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What Is The Infinite Banking Concept?

Though it’s been a hot topic for many years, a quick web search on any major search engine will show you that there is much confusion on the internet about the Infinite Banking Concept. Skeptics say the concept is nothing more than a disingenuous ploy used by unscrupulous life insurance agents to sell a lot of whole life insurance to unsophisticated prospects and clients. This view seems to be predominant on sites frequented by people discussing mutual funds and other aggressive, risk-oriented investment approaches. It’s fairly well known that these folks tend to hold any form of permanent life insurance in low regard and generally adhere to the “buy term and invest the difference” philosophy over the course of their lives.

I might add that it would not be unlikely that many of the commentators/moderators found on these sites are involved in some aspect of the business of selling mutual funds or other securities or are connected in some other way to the securities industry. In my experience, most “financial planners” fit neatly into this group of securities enthusiasts, too.

At the opposite end of the philosophical spectrum are others – most likely insurance agents – who unabashedly tout the Infinite Banking Concept as a “near-miraculous cure-all” for overcoming almost every financial shortcoming in a person’s life. You can almost hear the agent shouting across the kitchen table “Ya gotta just trust me on this, Ben. Load everything you can into this policy and I guarantee you, you’ll want to kiss me 30 years from now ’cause you’ll be a wealthy man! Just look at the numbers here on this proposal – it’s all right here on this page, man!” Maybe you know that agent, too? I’ve met more than a few.

Obviously, an intelligent reader would consider the general context of the site they’re visiting and immediately suspect that either of these positions must be near the two extremes of the spectrum of possibility. Naturally, the truth lies somewhere toward the middle of the spectrum. The challenge of the internet is that both extremes are likely to show up, side-by-side, on the first page or two of your web search! How do you begin to ferret out something rational and close to the truth?

It is my goal in this section of my website to systematically dispel the myths and confusion surrounding the Infinite Banking Concept. At the same time, I am opening the Infinite Banking Concept as a new topic on this blog to begin introducing more details about the concept in future articles so that people can learn about it and decide on their own whether or not it makes sense to them and is something they wish to pursue as a part of their own financial strategy.

With the added goal of teaching the concept without “hyping” it, I welcome a dialogue with site visitors who’d like to ask questions or leave comments for others to ponder – just as long as they are helpful and constructive to other readers. I also welcome feedback so I can learn what areas of the concept are most confusing to readers so I can focus future articles in those areas. So, let’s begin with a quick background and an overview of the concept.

The Infinite Banking Concept was pioneered by Mr. Nelson Nash of Birmingham, Alabama beginning in the high interest rate environment of the late 1970′s and early 1980′s. Based upon his personal financial struggles through those difficult times, Mr. Nash learned to effectively use the cash values from several whole life policies he’d owned for many years to make the best of an otherwise bad situation. As a result, he found that he had substantially increased his personal wealth as a direct consequence of what he’d done – using and repaying the policy loans!

Mr. Nash was so enthusiastic about his experience that he wrote a very popular paperback book introducing his idea and the concept and, essentially, branded it by detailing it in his book. The concept has actually been around as long as permanent life insurance has existed but Mr. Nash can be credited with putting it all together and teaching people how to directly benefit from using it deliberately in their lives.

At it’s very essence, the Infinite Banking Concept involves buying a permanent life insurance policy that is intentionally designed to build large cash values and death benefit over time. As policy cash values build, they become available to the policy owner for loans. Policy loans tend to be available at very favorable interest rates and terms, despite economic conditions and without any need to “qualify”. As long as you have cash values available, one quick phone call and you’ve qualified! The insurance company will put a check in the mail to you for whatever amount you desire up to the extent of your policy’s available cash values. (I’ll offer more details on how policies work in future articles but, for now, just picture policy values continuing to grow and compound over time as premiums are paid.)

So, we now have our permanent policy in place and have been paying premiums into it over the course of a few years and we have some cash values becoming available for us to borrow out.

IMPORTANT QUESTION: WHY ON EARTH WOULD I WANT TO PAY INTEREST TO AN INSURANCE COMPANY FOR THE USE OF MY OWN MONEY?

Sounds crazy, right? Well, not so fast…

This is where we need to shift our economic mind from the micro-economic view to the macro. This is where the actual cost of our alternatives enters the picture and must be accounted for. This is also where we need to learn THE ONE MAJOR DIFFERENCE that a quality permanent life insurance policy offers that sets it a world apart from each and every one of our other options. It is this one critical difference that makes the Infinite Banking Concept possible. The difference is simply this; a properly selected life insurance policy pays you interest or dividends on your cash values EVEN IF YOU HAVE BORROWED THEM OUT. In other words, you’ve now found a way to “magically” make your money work for you in two places at the same time. Take a minute and let the full importance of that sink in, OK?

Now imagine you have a bank account that pays you 5% interest on your funds. If you want to make a purchase of, say, a $20,000 new car and you pay cash for it, you are INCURRING A COST (lost interest) of 5% on the use of your money, correct? Are you not paying interest? Of course you are. You’re paying interest by not receiving it. You’ve chosen to move your investment from an account that was paying you 5% to an automobile that pays you nothing. Therefore, your decision has still cost you 5% interest on your money – in the form of sacrificed interest.

Now, back to life insurance policy loan. If you borrow the same $20,000 for your car from your insurance policy, you will pay interest of, say 6% for the use of your money BUT – and here’s the big difference again – THE INSURANCE COMPANY WILL CONTINUE PAYING YOU INTEREST OR DIVIDENDS ON YOUR MONEY AS IF IT WERE STILL INSIDE THE POLICY. Your mathematical mind kicks in now and quickly calculates that your actual cost with the policy loan is NOT the full 6% but is actually the difference between what you pay the insurance company and what you are receiving back from them. In practice, this “cost” for the use of your money is very negligible (1-1.5%) in the short run and is normally FULLY RECOVERED PLUS A PROFIT in the long run (when the income tax-free death benefit is eventually paid to your heirs).

While this difference in financing costs may not initially strike you as meaningful, consider everything you finance (by paying cash or borrowing) compounded over the course of your lifetime. Then, consider that banks do the very same thing and look at how large they grow. Then, consider that it can be proven that most people spend between 30 and 50% of their annual income on financing charges over the whole course of their lifetime. Then, imagine that some or perhaps even most of that money could be recaptured and compounded into your own pile of wealth and reinvested again and again for your own enjoyment later in life as your resources continue to expand exponentially. This wealth becomes available FOR USE DURING YOUR LIFETIME. These are the possibilities of the Infinite Banking Concept.

Mr. Nash emphasizes that everything in life is financed. Paying cash is just as much a form of financing as is borrowing or leasing. It’s just a matter of how honest we are with our accounting that determines the “least cost” method of financing that we employ over the course of our lives. When the accounting is accurate, it becomes evident that policy loans are a superior means of financing nearly everything in life, perhaps even our mutual fund purchases. But I’ll reserve that topic for another day and another blog entry.

As you might imagine, the Infinite Banking Concept can be quite simple but, at the very same time, it has many nuances and complexities. It also requires a knowledgeable professional insurance agent to help you learn it and apply it in your own life.

That is a thorough overview of the Infinite Banking Concept and should serve to provide you with a working knowledge of it. Please check back often as I fully intend to dig deeper into it to explore its complexities and nuances for the benefit of readers as time allows and creative impulses dictate. Meanwhile, please tell a friend about this blog and check out my other posts on different subjects. And be sure to look at topics that are related to Infinite Banking as I write them (i.e. velocity of money, term insurance, lifetime economic acceleration process, etc.).

I promise to keep working and developing this site to transfer valuable knowledge to my readers so that you can enjoy more wealth and certainty in your life. As always, feel free to contact me with questions.

36 Comments on “What Is The Infinite Banking Concept?”

  1. #1 Tom Humes
    on Sep 18th, 2008 at 2:51 am

    Nice Site layout for your blog. I am looking forward to reading more from you.

    Tom Humes

  2. #2 Susan Kishner
    on Sep 18th, 2008 at 3:17 am

    Hello. I was reading someone elses blog and saw you on their blogroll. Would you be interested in exchanging blog roll links? If so, feel free to email me.

    Thanks.

  3. #3 Allen Taylor
    on Sep 18th, 2008 at 3:34 am

    Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

  4. #4 Jim
    on Sep 18th, 2008 at 10:11 am

    A very good, mostly accurate and concise overview of Infinite Banking. I look forward to seeing how you expond on this foundation in coming posts. One slight modification: when you say “THE INSURANCE COMPANY WILL CONTINUE PAYING YOU INTEREST OR DIVIDENDS ON YOUR MONEY AS IF IT WERE STILL INSIDE THE POLICY”, dividends are only one of four ways that Infinite Banking ‘pays you’. Technicallly the insurance policy does not ‘pay interest’, properly structured, it increased in cash value every year by contract at what the outside observer may call ‘interest’, but it is actually a contractual gurantee (try that with your mutual fund, Real Estate or your investments). Dividends paid by a mutual insurance company are tax free and are included in the non-guaranteed assumed growth of a policy.

  5. #5 David
    on Sep 18th, 2008 at 11:15 am

    Hi Jim, my opening article on Infinite Banking was written to illustrate that the concept can work with a variety of PERMANENT life insurance policies and is not restricted to whole life only. Universal life policies do pay interest on internal cash values, not dividends. Whole life policies pay dividends (officially regarded as a return of an overcharge) and this may give them an edge over some other policies, but there are certain shortcomings to whole life which I will address in future articles. This is an introductory article that isn’t intended to go very deep. I do appreciate your comment and hope you’ll add to the dialogue in the future. Thanks!

  6. #6 BB
    on Oct 10th, 2008 at 8:27 am

    We started our bank 4 years ago and are starting to see growth in our capitalization phase.

    One thing I’d like to point out is that this concept has “nothing to do with investing.” It has everything to do with financing.

    A lot of people say, “Well, I can buy term and invest the difference.” However, if you borrow from your policy and invest those funds in the same exact thing, you will be better off.

    The focus here is on the lost opportunity costs from the cash that is leaving your pocket. Velocitize the money and you’ll be way ahead of the game.

  7. #7 David
    on Oct 11th, 2008 at 6:11 am

    Hi BB,

    I agree with everything you’ve stated. Minimizing opportunity costs, velocitizing wealth, and maximizing “benefits” is key. The difference between the two approaches in retirement is like night and day! Two completely different worlds altogether.

    In general, people misunderstand wealth BECAUSE OF THEIR FINANCIAL PLANNER! Their “advisors” (financial advisor, stockbroker, financial planner, CPA, attorney, real estate agent, and probably their insurance agent, too) actually prevent them from ever achieving their maximum success. A few simple adjustments to their overall plan can make the whole thing change character and spring to life.

    I can see that you understand why I’d say that and you also know why I am correct. Thanks for commenting.

  8. #8 Melody
    on Oct 12th, 2008 at 3:07 am

    BUT is the money you put into buying and increasing the cash value of the insurance policy guaranteed in any way? IOW, isn’t this all dependent upon the insurance company not ever going broke and always keeping its legal promise to pay what was agreed to? It seems to me that is one of the big risks a person takes with parking a lot of cash in some kind of insurance policy.

  9. #9 David
    on Oct 12th, 2008 at 11:56 am

    Yes, Melody, there is no question that we must trust our institutions for their financial strength and integrity. That is the way of the world.

    Insurance companies are the longest-lived financial entities on Earth due to their conservative nature and long-term planning horizon. Imagine if you were selling contracts that guarantee the payout of a death benefit on a newborn baby 85 years from now! This is EXACTLY what insurance companies do and, from what I can see, they seem to manage their affairs without peer in the financial world.

    There are no absolute guarantees in life or in finance. Even governments can and do go down. On the whole, insurance companies have proven themselves over more than a century to be survivors and, since we’re all forced to trust one institution or another, insurance companies have done a surprisingly admirable job of delivering on the promises they’ve made. Their record isn’t spotless but, when scrutinized, it’s pretty darned good.

    That said, diversification is ALWAYS a good idea, even with a portfolio of insurance policies.

    Another thing to consider is that much of the money that funds an insurance policy can be “cost recovery” money or money that would have been thrown away anyway. An experienced and knowledgeable agent can help you get a grasp on this concept.

    Food for thought: Even cash in a mattress is GUARANTEED TO EVENTUALLY BE LOST (at least most of it) due to the long-term ravages of inflation.

  10. #10 Joe Kane
    on Feb 7th, 2009 at 12:08 pm

    David,
    Great site, great info, balanced and well reasoned.
    Thanks,
    Joe

  11. #11 Kenny Taylor
    on Feb 24th, 2009 at 1:37 pm

    David,

    My wife and I were sold on the infinite banking concept and repositioned equity from a cash out refi on our home. I was confident I understood the opportunity both from reading Nash, Douglas Andrew’s “Missed Fortune”, “Bank on Yourself, etc. What our agent apparently did not take into consideration was the unsuitability of the product given our now evident inability to come up with the $50k/year premiums annually over the next three or so years (persuaded to set up various kinds of “investment grade” whole life policies since). When one considers the 70% surrender we stand to lose plus the inestimable opportunity cost for the last five years since our initial participation, the reality of where we are now is heartbreaking beyong words. We are in our fifties and stand to have all of the smart and prudent things we have done over the last 18 years be ruined and practically reversed all because of this one “investment”. Although we believe in the concept, we believe we were misadvised of those for whom no downside seems to exist. We are taking our issue to an insurance expert in hope of salvaging whatever can be before we consider cancelling the policies. We were informed that we stand to forfeit $70k of our $110k paid up value. Do you see any remedy in this? How could such a catastrophic risk not be a principal red flag in the legion of surveys and literature on the subject?

    Thank You,

    Kenny Taylor

  12. #12 David
    on Feb 25th, 2009 at 5:09 am

    Hi Kenny,

    Either your agent failed to warn you or you simply misunderstood that a whole life policy requires a strong level of commitment to following through. Typically, 10 years would be a minimum number of years I would want to see a client be able to sustain premiums without fear of interruption.

    If the policy premiums must come from income, I want my client to be very confident in the sustainability of that income stream. Otherwise, I want to see the premiums flowing in from other assets, places that give us a high level of certainty that they’ll be there when we need them.

    Perhaps it’s just my conservative nature but l DON’T EVER LIKE TO SEE ANYONE GET HURT! I’ve walked away from plenty of hefty commissions in years past when I wasn’t convinced the client had the staying-power to build the policy and follow through with the plan.

    Sorry to hear of your misfortune but, in the hands of a knowledgeable agent, you probably still have options that are much better than just quitting and walking away with what little cash value you have built, thus far. If the agents and “experts” you contact don’t have the answers, I strongly suggest you find one who does.

  13. #13 Art L
    on Jul 23rd, 2009 at 12:20 am

    It sounds as if you did not have a qualified agent that understood the banking concept and he or she did not do a proper fact-find. Were you in a Variable Whole Life, where there was risk. I can not imagine you losing $70k in a whole life policy that was properly structured. I am sure that there is more to this that what you have said.

    Art

  14. #14 David
    on Jul 23rd, 2009 at 5:29 am

    Hi Art,

    It sounds to me like it was a large face-value policy with fairly high scheduled premiums and Kenny and his wife were forced by unforeseen circumstances to quit paying premiums too early. A classic case of poor planning by both the agent and the client. It’s critically important to have an understanding of the macroeconomic environment we’re in or are likely to be entering. Sounds like neither of them did.

    See why I write about the many precautions as I do? This all needs to be a big part of the story every agent tells his clients before they get too excited about the IBC. All possible risks must be considered, including economic risks and any potential interruptions to cash-flow.

    Any amateur agent can get clients excited by highlighting the many great features and benefits of Infinite Banking. That’s the easy part. It takes a true ethical professional TO CARE ENOUGH ABOUT HIS CLIENT to present a balanced view, equally highlighting the good and the potentially harmful aspects, the opportunities as well as the risks – BEFORE TAKING THE APPLICATION! In my many years in the business, I haven’t met a lot of them and don’t expect I ever will. Commissions tend to rule.

    The Infinite Banking concept itself won’t fail but people will when they misunderstand it and/or misapply it and aren’t adequately prepared for a variety of potentialities. There is no substitute for Infinite Banking and it can certainly bring tremendous long-term value to a family but, like a Ferrari, it must be handled with due care and respect.

  15. #15 The Infinite Banking Concept
    on Oct 1st, 2009 at 11:33 am

    This is a great blog post about infinite banking. We have been using the concept for years, and it has been very useful to both us and our clients. Thanks!

  16. #16 Lisa
    on Oct 21st, 2009 at 4:19 pm

    I have a question that is posing a problem on my husband and I getting started on our “bank”. We owe appx $250,000 combined on various properties and vehicles. Last year we paid 18K in interest. should we take the money (50K) that we will be putting in to start our banking system, and work on paying off our debt first, as this will save us 18K currently? It would take us appx 4-5 years to do this. Or should be do the banking on top of the debt.
    My husband has the Dave Ramsey, pay off your debt first idea, and I want to get started now on our IBC. We are both early fifties.

  17. #17 David
    on Oct 21st, 2009 at 8:36 pm

    Lisa,

    I will respond privately.

  18. #18 Lawrence Thomas
    on Nov 18th, 2009 at 4:07 pm

    Hi David I just discovered your site. I recently discovered the IB concept and am very curious. I recently read the book “Be Your Own Banker” by Pam Yeller and she highly recommends using Whole Life. Is there ever a case when Index Universal Life would be a better fit? It seems with the higher return potential plus the dowside protection you would have better cash accumulation. Thanks!

  19. #19 David
    on Nov 19th, 2009 at 8:07 pm

    Hi Lawrence,

    You ask a very good question – one that I’m sure has crossed the minds of a number of readers.

    As an agent, I’ve had plenty of opportunities over the years to play with the illustration software from the major carriers who offer Indexed Universal Life – at least from the ones I know offer the most competitive products and have strong financial ratings. In other words, the only products I’d ever consider selling.

    Time and again, I’ve reached the very same conclusion and that is that a good whole life policy wins in most scenarios. When I “stress test” the IUL by reducing annual returns below about 6-6.5%, the whole thing seems to crash (policy failure). If I were to reduce premiums for a period of time, this could also result in a crash. Yet another “moving part” is the mortality charges, which the company can change at will.

    I’ve tried hard to be completely objective and justify these policies and have always reached the same conclusion; for my clients, it will always be a top-quality dividend-paying whole life policy. Other options may sound appealing but it seems there are simply too many “moving parts”. I, for one, am not willing to trust any company with “moving parts” because if they can be moved, they will be moved. It’s only a matter of time.

    If I were you, I’d only consider whole life and I wouldn’t even want to work with an agent who tried to convince me otherwise. I’d have to assume that he hasn’t done any stress testing and, therefore, doesn’t fully understand his products. Honestly, it couldn’t be any other reason than lack of understanding because agents will generally earn a higher commission on the whole life.

    It’s your future at risk, not the agent’s, and the guarantees, flexibility, and strong performance of a good whole life policy are very hard to beat by any product. The longevity and continuing popularity of the whole life products speak for themselves. I’m quite confident that the most experienced agents would have to agree.

    That was a great question and I thank you for asking it. I know it added to the value of this post.

  20. #20 Brian
    on Nov 26th, 2009 at 11:02 am

    David,

    Have what is probably considered a detailed question regarding IB concept.

    Regarding the proverbial automobile purchase often discussed in Mr. Nash’s book, the concept is to pay yourself the “interest” instead of a bank/finance company. Thus, if you could finance a car at 8% APR in the marketplace, that is the interest you should charge yourself with your repayment to the insurance company.

    I understand how you arrive at your net cost for borrowing (1 – 1.5%). But if your paying “interest” back at 8% (the market rate), then where does the additional 2% go?

    In Mr. Nash’s book, it appears the extra 2% goes into Paid Up Additional Insurance which in turn increases the dividends earned on the policy. That increased dividend amount, compounded over time in the cash value account, is how a policy owner is reacapturing his entire 8% interest paid for the loan in his cash value. Is this correct?

    I understand that most insurance companies now (if not all) do not allow such “additional” interest from loans to be credited to Paid Up Additional insurance (thus increasing dividends) but rather simply view the “additional” interest as satisfying premium payments. Correct? If this is correct, then although the IB concept would still seem beneficial from the point of view of access to “cheap money”, it doesn’t give you the extrodinary exponential growth in cash value Mr. Nash’s book discusses.

    I hope my question makes sense and you can clear this up for me

    Brian

  21. #21 David
    on Nov 26th, 2009 at 12:46 pm

    Hi Brian,

    Thanks for a great question! I apologize in advance for what will probably become a detailed and lengthy answer to address, the best I can, each of your points. Let me preface my comments by stating that I think all of your statements and assumptions are more-or-less correct.

    In his examples, Nelson Nash wavered on whether loans or cash surrenders should be used and this inconsistency has lead to a great deal of confusion among agents and DIY “bankers”. I can see how both approaches would work but, upon careful analysis, I still think the loan approach wins. Permanent death benefit is a VERY GOOD thing to own – as it provides a wide variety of lifetime uses – and the loan approach will tend to provide greater net death benefits (net of loans) over time than would the surrender approach. This extra death benefit occurs at “no additional out of pocket cost” since the cash-flows tested would be identical using either approach.

    Hopefully that explanation can provide some broader background and increase your understanding. Now, let’s shift gears and try to address your questions more directly.

    First, I think I am being very conservative when I talk about the approximate 1 or 1.5% “net cost” for using policy loans. When loans are being properly repaid and the policy functions normally – as if no loan exists – the net cost, I strongly believe, is actually somewhat less than zero percent. The extra return comes in the form of increasing death benefit and is verified by an Internal Rate of Return (IRR) calculation based on the death benefit.

    I guess there is some possibility I could be wrong in my analysis but, at this point, I highly doubt it. (Someone smarter than me will have to correct me!) I will state that I believe the extra 2% “most probably” goes there. This increasing DB and its associated increasing cash value helps drive future dividend growth in an exponential fashion. Also understand that DB can be “spent” in the policyowner’s lifetime in a variety of ways to provide enhanced benefits, particularly in retirement.

    I’m pretty sure I agree with what you said in your last paragraph but I have just heard that at least one good company is finally unveiling a new flexible paid-up additions rider that could help address this problem. What people must understand is that the IRS presents us with the ultimate problem in that we may eventually drive our policy over the MEC line if we use it beyond capacity (paying too much money into the policy). Mr. Nash mentions this in his work but I’m not sure many people other than the more sophisticated agents could completely catch it. The fact is, policies are ALL destined to eventually become MEC’s if they’re over-utilized. This is why I often recommend my clients keep extra reserve capacity available via fully-convertible term on themselves and/or other insureds. In this manner, they can continually grow their policy “banks” by opening new branches and get closer to Mr. Nash’s ideal of “infinite” without running afoul of the MEC restrictions.

    Understanding this is a work-in-progress for all of us and it seems you’re well on your way.

    Thanks for the great questions Brian and, of course, thanks for participating in this discussion. I hope I’ve answered your questions adequately and accurately and have helped move you forward in your thinking. If more questions come up, I’ll do my best to help you!

    Kind Regards…

  22. #22 K
    on Jan 12th, 2010 at 6:52 pm

    Hello. I am currently about to embark on a Universal Whole Life Policy. But…because I don’t fully have a complete understanding of it, I am a bit hesitant. If I put 10K per year into the “bank”, and then in 5 years, I lose my job (which can be unpredictable for just about everyone), what happens? I read all of these posts and I am concerned with the man who said that they are going to have to pay a forfeiture penalty. I thought that the amount that you put in, plus the guaranteed “interest” were, in fact, guaranteed. I know that you have to pay interest on any earnings if you cancel the policy but I would like to know more about the penalty, please.

  23. #23 David
    on Jan 17th, 2010 at 11:03 am

    Hi K,

    Please be clearer in your question about which policy type it is you are considering, universal or whole life, as there tend to be differences in how policy loans are handled. Most knowledgeable agents who work with Infinite Banking stick strictly with a certain type of dividend-paying whole life insurance – one that pays the same dividend whether policy cash is inside the policy or loaned out.

    Let me preface the rest of my response by repeating an old saying in finance “Never put money into anything you don’t fully understand.” Imagine how very different our world would look today if this advice had been scrupulously followed by all, regardless of perceived “sophistication” level.

    Now, of all vehicles you can put money into (life insurance is not to be bought or viewed as an investment, per se), life insurance can be one of the most useful. Infinite Banking is only one part of that picture. Life insurance is also relatively easy to understand. Pay your premiums as agreed and things tend to work out favorably over time for both you and your partner, the company. Your question arises from a VERY VALID concern about being able to consistently pay your premiums into the future.

    There are several good answers to your question, K. First, don’t over-commit. My opinion is you don’t have an adequate cash reserve built yet if you are asking this question. Your agent should say the same if he’s as concerned about your well-being as he is about his commission.

    Build your cash reserve now and build it large enough to handle whatever comes your way! This includes a substantial reserve for an extended period of un/under-employment as well as disability, emergency, costly repairs, etc.

    Meanwhile, as you’re building your cash reserve, you should cover your life insurance wants/needs with convertible term insurance FROM THE COMPANY WHOSE PERMANENT PRODUCT YOU WISH TO OWN. If you can afford some portion of that coverage in permanent insurance now, buy it now. If not, buy only term and convert as you’re confidently able to do so in the future.

    Ideally, “extra” cash reserves can be systematically moved into permanent insurance, picking up numerous benefits, with surprisingly little loss of overall liquidity. However, I would never advise any client to be without a READY SOURCE OF CASH kept in a place they can get to it right away, not a week or two from now. This is why we all still use local banks – for immediacy and convenience.

    K, the WORST THING a person can do is quit a policy early and walk away. Any agent worth his salt will do everything possible to prevent this from happening, even if that means walking away from a “tasty” commission now. This process should be “all about the client” and the client’s best-interests. The agent’s personal need for income should not be part of the thought-process if he’s functioning on a proper ethical plane.

    You are right, K, in that there are considerable penalties for cashing out of a policy, especially within the first 5-8 years. In the event you were unable to continue paying premiums you would still have some choices however to recover some value.

    Such choices (called non-forfeiture provisions) might include 1) Borrowing upcoming premiums from the cash value (often my personal first choice), 2) Using cash values to buy paid-up term coverage, 3) Reduce the policy face amount and have it be “paid up” permanent coverage or, 4) Some combination of these choices. Some companies may have other choices available but these tend to be the most common ones.

    If I were your agent I would design a plan that fits you comfortably NOW yet still allows plenty of room for growth in the future. Unlike shoes, this policy has to be able to grow with you for the rest of your life.

    I hope this helps and thanks for a great question – one that most-assuredly burns in the mind of nearly everyone who is considering making a long-term commitment such as permanent life insurance. For those who do it correctly and stick with it, the rewards can be tremendous. Those who did it wrong (often with the help of unscrupulous agents), gave the industry a black-eye which, in many cases, it did not deserve.

    Know what you are buying and be sure to only bite off what you can chew.

  24. #24 David
    on Mar 17th, 2010 at 3:11 pm

    Hello,
    I have been shown IBC from a college planner to fund my 2 kids
    tuition for the next 10yrs, assuming they both take 4yrs to complete college. The issue is the “equity Harvesting” I believe its
    called to refi my existing 1st mtg and line of credit and was advised to to get at least 80% of my house’s equity to fund the whole life policy. As you continue in your article it seems to good to be true, there has to be a drawback, like can we afford the yearly payback to the policy if we are drawing large sums to fund the tuition.
    It seems the only possibilty to fund at a low interest rate my children’s education, considering we do not have huge savings, and whatever we put away gets swallowed up by some minor emergency repairs, kids sports fees, uniforms etc.
    What are the red flags to look for before leaping.?

  25. #25 David
    on Mar 17th, 2010 at 8:59 pm

    Hi David,

    Unfortunately, you’re asking me questions that are nearly impossible to answer, especially since you’re not my client and I don’t know you.

    My initial impression is that – even if a refi made sense to you – it might be tough in today’s market to extract much equity from a home. Question: Assuming you could do this, is there any assurance you could borrow that money back out of a policy when you needed it to pay for your childrens’ college costs? If so, is this presumption based upon an illustration using current dividend assumptions? What if dividends came in considerably lower than what’s being illustrated (certainly could happen)? Would that money still be there? No one knows for sure and that uncertainty, when dealing with your kids’ education funds, would be a red flag for me.

    Based upon your statement – “It seems the only possibility to fund at a low interest rate my children’s education, considering we do not have huge savings, and whatever we put away gets swallowed up by some minor emergency repairs, kids sports fees, uniforms etc.” – I sense a strong need for liquidity and emergency funds in your household and, in today’s economic climate, any prudent person considering permanent life insurance would be sure he/she could continue making premiums so as not to drop a policy early and lose money.

    I’m seeing more and more examples of people buying convertible term (fully convertible to the permanent product they want to own) until they can get their economic house in order. Even more critical with young children is that you are PROPERLY INSURED. This is often accomplished with some combination of term if household income doesn’t cover an all-permanent plan. You’re probably already aware of this as is your college planner.

    I think you’ve done a very respectable job of identifying and enumerating the red flags yourself, David. As I’ve often told prospective clients, don’t start anything you may not be able to finish. It can be costly. Best wishes to you and your family.

  26. #26 Gloria Moudry
    on Mar 17th, 2010 at 10:33 pm

    I understand the IBC works best with dividend-paying whole life insurance from a non-direct recognition insurance company. Do you still prefer whole life vs universal life?? Also, I want to be sure I am choosing the best life insurance company for this IBC. How do I know for sure that a company is a non-direct recognition company, meaning that dividends are paid on cash value even if some of the cash value is loaned out? Thank you

  27. #27 David
    on Mar 18th, 2010 at 9:19 pm

    Hi Gloria,

    Personally, I tend to agree with your first sentence. Too many UL policies have imploded over the years and it’s still going on to this very day. Caution is due when considering the long-term purchase of any financial product and this certainly applies to life insurance as well.

    To verify that you’re dealing with a quality company whose products are non-direct recognition, I’d seek a company with a strong financial rating (generally a Best’s rating of A+ or better) and have your agent show you, in writing, that the policy you’re looking at is non-direct recognition with respect to policy loans. This should be stated clearly in a sample policy, if not the product brochures. Shouldn’t be too much more complicated than that.

  28. #28 JW
    on May 18th, 2010 at 2:58 pm

    I have been shown IBC from a college planner for my high school 10 grader. I was advised to put my current 529 fund (withdraw) and most of home equity (through refinancing), total ~$200K, to whole life insurrance. He said I don’t need to pay premium anually and can immediately get loan from the WL. It does not look like a non-MEC WL to me. After reading your website, I wonder if the college planner really understand the IBC or I misunderstand the concept?
    Please help. Thanks!

  29. #29 David
    on May 18th, 2010 at 8:00 pm

    Hi JW,

    Wow. I think you’ve been hit by one of the most unscrupulous salespersons I’ve ever had to offer rebuttal to. You, unfortunately, are dealing with EXACTLY the type of person who tarnishes the image of the life insurance sales profession while damaging the public. Did anything this agent presented to you make any logical sense whatsoever?

    Based upon my years of experience as an agent, I can tell you the following with a high level of confidence:

    1. NEVER WOULD ANY REPUTABLE LIFE INSURANCE COMPANY KNOWINGLY ALLOW an agent to recommend withdrawing home equity for the purpose of placing it directly into life insurance. Never, never, never. This is typically even carefully guarded against on the application itself. Big red flag here.

    To check me on this, simply call the compliance officer of the insurance company whose product is being offered to you and tell him/her that you’ve been advised to do this by their/your agent. Name names. That agent will see his/her sales contract pulled in the blink-of-an-eye. This will no doubt result in a “termination for cause”, which will probably bump this agent right out of the life insurance business as other companies will find out about the contract termination and the reasoning behind it and, will likely follow suit.

    2. I’m assuming your 10th grader is approximately 16 years of age, leaving just 2 years until college funds are needed. While it may make perfect sense to secure those “529 Plan” funds against market risks and uncertainties, putting the money straight into life insurance may well result in the withdrawn funds becoming immediately taxable (check with your accountant on this since I may be wrong). No matter, it would never dawn on me that whole life insurance would be a proper place to put funds that ARE CERTAIN TO BE NEEDED any time in the near future. Again, report this to the agent’s company’s compliance officer, and don’t be too surprised if the officer responds excitedly with something on the order of… “Your agent said WHAT?!?!?” Probable result: Agent sales contract immediately canceled.

    3. JW, whether or not the proposed policy is/would be a MEC – even though that WOULD create immediate as well as future tax problems for you while undermining the utility value of the policy – isn’t even the main issue. You are receiving horribly unethical advice from an agent who is greedy, self-serving, posing improperly and deceptively (and without qualification) as a “college planner” and who is, obviously, viewing you primarily as a big, fat commission.

    Do yourself and others a huge favor and call the company compliance officer. This kind of behavior cannot be tolerated from any licensed agent. Your call could very well terminate a career that never should have been started and definitely should not be allowed to continue.

    Run, don’t walk, away from this agent and tell your friends too.

    Best of luck, JW, and thanks for writing about such an illuminating topic. I’m sure others who are reading this have been approached with similarly appalling offers and, hopefully, like you, they’ve had the good sense to distrust them and seek additional opinions as you have.

  30. #30 CFP
    on May 28th, 2010 at 10:09 am

    David,
    I have enjoyed reading your posts and believe most of your responses have been spot on. However I would caution you to speculate on the motives or advice of another without knowing all the information. I might be wrong, but in response to your previous writer (JW) there are legitimate reasons why someone would use funds from 529 plans and home equity to fund a whole life policy other than getting paid. If JW was receiving advice from someone who is trained in short term college planning then they most likely were trying to provide liquidity and aid qualification potential. If someone was trying to qualify for aid then money in a 529 would reduce their potential, where money in life insurance is invisible to the Expected Family Contribution calculation. Secondly, if someone was having to pay a large portion of the tuition themselves then providing liquidity would be vital and the use of home equity can be an excellent source. Most likely JW was correct that their advisor was selling them a MEC contract. These contracts are commonly used in short term college planning and 99% of the funds go toward the Paid Up Rider, which as you know provide verly little comission. IF setup properly, they can provide as much as a 4% return in the first year, provide liquidity, and as mentioned before are financial aid friendly. The pre 59 1/2 penalty might apply, and taxes would be due but because of the short time horizon these are minimal in comparison to other investment options and potential aid qualification. This type of planning is definitely contrary to conventional wisdom but as you know we don’t practice by conventional wisdom.

    “When an idea comes along that is outside of our box of knowledge, we can choose to ignore it or get a bigger box”
    -Don Blanton

  31. #31 David
    on May 28th, 2010 at 11:20 am

    Hi CFP (Russ),

    Upon reviewing my response to JW above, I still STRONGLY BELIEVE that what her agent proposed is less than ethical and DEFINITELY would not pass scrutiny with any life insurance carrier’s compliance department.

    What if the carrier became insolvent and the home equity was put in jeopardy? What if the policy were forced to fall back upon its contractual guarantees and under-perfom forever…or worse?

    I don’t want to sound hard-nosed about this, Russ, but I think rational debate stops here. What was proposed was RISKY for both the client and the agent. Unfortunately, the client bears all the financial risk in this scenario (the agent still gets paid) and could potentially lose the home, the 529 Plan proceeds, and the life insurance in financial scenarios that are not too far-fetched in today’s brave new world of high finance.

    I also don’t, personally, believe that a MEC is typically acceptable for long-term planning for anyone younger than their mid 60′s – but maybe that’s just me. Why lock money away from yourself in a tax prison? Highly inefficient move. Weren’t the questions asked regarding a conversation JW was having with an agent presenting the Infinite Banking Concept? Why would a MEC be advisable/useful for that long-term purpose? (Scratching my head here…)

    All that said, Russ, you certainly do raise some relevant points and you are correct when stating that assets can effectively “hide” inside permanent life insurance policies (and annuities) with respect to qualifying for financial aid. I could imagine specific cases where your ideas might be absolute winners but, given the constraints of the information JW provided, I can’t see any reason to give any benefit-of-the-doubt to JW’s agent here. Risking a home is never an idea that’s acceptable to put “on the table”. From there, the rest becomes moot.

    Russ, I do sincerely appreciate your constructive, intelligent comments and welcome the “expansion” of the topic with the ideas you’ve brought in here. Readers can certainly benefit from the ideas you’ve shared and may wish to pursue them with their advisors. Thank you for participating.

  32. #32 David
    on Jul 16th, 2010 at 7:38 am

    Hi Bob,

    Thank you for your kind words. I try to offer my readers a haven of sanity and reason in a world filled with hype, salesmanship, and self-serving “information”. It is my with that you and many others are able to benefit from my efforts.

  33. #33 Dru
    on Jul 25th, 2010 at 10:53 am

    As you mentioned, don’t buy what you don’t understand and this certainly is not a simple program. My question is since interest rates are so low for many big ticket items, like cars. Would it not make sense to take a lower rate from a lender and just send the equivalent of an extra 1 or 2% to the insurance company for paid up additions? Wouldn’t it be better to earn the guarantee and dividends from the insurance company and not risk pulling out cash value to pay back loans unless the loan rate is equal or higher than the policy rate? Thanks.

  34. #34 David
    on Jul 25th, 2010 at 1:05 pm

    Hi Dru,

    I agree with you and think, in this case, it may be just as smart to pay the extra interest – as per your example – directly to the low-interest commercial loan used to make the purchase.

    For clarification of this idea, let’s use a current example. Right now a popular insurance company is charging an interest rate of 6.4% in advance (which compounds out to a slightly higher APR than 6.4% in arrears or simple interest) for whole-life policy loans. This differential (between the 6.4% the insurance company is charging and, say, a currently-available 3.4% auto loan) would go straight toward retiring the loan sooner and would pick up a little extra “tax-free” interest savings at the same time.

    Another approach some might use would be to simply pledge the policy cash-value to a bank or commercial lender for a fully-secured loan – if a favorable interest rate were available for such a transaction.

    In respect of the above, IF one’s policy could still accept paid-up additions (not all of them can) it’s quite possible that the very highest long-term combination of benefits might accrue by sending any excess repayment there – but nothing’s certain due to the non-guaranteed nature of dividends.

    If you’re familiar with policy design (as it appears you might be) using withdrawals of cash-value (as opposed to loans) may be a means of addressing the problem of having a policy that can no longer accept PUA’s. Most policies can accept regular premiums on an ongoing basis within certain limits. Just pay close attention to the MEC status and policy cost-basis when/if doing so.

    Thanks very much for contributing, Dru. It was a great question and your thinking is spot-on!

  35. #35 Mary
    on Apr 6th, 2011 at 12:21 am

    I am trying to determine the biggest down side/risks involved with this concept. As I see it, as long as I don’t miss my premium payments then around year 7 (assuming 4% guaranteed) I will have a cash value equal or greater to my contribution and can no longer “lose” money. Worst case scenario is I am not a good banker and don’t continue to borrow and pay which leaves me with only the money I put in and no death benefit. It would not make sense to do so, but in theory could I walk away at that point with no loss?

    Thanks for all the great info!

  36. #36 David
    on Apr 9th, 2011 at 8:32 am

    Hi Mary,

    I think your instincts are good and I’d add that you’ve surveyed the “risk landscape” accurately, as well.

    As I see it, the primary risk would be stopping short on making your premium payments into the policy. In the case of the IBC, quitters can certainly lose and this could be due to unemployment, change of business circumstances, or simply losing focus on the IBC over time, to name just a few causes.

    Another risk is that the insurers can’t maintain the dividend scale going forward as the low interest rate environment continues and their higher-yielding investments mature. This is a VERY REAL scenario that we are seeing now. This by itself would not normally force the companies onto the “guarantees” of their policies but it would also not enable peak performance from the IBC approach either.

    Insurer insolvency or related problems that could jeopardize access to – or use of – your funds is somewhat remote but our current world will likely deliver some very nasty surprises before this debt-collapse phase has worked itself through and is fully finished with us.

    Excessive, imprudent global debt levels can take many years to correct themselves and reach a more sustainable balance. I don’t believe we’re anywhere near a sustainable point yet. I do believe, however, that the long-overdue correction will be mostly or completely behind us within 10 years. The intervening time period will be challenging for everyone to navigate successfully, including all of the insurers. As debts are written off and liquidated, money will be lost. It’s just a matter of how much and by whom.

    As for your cash values equaling your total premium payments in year 7, this depends entirely upon the policy and company you choose to work with and how much additional premium you pay into it. Other important factors are your health, gender, and smoker/non-smoker status.

    One company I like to work with would “typically” (if there is such a thing) have the CV equaling the total premiums paid occuring somewhere between years 11 and 13 – with no additional premium paid in whatsoever.

    This approach maximizes the “pure life insurance” aspect in the early years (when most people have a higher need for coverage) presenting a more efficient alternative to term. I prefer this approach as the long-run performance of the two alternatives (normal funding approach vs. early additional premiums) is nearly the same, with this particular company anyway.

    As for your “worst case” scenario of being a bad banker and “neither borrowing nor paying” (continued premiums, I assume), some policies that are over-funded excessively in the early years will not sustain themselves on dividends alone and may either “backslide” by consuming cash values to cover premiums due in excess of dividends or may even completely cannibalize themselves. This is typically NOT a risk with a normally funded policy or with smaller paid-up additions – which is one of the primary reasons I prefer this approach, as mentioned above.

    One way to stop such cannibalization or a potential policy collapse in that situation is to make a phone call to the company and choose a reduction in coverage that either required smaller ongoing premiums or was completely paid-up. Bear in mind that there can be tax consequences to this approach and it can trigger the policy to become a “modified endowment contract”, which limits the usefulness of the policy. Either way, it’s better than losing it altogether.

    Contrary to popular opinion, one of the nicest things about whole life insurance is there are many options that add considerable flexibility to how it can be used to address a wide variety of different circumstances that life throws our way.

    I hope this helps extend your understanding, Mary, and I’m certain your questions are looming in the minds of many other readers, as well. Thanks for writing and I wish you the very best!

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