so any insightful points are appreciated.

if you are dissatisfied with the performance of your policy (and it sounds like you are), there is the option of doing a 1035 exchange to another company's Whole Life Policy. however, there are inherent startup costs involved that may prevent that from being a good option for you. if i were in your shoes, i would get an updated illustration from the current policy agent at current dividend rates and consult with an agent with another company who can provide you with a 1035 exchange illustration based on your current CV in the policy you hold, your general health, and age. compare these two illustrations and consider whether it is worthwhile to make the switch. just my 2 cents.

"beautiful" good or "beautiful" bad?
Beautiful good. Contrast your emergency savings to a traditional method that is most likely earning less interest and is NOT supporting a $600k death benefit.

This is perfect example of leveraging your assets.

1_more_opai: You say that you will stop paying your child's premiums after 10 years. How are you able to do that?
Are the expected dividends alone enough to pay the premium AND still grow the CV as you desire?

pochax: It's not a question of being unsatisfied with the performance but more a question of "did they screw up my policy?" I've had one or two other problems before with the policy that have gotten corrected and they've had to go back and adjust CVs accordingly. If in the end this is truly how the policy is behaving then I may need to do something. At the current growth rate, in another 10 years the policy will be about 100K below illustrated CV.

blastAway,

I checked on Canadian Life's participating products and the only ones listed are the Wealth Achiever & Estate Achiever. Are one of these your policy? I don't see a TRADITIONAL participating whole life policy available through Canada Life.

I say "traditional" in the sense that the whole life policies being discussed here (by others) are not subject to any market fluctuations and offer a FIXED and GUARANTEED rate of interest on your money + dividends.

Althought the two policies mentioned above (Wealth Achiever & Estate Achiever) are "particpating" and dividends are paid into them, there is an underlying VARIABLE investment fund that your cash values are reinvested into. In other words, it seems that you may own a Variable-Rate [whole life] policy (more similar to a Variable Universal Life/VUL) that will respond to market performance to some degree. The downward fluctuation of the markets could explain the lack of apparent growth in your cash values and the abnormally large disparity between illustrated and realized results. In short, it's may be a different kind of policy than the traditional Par-Grade whole life being discussed in most of this thread.

Canada Life "participating products" page:

http://www.canadalife.com/003/Home/Products/LifeInsurance/PermanentInsurance/ParticipatingLifeInsurance/S5_009442

Evidence that leads me to believe there is a variable component:

http://www.canadalife.com/003/Home/Products/LifeInsurance/PermanentInsurance/ParticipatingLifeInsurance/S5_009620

You cash values may be INVESTED in this variable fund (responds to market fluctuations):

http://www.canadalife.com/003/Home/Products/LifeInsurance/PermanentInsurance/ParticipatingLifeInsurance/Documents/S5_009632

Does any of this make sense? I'm taking a stab at your question because I have to agree with the others that your situation sounds a bit "unique".

All of our dividends each year have gone towards buying more PUA. In fact there's been an average of 22K worth of additional insurance purchased every year.This sounds like the "Estate Achiever". The emphasis for PUAs on the Esate Achiever is increasing your insurance protection, with cash values a secondary consideration.

From the website: Estate Achiever provides higher long-term growth in total cash value and death benefit.

Conversely, Wealth Achiever favors cash buildup more quickly and less death benefit.

From the website: Wealth Achiever provides higher growth in cash values over the short term, while still providing lifetime insurance protection.

pricespector: Thanks for those links - I will definitely look more closely at them. The policy is 11+ years old so the product names back then may be different than now. I don't recall either of those names used but I will look at the contract.

The strange thing is that although the dividend payment is strange the CV has grown relatively nicely over the course of the policy (not to the fullest of the illustration but I expected that). There is definitely a guaranteed portion to the policy that is in one of the contract pages compared to the illustration. It shows a certain guaranteed growth in CV of the base policy. The PUAs are really making the policy grow anywhere near the potential of the illustration. In fact the CV of the single premium PUAs is actually outperforming the CV in the contract.

Also, related to the dividend rate, I requested 5 years worth of that information and during the obvious down periods there's been a decline but it's far from huge. I think that over a five year period (most recent 5 years) it's decreased by less than .5% with the past 3 years being flat but I don't have it immediately in front of me.

I have seen several times that people are confusing "dividends" with the TOTAL cash values increases.

There are TWO components to cash value growth in a life policy. Dividends are usually the SMALLEST and least important component. Alas, people speak of "dividends" as the driving force behind a policy's growth. The Infinite Banking nut j(ac)ob was constantly doing this. They are an enhancement, not the meat and potatoes.

It is quite normal for a dividend rate to be only 1 or 2% per year, which is nowhere near an illustrated return. What folks fail to take into account is that it is not dividends alone that make cash values grow. In fact, dividends are typically the smallest part of the growth component. In any participating policy there will be an additional PRIMARY method growth. It may be an interest rate (whole life/Universal Life) or appreciation (Variable Life/Market driven).

The cash values in a policy are the sum of BOTH parts. So, a whole life policy that guarantees a 4% return will do so...PLUS an additional 1 or 2% dividend rate. This equates to a combined crediting rate of 6% (interest + dividends). It would be completely normal (and expected) that any whole life policy would never pay for itself if it relied on dividends alone.

A variable life insurance policy may have a positive market rate of 8% + a 1% dividend rate for a net cash value credit of 9%. Or, it may have a negative market experience of -8% + a 1% dividend rate to net an annual decrease in cash values of -7%.

In short, the dividend is completely seperate...and IN ADDITION to...the PRIMARY method of growing the cash values in a policy.

I'm completely with you on that.

The reason I started this set of questions is that the dividends paid out is supposed to be based on the amount of insurance you actually have. (This is even what the insurance company specifically said). If you purchase more insurance I would expect both the dividend to increase and the CV to increase appropriately. All things being equal, if the published dividend rates stay the same AND you are purchasing additional insurance I would expect the $ amount paid in dividends to increase.

The fact that the increase was sooo slight was my first indicator of a possible problem.

The second indicator (and maybe I should have disclosed this earlier) is that we have a 2nd policy on my wife. It's also a WL policy and it's behaving exactly as expected. We have the option for purchasing PUAs as this policy and both the CV and dividend $ amount is increasing as the amount of insurance is increasing. This is what led me to wonder why this particular policy is behaving so strangely. And actually the amount of PUA being purchased on hers is about half that of mine.

Just to clear it up a bit more, dividends are usually tied proportionately to premiums paid, not PUAs or death benefit. The reason it is explained as a function of PUA is because the cash is being applied as premium to purchase the PUAs. It's not the actual face amount (death benefit) that determines dividend payout it's the premium going in. After all, dividends are "return of premium".

Assuming all things equal, this means that if your PUA cost (cost of insurnace) is lower than your wife, you would technically be credited with more PUAs while paying the same premium. For example, if you put in $100 and it buys $500 of PUA, but your wife puts in $100 and it only buys $400 of PUA, her cost is higher for the additional death benefit that the PUAs provide. You would have $100 more in PUAs, but you would both be credited the same amount in dividends because you both paid $100 of premium into the policy.

With that said, your case is definitely perplexing; especially if you have a second (presumably identical) policy on your wife that is performing as expected.

There is one bit of general experience that may be helpful.

I have noticed that young (under 30) and very healthy (best rating) policyholders that pay low premiums thorughout the life of a policy will (in almost every instance) take longer to build cash values and self-sustain their policies than older, higher premium policyholders.

This is simply a function of less premium equals less interest and dividend crediting. Younger policyholders often are advised to slightly overfund their policies as a matter of practice to offset this anomoly. Knwoing that you have had your policy for 11 years and hers only two, the age and health may be a real factor.

I thought of this very early on. However, you mentioned a large premium deposit up front, so I sort of threw it on the back-burner. As you surmised, this large deposit should have kick-started your policy very nicely.

Sept is the anniversary month of my par WL policy. This month is the end of my 3rd year. According to my agent, I have 2 more years of premiums and then no more for the rest of my life.

So how am I doing? Let's see...

For the first year, I paid $1,000/month. The cash value at the end of year 1 was projected to be $8,482. (And this was the optimistic/non-guar assumption.) At the end of year 1, the actual cv was $9,766.

The cv for the end of year 2 was projected to be $15,447. The actual cv was $16,791.

The cv for the end of year 3 was originally projected to be $24,937. Then about 18 months ago, it was revised upwards to $25,865.

And now that year 3 is actually over, my cv is $26,344.

Also, in light of the whole AIG fiasco, it's worth repeating my life ins company is a mutual.

I've owned my (and my wife's) par WL policy with a PUA rider since March 2008 with Mutual Trust Life. I've got an illustration from my agent that shows some policy loans taken out after the 5th year...my cash values actually do decrease (as well as the DB) and the dividend is also decreased. This could be from the fact that I have the base premium being paid from the policy values (aka no more cash outlay from me), but from what most of the posts have stated, this shouldn't be the case.

I haven't asked my agent these questions yet and perhaps this is just how MTL works. If so, I'm going to ask about a company that doesn't decrease cash value when I take a policy loan and doesn't decrease dividends when I take out a policy loan.

Anyway, any insight into this would be great.

Actually, I just noticed the same thing in my illustration so my policy isn't really performing any differently than yours.

Seems odd...this was one of the great benefits being touted about the IBC. Without it, there seems little benefit besides securing a DB.

Although you both should see a reduced cash value on your statement if there is an outstanding loan, this is only due to the fact they report a "Net" cash value. This is the gross cash value inside the policy, minus the loans outstanding and any premium due. Remember, it is no longer available as cash because you have assigned it as collateral to the loan. It gets freed up (with interest accrued) once you repay the loan and you will then see a higher net cash value on your statement.

However, one place that whole life policies notably differ is how the dividend crediting rate is applied against cash values. Some companies do not credit dividends to any cash that is collateralized with a loan. This is called "direct recognition". Other companies will still credit dividends to borrowed cash values and maintain the advantage while borrowing.

Also, don't be surprised to see dividend rates come down simply because of the economic environment.

That makes sense, it is reported as "net cash value". Excellent explanation, thanks price.

Do you know of any good mutual WL companies that DO credit dividends on cash value used as collateral against a policy loan?

Thanks so much for your educational posts price, 1MO and others, as you've cleared so many things up for me, and probably many others.

arcee49,

I'm glad I could help.

I tend to stick with the big mutuals, so I am by far more familiar with them. New York Life credits dividends to borrowed cash values as an automatic feature in all of their whole life policies. A traditional Northwestern whole life policy uses direct recognition, but you can remedy this with a rider that is available (not sure if there is an additional cost). Mass Mutual uses direct recognition as a default, but I believe you can choose otherwise only at the time of application. Once this choice is made, I don't think it can be reversed.

These are really the only three companies I look to for whole life, but there are other good ones (and a lot of bad ones) out there. One key is that it should be a mutual company...preferably and old and large one. If you have a particular compnay in mind, just do some digging for "direct recognition" of dividends and loans. Most, if not all can provide you with the info on a website or can be remedied with a quick phone call.

Before considering a surrender of any policy though, be sure to look very carefully at your options side by side. It very seldom makes sense to get rid of a whole life policy that has been in force for years in order to squeak out a half percent advantage in cash values.

I think in terms of ROI so I decided to get my latest illustration and do some rough "figurin".

At the end of my 5th year, I will have paid in $60,000. Now to make things easy, let's assume I had $60K in one lump sum to put somewhere else. How would that other investment (don't go there :)) have to perform to equal what's in my illustration?

Well, at the end of my 15th year, the other investment would need to do about 2% to keep up. At the end of my 20th year, the other investment would need to do about 3%.

And after 30 years in my policy, my plan B would have needed to return 3.5% (every single year mind you) to have an amount equal to the projected cash value at the end of year 30. And of course, if I'd gone with plan B, I wouldn't have the DB.

I emailed Dave Ramsey for a comment - haven't heard back yet.

And on the topic of declining DB (when you surrender PUA's to make premiums), here's what my illustration says...

DB increases to a $600K at the end of year 5. After that it drops somewhat regularly and "bottoms out" in year 35 at $415K. After that, it's onward and upward. And when I die at the age of 121, my 115-year-old wife (got me a young one!) will get $1.3M

All for $60K

And that is assuming that your "other" saving vehicle is tax free as well. If it is a taxable account it would have to exceed 4.75% if you are paying 25% income tax on the interest earned.

almost forgot

even better

I am a "broker's broker" for MassMutual. MassMutual WL is direct recognition ONLY if a fixed loan rate is chosen at time of application. If adjustable is selected the contracts are NOT direct recognition. Historically MassMutual WL has had the best performance of any mutual company offering policies without direct recognition. Their 2009 dividend rate is 7.6% with a total dividend of about $1.35billion. If you are trying to do IBC you are crazy to do so with a direct recognition product.

If you are looking for someone who can help you buy a MassMutual policy let me know. I can point you in the direction of an advisor who is licensed with us.

How is it that this product/system can help me avoid "paying interest to others" when in fact, policy loans come with an attached interest rate payable to the ins company itself?

This seems contradictory...

You do pay interest. Simple. If you read the entire post, you will see that your argument was made to take some of the luster of what is predominantly a big sales pitch.

However, policy loans are a very cheap financing strategy. While you pay interest on the cash you borrow, the cash inside your policy (collateralized, but untouched) continues to accrue interest at a rate comparable to the loan rate. For example, the loan rate may be 6%, but the cash values are earning 5%, so the net cost of loan is only 1% after it is paid back.

"Infinite Banking" is just another way to present the policy loan feature of cash value insurnace. It DOES NOT build wealth at all. It is a cash-management strategy only. Once disected, you will find that any profit you make with infinite banking isn't profit at all, you paid for the increases in cash values yourself.

arcee49,

I'm glad I could help.

I tend to stick with the big mutuals, so I am by far more familiar with them. New York Life credits dividends to borrowed cash values as an automatic feature in all of their whole life policies. A traditional Northwestern whole life policy uses direct recognition, but you can remedy this with a rider that is available (not sure if there is an additional cost). Mass Mutual uses direct recognition as a default, but I believe you can choose otherwise only at the time of application. Once this choice is made, I don't think it can be reversed.

These are really the only three companies I look to for whole life, but there are other good ones (and a lot of bad ones) out there. One key is that it should be a mutual company...preferably and old and large one. If you have a particular compnay in mind, just do some digging for "direct recognition" of dividends and loans. Most, if not all can provide you with the info on a website or can be remedied with a quick phone call.

Before considering a surrender of any policy though, be sure to look very carefully at your options side by side. It very seldom makes sense to get rid of a whole life policy that has been in force for years in order to squeak out a half percent advantage in cash values.

Hello everyone. I have been following this thread for quite some time and unfortunately I wasn't allowed to post...some glitch with kiplinger.com. Anyway, I finally got IT on the line and fixed the problem.

I just wanted to add a few things, and I'm probably going to incite a few sighs from those that didn't catch this before now (or their advisers/agents didn't explain this to them). There is one thing that I've noticed that no one has come out and said and I'm going to say it at the end of this post.

...like pricespector, I think you ought to keep this simple. I hate it when things are made so complex that you start to wonder if you are the one who is stupid...I've talked with Mr. Nash on the phone and have traded MANY emails with him...to the point that I am convinced that he actually has about the same level of understanding of how this works as most of the folks who have been doing this for 30 years and just call it a "policy loan". The IBC is a good marketing angle though, you have to give him that.

For the most part I agree with pricespector. The policy loan feature is essentially a cheap source of loans for you. What I want to add and emphasize is that the dividend scale (the non-guaranteed column) is basically going to offset the interest that is being charged on the loan...so it is essentially a wash or a very small spread in many cases...not all, but in many cases.

Even still, the loan is simple interest and the policy cash values are compounding so unless you swamp your policy with loans, this actually has a lot of benefits to the policy owner. I agree that it doesn't really matter where you get the loan from (sort of), but in most cases it's just more convenient to get it from your own policy. With a net cost of usually 1-2% and in some cases 0% or going into arbitrage, it's a good deal IMO. Unless you can get a loan for less than, say 2%, I can't see a reason to go through the hassle of using a bank or CC.

About the PUA and resulting cash value

The problem I have with Nash and Infinite Banking is that it does not really explain the mechanisms of whole life, which I had to confront an actuary and several wholesalers about before I learned the facts behind how these products are built.

When Nash et al suggest that you pay whole life premiums over a period of 4, 5, or 7 years and then make the dividends pay the premiums, this is not paying up the policy. It is also not "maximally funding the policy", even though most every life insurance sales dept will tell you that that is what you are doing. The reason you are never going to "max fund" a life paid up at 100 is because the contract was designed to accept premiums to age 100. Plain and simple. There is no getting around this fact (ask an actuary, I did).

The problem lies in several laws that were created in the 1980s (TEFRA, DEFRA, TAMRA). Those MEC guidelines that you are told to fund the contract up to just represent IRS limits on how fast you can put money into the contract.

For this reason, you can go on "APO" (make the dividends pay the premiums) after 4, or 5, or 7 years, depending on how the dividend scale looks and the amount of premium you are putting into the contract.

After that period, and this is crucial to understand, you must surrender the paid up additional insurance that you purchased in the first 5 years in order to pay the guaranteed premium costs. As you do this, you start to move away from the MEC guidelines and create "room" in the policy. So, in the first 5 years, you are making the policy very efficient, and then you are sapping its efficiency by surrendering the PUA. As you "bank", according to Nash, you are putting PUA back into the policy to get back to that MEC guideline. Once you hit that limit, you have two choices...continue to surrender PUA or start a new contract and keep funding the old one.

You can see that this process really involves a lot of spinning of your wheels. It also kills the internal rate of return (IRR) on the contract.

In his book, Nash suggests using a limited pay contract, like a life paid up at 65. It's not a bad idea but you still run into the same problem if you want to fund the contract within 5 years and not have to make any more premium payments.

What I haven't heard anyone doing is using either an "X pay" (according to an insider, this ought to be coming soon to a few cool insurance companies near you - where you get to determine when the contract is paid up in full) or a 10 pay WL (dividend paying, of course). These ultra short limited pay WL contracts guarantee that no more premiums are due, AND the most important part...you are not surrendering PUAs after it's paid up because it is ACTUALLY paid up.

The PUAs are actually built into the contract and so as a result of the contract being actually paid up (as opposed to relying on an APO to pay the premiums to age 100), you bump your IRR to between 5-6% at the 15-20 yr mark.

So, you are really talking about a tax-free 5-6% savings after, say 20 years assuming that the dividend scale can remain at about 7-7.5% (the non-guaranteed side), which I think is reasonable based on how well some of these companies have been run in the past and their resulting dividend scales.

You can still do BYOB (be your own banker), but you may have to either buy an additional contract if you want to plow more premium in than what the 10 pay will allow (if you want to pay over and above the interest rate the ins company charges you) or convert some term (no evidence of insurability required for the companies I work with).

If you ask me, 5% tax-free is very hard to beat. Very hard. Now, that aside..I'm a big believer that a lot of a client's money can go into these...some can be siphoned off for investment purposes, but that you probably only need 10-20% of your savings invested outside the WL intelligently (note I did not say conservatively) to get a nice blended return that will make you very happy at retirement.

Even if you're not one of those guys with Warren Buffet aspirations on the side, 5% net of taxes is still impressive regardless of how you cut it.

Also, I don't remember pricespector mentioning this, but I know for a fact that at least the folks at Mass Mutual know exactly what you are talking about if you mention "becoming your own banker" to them. Maybe not the customer service people, but the sales guys, concept guys, and the higher ups can definitely walk you through this if you ask them.

Good post to add some clarity to a simple (and old) concept that has been boxed into a complex theory called "infinite Banking". Your additons were spot on, but here are a couple small points of interest:

I've talked with Mr. Nash on the phone and have traded MANY emails with him...to the point that I am convinced that he actually has about the same level of understanding of how this works as most of the folks who have been doing this for 30 years and just call it a "policy loan". The IBC is a good marketing angle though, you have to give him that.I agree with your assessment of Mr. Nash. Spot on really...the concept is very old, the name he gave it is the only new twist.

When Nash et al suggest that you pay whole life premiums over a period of 4, 5, or 7 years and then make the dividends pay the premiums, this is not paying up the policy.As you stated, it is important to understand for clients that if they exceed the IRS funding limits, the policy loses the favorable taxation forever...never to be reversed. Generally, any policy paid-up in less than 7 years becomes a Modified Endowment Contract (MEC) and is forever taxed like an annuity...interest/gains out first and taxed at normal income. Be very wary of someone suggesting you overfund to pay up in less than 7 years.

What I haven't heard anyone doing is using either an "X pay" (according to an insider, this ought to be coming soon to a few cool insurance companies near you - where you get to determine when the contract is paid up in full) or a 10 pay WL (dividend paying, of course). These ultra short limited pay WL contracts guarantee that no more premiums are due, AND the most important part...you are not surrendering PUAs after it's paid up because it is ACTUALLY paid up.New York Life currently offers this product. It's called Custom Whole Life and can be guaranteed paid-up in any year after year 5 with no reduction in death benefit or cash values.

Also, I don't remember pricespector mentioning this, but I know for a fact that at least the folks at Mass Mutual know exactly what you are talking about if you mention "becoming your own banker" to them. Maybe not the customer service people, but the sales guys, concept guys, and the higher ups can definitely walk you through this if you ask them.As I was saying earlier, almost very competent agent or planner knows this concept. It's as old as whoile life itself.

Thanks for the input pro_student.

Good post to add some clarity to a simple (and old) concept that has been boxed into a complex theory called "infinite Banking". Your additons were spot on, but here are a couple small points of interest:

I agree with your assessment of Mr. Nash. Spot on really...the concept is very old, the name he gave it is the only new twist.

As you stated, it is important to understand for clients that if they exceed the IRS funding limits, the policy loses the favorable taxation forever...never to be reversed. Generally, any policy paid-up in less than 7 years becomes a Modified Endowment Contract (MEC) and is forever taxed like an annuity...interest/gains out first and taxed at normal income. Be very wary of someone suggesting you overfund to pay up in less than 7 years.

New York Life currently offers this product. It's called Custom Whole Life and can be guaranteed paid-up in any year after year 5 with no reduction in death benefit or cash values.

As I was saying earlier, almost very competent agent or planner knows this concept. It's as old as whoile life itself.

Thanks for the input pro_student.

Thanks..yeah, I just wanted to add my little comments because I think that a lot of folks using this concept are trying to do it with a life paid up at 65 or (gasp) traditional whole life paid up at 100. It's unnecessary and produces nasty drag on your IRR. Used to be the old endowment policies or family policies I believe you could pay up in a short period of time and do this...(before my time).

Also, despite what Nash says, I think IRR does matter to some extent, and the shorter the pay up period, usually the better the IRR. Not sure why he insists on using those life paid up at 65 for his IBC???

Pro_student,

In the interest of "keeping things simple" - can you boil down your point to a one liner? Are you saying to not do IB with 65 of 100 year insurance but to do it with this new fangled X Pay policy or what?

Please be clear b.c I am just a regular guy... who now has spent about 100 hours trying to figure out how this all works (You should see my spreadsheet!).

Thanks.

I have the same question. I have a 100 year policy. Does this mean that as long as I don't sacrifice any paid-up additional insurance over the years for premiuns, paying the premiums with new money, then it will perform better?

Pro_student,

In the interest of "keeping things simple" - can you boil down your point to a one liner? Are you saying to not do IB with 65 of 100 year insurance but to do it with this new fangled X Pay policy or what?

Please be clear b.c I am just a regular guy... who now has spent about 100 hours trying to figure out how this all works (You should see my spreadsheet!).

Thanks.

I'm a regular guy too, so here's my take...

I'm treating this as a savings account, not an investment. This is a piggy bank with a death benefit attached.

So I'm not trying to eeck out every last 1/10th of a % in returns. I just want my "bank" funded as fast as possible so I can quit making those (damn) premium payments. I don't want to be making premium payments on top of loan payments till I'm 95. I just want to be "paying myself back".

Whole life is a very conservative use of your money. So conservative, that if you put too much money there, and not enough in true investments, you may regret that.

But didn't we already establish that the "paying yourself back" thing is not unique to Infinite Banking?

I've got an illustration based model for a policy that back calculates the effective "interest rate" including policy payments... it is still a postive return after year 2- EVEN including premium payments... so I think it is a "good" savings account alternative EVEN IF the policy is not "self supporting"... what do you think?

I have another question. Does anyone know if the government rules regarding policy loans could easily be changed? Meaning could they be treated as disbursements? I prefer to pay taxes now, mostly because I don't trust the government to declare a "fiscal emergency" at some point and decide that they want to start messing with our roth iras, 401k money, or other government encouraged retirement plans. I did hear some rumblings about the possibility of 401k money somehow being combined with social security to prop the system up. That does not sound like a good idea. The policy loans in retirement is one of the things that has drawn me to whole life, but if the treatment of policy loans changed, then it would blow the whole tax free growth benefit once I would exceed the money put in. My thought on that is there aren't tons of people with whole life so it wouldn't represent a great source of income vs. messing with other retirement plans so the risk may be low for a change to policy loans. Can anyone clarify?

Personally, I believe that if the govt is going to change the rules w/ regard to policy loans, they will grandfather policies issued before a certain date.

That's what they did with all life ins policies issued before 1986 (thereabouts). Pre-1986 policies never lost their cool tax treatment - it's just all the policies after 1986 that get treated differently.

I believe the same will hold true for retirement accounts. They may change the rules for retirement accounts that are begun after a certain date. But I don't think they're going to go back and retroactively tax things like Roths that have already been taxed. They might do away with the Roth 401K. I've heard 2010 is when Congress has to decided on that.

The real trap, as I see it, that has yet to be sprung is all those traditional tax-deferred 401k's. Those poor bastards (IMO) because that money hasn't been taxed. And when it does come time to tax those things, there's going to be a giant sucking sound (to borrow a phrase from Ross Perot) - it's the sound of those hard earned dollars being sucked into the US Treasury in the form of sharply increased taxes.

Just you wait.

If you think $2 trillion of "stimulus" is a lot, consider the unfunded liabilities of SS, Medicare and Medicaid. Together the total over $50 trillion!

Check out www.pgpf.org if you like unbiased truth and/or you just like being really scared.

Roth Roth Roth - IRA's, 401k's, whatever you can find. Because when the taxman comes, you want to tell him "I already paid".

But didn't we already establish that the "paying yourself back" thing is not unique to Infinite Banking?

I've got an illustration based model for a policy that back calculates the effective "interest rate" including policy payments... it is still a postive return after year 2- EVEN including premium payments... so I think it is a "good" savings account alternative EVEN IF the policy is not "self supporting"... what do you think?

Right, not unique to IB.

My feelings on savings accounts: There should be zero chance of losing any money that is in a savings account. CD's pass that test. Bank savings accounts pass that test. Online savings accounts do too. Some cash value policies do also. WL does. VUL does not.

So I would characterize VUL policies as investments and WL policies as savings accounts.

In the interest of full disclosure, I'll tell you that I don't like the idea of VUL at all. VUL mixes two things that you definitely don't want to mix - stock market volatility with a death benefit.

If your policy has a cash value in year 2 that is greater than basis, that sounds pretty good. But does the market have to perform in a certain way to meet that projection?

Be careful.

I bought my policy without fully knowing what I was buying. It was nothing but pure dumb luck that I got something of real value - a good ol' boring participating WL policy (that has outperformed the most optimistic projection each and every year).

OK- I am no brainiac- and believe me--- I REALLY want to be a believer on this thing- but here is the current problem I have.


Compare IB to Savings.

Lets say for any given year- say year 20 of my life insurance policy- it produces an effective interest rate of 3%. At the beginning of that year I take out 10k policy loan and pay it back within one year.

For Mass Mutual- with a 6.16% interest rate- I will have paid 337 to the company in interest over that year. My cash values will have grown the 3% just as if I had not taken out the loan (Non-direct recognition). My loan balance at the end of the year is zero.

Lets say I have a savings account that has the same balance at the beginning of the year. I withdraw the 10k from my savings account and I pay back in monthly, the same amount I would pay Mass Mutual -- namely- 10k plus the 337.

At the end of the year- my savings account has a HIGHER cash value than my policy...

WHY?? Because I PAID MYSELF the interest...

So where am I going wrong here? You can pick any year of any illustration... and you'll always come to the same conclusion I think.

What am I doing wrong or overlooking?

Any thoughts?

Thanks.

The savings account doesn't come with a death benefit.

That's the difference.

Your savings account is also taxable (a much smaller detail, for sure).

kevin,
you can also take out cost basis from the CV of the policy without any tax penalty and thus it is not a loan. Thus if you put in $100k into a policy where the CV is $180k after 15 years or so, you can pull out up to $100k of the CV as just that, CASH! however, you will have to leave the rest in there or access it via policy loans plus you will not have the higher CV balance working for you in terms of more interest.

So the difference (neglecting tax benefit for now) is simply that the IB scheme comes with a Death Benefit? This is exactly the thing that the agents DOWNPLAY when they are pushing the product though... right?

So it seems that the exact thing they are downplaying- is really,primarily, the only thing that is really a benefit compared to other investments.

(OK- the protection against legal action and the tax advantages are also valuable)

maybe they (sales agents) downplay the death benefit because:
1) you can't enjoy the death benefit, only your beenficiary can.

2) they probably realize that you won't fully pay back the loans and thus the balance of the loan will be subtracted from the death benefit when you do die (which may not leave much death benefit depending on how big the loans were at the time of your death)

So the difference (neglecting tax benefit for now) is simply that the IB scheme comes with a Death Benefit? This is exactly the thing that the agents DOWNPLAY when they are pushing the product though... right?

So it seems that the exact thing they are downplaying- is really,primarily, the only thing that is really a benefit compared to other investments.

(OK- the protection against legal action and the tax advantages are also valuable)

Exactly!

Sneaky, wouldn't you say?

I'd be tempted to call is a misrepresentation - borderline dishonest.

It's too bad you can't actually get a personal audience with Pam Yellen or Nelson Nash. I'd be too scared if I were them.

There are two sayings that come to mind when I think about IB...

1) Life insurance is a product that is sold, not bought
2) Reality is a tough sell

The IB strategy is almost deceptive, but we can't blame the agent for pulling the wool over our eyes. There were a couple red flags that should have made anyone take notice.

Red flag #1: The death benefit

They completely downplay it as you say, as if you're getting something for nothing. There's no free lunch.

Red flag #2: (Who really bothered to look at that illustration before they signed the contract?)

I didn't.

If I had, I'm sure I would have had a conversation like this with my agent...

me: At the end of year 5, I've paid in $60,000, but the CV is only $50,000. Where did the other $10K go?

Agent: Well, that $10K went to buy the life insurance/death benefit

me: But I don't want to buy a death benefit!

Agent: Oh

So Kevinvinv, are you feeling "had" like I did about a year ago? Do you have any need for a death benefit? If you're not married and have no kids, maybe you'll get married at some point in the future.

I did.

Maybe you have other family members that could use a giant tax-free windfall when you die.

Also, check out what that illustration projects for 30 years from now. I bet it'll show a decent ROI (~4%). 4% ain't bad when you consider it was a savings account and that it's all tax-free.

Great comments! I am not feeling "had" just yet b/c I dont have a policy yet- I am in the "research phase"... it has been a VERY painful experience to get the straight scoop. I get a lot of "trust me" - but not a lot of actual information.

I see benefits of the product and will likely get one but right now I am so very upset about how it is marketed... I would say it is out and out dishonest- not just "borderline" :)

For example- one agent I talked to said that there is a "Guaranteed Interest Rate of 4%" and "forget the death benefit- we are solving a financing problem here" -- guess what- you dont see that in your cash values- it is easy to see if you dis-assemble the illustration- it just isn't there. I back calculated the actual CV interest Rate and it never peaked past 2.2%... where is the 4%?? I asked him about it and he said "yeah- some of that goes to the policy costs etc" -- Thanks for being up front and straight with me buddy. Thanks for wasting my time trying to figure out the Excel Rate() function.

How about this one-- "Avoid paying interest to other people" -- The MassMutual policy I am looking at has a 6.16% policy loan interest rate noted... well- who gets that interest?? Not me- They get it- I saw some guy on this list saying otherwise a few pages back but he is just plain wrong. It really cant be argued... you are paying someone else interest. If anyone can disagree with this and actually show me how I am avoiding paying interest to others - I'll send them a gift cert for a steak dinner... The challenge is out there! Deadline: 3/1/2009.

Then there is that "recapture" nonsense--- which is really all it is-- complete nonsense- You recapture the purchase price no matter what financing option you use... unless you go bankrupt. It certainly is not unique to WL Banking. Even if I use a Credit Card- I pay it off and have recaptured the lost "net worth"

Now- I will say this- compared to todays savings accounts- a WL policy does have a pretty good return and some great benefits... so why all the misleading marketing? I gotta find an honest agent who I can look square in the eye- I'll buy a policy from him... if he exists.

:)

great insights kev. i think u get the point...you don't get a WL for the IB, you get it for what it is, a great vehicle for tax-advantaged conservative portion of one's portfolio which has a nice added value of death benefit and the potential for access to the gains through policy loans.

however, a few cautionary notes from my experience (since i bought one of these WL policies without knowing what i was getting into, but am happy to have fallen into it much in the same way as bdunklau):
1) i don't plan to even begin to touch this money until 15-20 yrs. from my illustrations and the way my policy is configured (no extra PUAs) it just doesn't make sense. this is truly my EMERGENCY FUND. no weekend getaway slush fund or last minute christmas gift fund...EMERGENCY FUND.
2) i also have a more accessible liquid savings account (my more traditional emergency fund of 4-6 months living expenses). this one can get hit with the occasional splurge if necessary, but is an extra buffer so i would never have to hit my WL policy for many years to come.
3) i count the Death Benefit as a major value for why i keep this policy. i don't ever want this policy to lapse. i could have made more money in a taxable high-yield savings account or CD ladder even AFTER taxes if i just compounded everything, but knowing my kids will have extra cash to pay off any estate taxes/fees etc. is more peace of mind for me. if you add in the death benefit (and most people don't because they don't get to use it), i do think the WL policy comes out ahead.

pochax, I can easily agree with and understand your statements. You make good sense. It's like a breath of fresh air- some of you guys :)

Thanks.

Kevin,

I gotta find an honest agent who I can look square in the eye- I'll buy a policy from him... if he exists.

But I do exist :)

-Joe

I don't mean to sound like some of the previous posters...but one aspect of the overall rate of return that is not calculated in the interest rate of the cash value is the dividend. This pushes your overall rate of return to an after-tax ~4-5% which could easily be 6%+ before tax return.

Sorry, I don't want to sound like I'm pushing anything here but without taking the dividends into account it can remove a lot of the total return (much like the stock market).

Of course, dividends are NEVER guaranteed :p

I gotta find an honest agent who I can look square in the eye- I'll buy a policy from him... if he exists.

Most agents that only represent one insurance company are pure salesmen so it can be very tough to get any kind of objective advice from them because they are only interested in pushing their company policy on you. You will probably have better luck talking with an independent agent that can work with many different insurance companies.

So I just got my statement.

I have just finished my 4th year in this sham ;) Let's see how I did...

On day one, if I had dropped dead, my beneficiary would have rec'd $392,000

One year later, after having paid in $12,000, my wife would have rec'd $448,000 (an increase of over $12,000 ...hmmmmmmmm) The cash value was $9,800 (projected to be $8,400 when I took out the policy).

At the end of year 2, after having paid in $24,000, my wife would have rec'd $484,000. The cash value was $16,800 (projected to be $15,400 when I took out the policy)

Then I got an updated illustration.

At the end of year 3, the same month our entire financial system almost slid into the abyss, my wife would have rec'd $520,000. The cash value was $26,300 (projected 12 mos earlier - the revised illustration mind you - to be $25,800)

And now, having "wasted" 4 years of my life and close to $50,000, if I dropped dead tomorrow, my wife would receive $558,000.

If I don't drop dead and I just want to go to Vegas, I've got $38,200 in cash value available to put on one number at the high stakes roulette table. The most optimistic projection from the ins co 2 yrs earlier said the CV would only be $37,700.

So let's see, Dave, Suze...

If I pay in $50,000 over 4 years and my death benefit goes up $160,000, isn't that the same thing as getting the original DB plus my $50,000 plus another $110,000 ?

So much for "They keep your money when you die" (the most misleading Dave Ramsey quote of all time)

And just to nail this thing shut, yes, $38,000 in CV is less that the $50,000 I've paid in. So I've paid $12,000 to support the DB.

2 years from now, when the CV catches up to basis, what will the DB have cost me?

Zero.

Thanks for the advice, Dave.

I, for one, am glad I didn't listen to ya

---------------------------------------------------------------------

If you have been considering one of these plans, make sure you get an A++ rated company.

Make sure you can put away $500 or more every month and make sure you can support those premiums for at least 5 years, maybe 6 or 7.

And don't sacrifice traditional retirement investing to do one of these things.

Life insurance is not an investmest.

Thanks for that good info and great advice. What company do you recommend then?

My policy is with Lafayette Life out of Lafayette Indiana.

www.llic.com

I would look at the big 3 too though.

To strengthen your point, bdunklau, it would be wise to mention that had you invested that $12,000 each year into "Growth-stock mutual funds that average 12%" your current portfolio would be far less than the $38,000 cash value given the recent market decline.

It's nice to see a good (intelligent) discussion on these forums again. And for you clients that insist on plugging illustration data into excel spreadsheets, you are our worst (and our BEST) clients! I hope you get an advisor that is worth having you.

http://finance.yahoo.com/banking-budgeting/article/107796/our-best-and-worst-financial-moves.html?mod=bb-budgeting

"Jeff Kosnett, senior editor
My wisest move was buying whole life insurance in the 1990s, precisely when countless books and articles mocked whole life as obsolete. My wife, Debbie, did the same. In the ten-plus years that we've paid $5,000 a year combined into our policies, both from extremely sound mutual-insurance companies, we've built substantial five-figure cash values, can borrow from them instantly at virtually no cost and haven't paid a cent of tax on the earnings.

Some might prefer putting the money into certificates of deposit, but I can't imagine a better sleep-through-the-meltdown savings asset than whole life. And, no, I don't know the rate of return on the premiums we paid. That's beside the point. I think about that with my stocks and mutual funds. This asset is for security."

Hindsight is 20/20!

Can somebody get Dave Ramsey on the phone before he advises another listener to "sell that trash"?

Or Suze, who is currently 0% on her large I-bond holdings.

Price,

Out of curiosity, how do you know that?

Actually, the I-bond was just a theory because she uses almost exclusively bonds. She says the majority are municipals (which are probably even worse).

http://articles.moneycentral.msn.com/Investing/Extra/IsSuzeOrmanOutOfTouch.aspx?GT1=9215

"Orman estimated her liquid net worth at about $25 million, with an additional $7 million worth of houses. With just $1 million of that in stocks, it means that just 4% of her liquid net worth is in the stock market.
What does Orman do with the rest of her money? Solomon asked, and was told: "Save it and build it in municipal bonds. I buy zero-coupon municipal bonds, and all the bonds I buy are triple-A-rated and insured so that even if the city goes under, I get my money. I take a little lower interest rate to make sure my bonds are 100% safe and sound. "

As for playing the stock market, Orman said "I have a million dollars in the stock market, because if I lose a million dollars, I don't personally care."

In short, the person being trusted as everyone's financial adviser has a portfolio that few people could live with."

Pro_student,

In the interest of "keeping things simple" - can you boil down your point to a one liner? Are you saying to not do IB with 65 of 100 year insurance but to do it with this new fangled X Pay policy or what?

Please be clear b.c I am just a regular guy... who now has spent about 100 hours trying to figure out how this all works (You should see my spreadsheet!).

Thanks.


I know I'm a little late on this one, but I agree: keep it simple.

The Custom whole life from NY Life and the limited pay policies you can find from Mass mutual and other mutual companies are not "few fangled". It's a whole life insurance policy that is guaranteed to be paid up in a very short amount of time.

Point blank: If you try to make your dividends from the policy do 2 things at once (pay the premiums after 5 or 6 years and try to increase the cash values at the same time), you decrease the long-term value of that policy.

The solution is to get a dividend paying policy with the shortest pay period. Life paid up at 100 means premium payments must be paid until age age 100. The reason you can stop paying after 5 or 6 years is because some of your dividends or paid up additional insurance from the first 5 or 6 years are redirected to pay the premiums that are due.

Life paid up at 20 means premium payments are due for 20 years. After that period, no more premiums are due-guaranteed, regardless of what the dividend scale looks like.

Life paid up at 10 means premiums are due for 10 years. After that period, no more premiums are due-guaranteed, regardless of what the dividend scale looks like.

If you want maximum cash value growth, with or without "banking", then you want the shortest premium payment period possible while still being classified as a life insurance policy. This will maximize the cash value like you wouldn't believe. If you can get a life paid up at 20, good, If you can get one at 10, better, if you can get one at 6 years with the custom whole life, do it. If you go shorter than that, I believe you loose your tax benefits.

All other things being equal, the shorter the premium payment period, the better. Now, if you compare a 20 payment policy to a 10 year, keep in mind that you have to squeeze 20 years worth of payments into 10 years so that the premiums you put in the policy are the same. Compare the difference. The 10 pay will always win. What you are doing is getting the most amount of money on that compound growth curve as fast as you possibly can. That's it.