Here at the DWS blog, we’ve already covered a bevy of complicated topics. We have covered oil markets, the emergence of marijuana stocks, Fed decisions, Bitcoin, etc, and (hopefully) broken these topics down into easy to read pieces, making them approachable and enjoyable for the people who DON’T do this kind of thing for a living.
So when I was asked to cover “Infinite Banking Through Life Insurance”, I was a bit spooked. Explain “turning yourself into your own bank through a whole life insurance policy using a paid-up additions rider”, in a clear and concise way? Good Heavens.
But as I dug further and started learning the grim details, I unearthed yet ANOTHER failed scheme to separate good-hearted investors from their cash, and I grew upset. I encourage you to share this article with any friends or family using “Infinite Banking”, “Bank on Yourself”, or “Be Your Own Banker” immediately.
First, what is “Infinite Banking”?
- 1) Over-fund (with your after-tax money) your whole life insurance policy from a mutual life insurance company.
- 2) Have it accumulate cash value over the years with a guaranteed 3-4% interest rate.
- 3) Take tax-free loans (that don’t necessarily ever need to be paid back) against the policy’s cash value to fund payment for a car, a house, everyday living expenses, or anything you can dream of!
Sounds pretty good. In essence, an insurance agent selling you a whole life policy with a paid-up additions rider will tell you that you can “become your own bank!”, borrowing your OWN money and paying the interest to you! No more taking out costly loans, no more crazy interest payments. In fact, you don’t EVER have to pay back the loan if you don’t want to!
So why am I crabby about this? Let’s start with the most fundamental question of all; how is your life insurance agent getting paid?
Why, with commissions from your premium of course! See, you’re not “directly depositing” your cash into your whole life insurance policy at all. You’re paying it to a large life insurance company, who takes a cut, who then takes ANOTHER cut to give to your agent, then drops the rest into your policy. Let’s say you’re paying $12,500 a year for a $125,000 whole life policy. In four years, after paying in $50,000, you will only have $46,110 in your account. We hope you’re enjoying your devastating -9.22% loss thus far, because the problems are just getting started.
Now that there’s some extra money in your account, you can start borrowing it! Hurray, the banking bit! You can borrow up to 90% of the net value, or $41,500. The interest rate the insurance company will charge you for borrowing your own money back is 5%.
…Wait, hang on, the insurance company is only paying you 3-4% a year in interest on your policy. You’re being charged 5% annually to borrow your OWN money back. I trust you, my reader, are asking the very obvious question. “If I had the money to dump into the policy anyways (AND to take a 9.22% loss immediately), didn’t I have enough money for whatever I wanted in the first place!? I could’ve just held onto my cash, or put it elsewhere.
TADA! And just like that, the very simple conceit of the Infinite Banking Concept is broken. So, is this concept dead in the water? Is no one falling for this trap anymore? Unfortunately, no.
History and Self-Serving
This shell game has been going on since the 80’s, with a new coat of paint and new branding every time the old name is debunked or discovered. “Infinite Banking”, “Be Your Own Bank”, “Bank on Yourself”, these are all slick, new-sounding endeavors promising independence, freedom, and happiness, which amount to nothing more than a clever way for insurance agents to sell more product to a client who simply doesn’t need it. Let it be known: the advisors at Dynamic Wealth Solutions are not hostile to life insurance. On the contrary, we recommend it to most of our clients as part of a comprehensive financial plan. Our problem is with agents and actors who have gained their client’s trust, abusing that trust, most often to generate extra commission for themselves.
We are not alone in our endeavor to help clients understand the travails and pitfalls facing them; another excellent article on this topic by Allan Roth can be found here. He comes to the very same conclusions I do, and finds that in repaying his loan of $30,000, he ends up paying over $12,000 to the life insurance company.
Furthermore, he discovers how the company who owns the “Bank On Yourself” trademark markets their plan to eager insurance agents. The company’s materials describe it as “the ultimate power prospecting and marketing system” and claim that users will “be earning the kind of commissions you’ve always dreamed of in practically no time.” That hardly sounds like concern for the benefit of the client is in mind.
Aggression Under Questioning
He also shares the anger and hostility he gets from the insurance agents he dealt with, simply because he asked to see the numbers. The advisors at Dynamic Wealth Solutions have experienced this aggression firsthand. When confronting our client’s insurance agent about her numbers who was selling expensive “Infinite Banking” riders, we were met not with rational rebuttal but with blatant and abject scorn. No number of her large company-provided pamphlets and graphs could explain away the exorbitant losses to commission on every premium our client paid into their life insurance with her, or the simple fact that 5% interest charged is larger than 3% interest gained. When the client was gone, she asked us in private why we were so hostile to her making a hefty commission. We told her that we don’t collect commissions, and instead earn a low, flat percentage rate each year. She gave a derisive snort and asked “Well then how do you feed yourselves??”
This agent can’t be a representative for every insurance agent out there; many are good and honest people selling a product that most everyone needs. The problem becomes when they use a self-described “marketing system” to promote an expensive shell-game that results in net losses for their client and huge commissions for the agent and their company.
So, What Do You Suggest?
Instead of over-funding your life insurance policy, you could put that money into a cash balance investment account. Investing conservatively, you could grow the account at a reasonable rate (think 4-5%), and withdraw money to make large purchases anytime, and at no interest rate!
Concerned about market volatility affecting your portfolio when you need to withdraw money the most? Invest exclusively in municipal bonds, which are triple tax-exempt, and relatively stable. Good choices in municipal bonds alone can net you a 4-5% rate of return. You’ll thank yourself for not losing 9.22% on premiums, and not paying 5% interest to an insurance company for the privilege of accessing your own money.
– Kiernan Easton, Partner and Private Wealth Manager at Dynamic Wealth Solutions
29777 Telegraph Rd #2417, Southfield, MI 48034