Since NuWire wrote an article about the Infinite Banking Concept, we have noticed many inquiries wondering whether or not the Infinite Banking Concept was really a scam. In order to answer these questions, I thought I’d write a blog post on the subject.
To the question on whether or not the Infinite Banking Concept is a scam, the answer is no. Infinite Banking is just a creative way to use whole life insurance. People have been doing things similar to the Infinite Banking Concept for a long time. They just didn’t know what to call it. The Infinite Banking Concept is a trademarked name created by Nelson Nash (the founder of the Infinite Banking Concept).
Nash travels and teaches insurance agents about the Infinite Banking Concept so that they can generate more sales. This is how Nash makes his money. Those insurance agents are then able to teach their clients about this new and exciting way to use whole life insurance. This opens up a new sales avenue for these agents to convince potential clients who would otherwise have no interest in buying a whole life insurance policy. Since whole life offers large commissions, that are much larger than term life, this is a great tool to increase revenue for the agents.
The Infinite Banking Concept is not something you can buy. It just shows you a new way to use something already familiar and should work with any dividend-paying whole life plan. You can use these concepts without signing up for any special plan or paying Nash any money. Those agents who have been trained by Nash are supposed to have a better understanding of the ways to use this strategy. That being said if you are going to open a whole life plan with those hefty commissions for the purpose of utilizing the Infinite Banking Concepts, then you might as well use an agent who can give you some advice and tips and make sure you do it properly. Using the Infinite Banking Concept in your whole life insurance policy though doesn’t change the policy. As long as you believe that whole life insurance isn’t a scam, then the Infinite Banking Concept shouldn’t be considered a scam either.
I will add that the projected returns your plan experiences could very well be different then what is portrayed in Nash’s book. I believe them to be fairly accurate examples, or were at the time the book was written, but they are in no way guaranteed. It is also possible to use these concepts in a variable life account where base returns are tied to the market. Nash doesn’t recommend that people do this, but these are open concepts and they can be used in any way one sees fit.
74 comments:
Are there other investment accounts with lower fees and commisions that can be used the same way as the infinite banking system?
Unfortunately this system was created to work with life insurance accounts, namely whole life, which are very expensive. No matter which insurance company you go with they are still going to be pretty expensive. That being said, it is possible to practice some of the same concepts in other accounts, it just won't work exactly the same. One of the main benefits to the program within the life insurance account is the favorable tax treatment, and if you do the program in a different type of account you might save on fees, but you will probably pay that back in taxes.
The basic idea of the infinite banking system is that you want to be your own bank. Instead of taking out bank loans you want to take loans from yourself. This same basic idea could be practiced inside a money market account for example, however, again the biggest problems are that you lose the favorable tax treatment, you don't have the death benefits, and you potentially have lower returns.
One idea could be to start this system in a money market type account until you grow the amount large enough to justify moving into a life insurance plan.
I have a whole life policy that I use as my "Personal Bank" as described by Nelson Nash. My policy is 1 mill and costs me 5k a year.
As compared to when I was putting money into my 401k the monthly out go is the same (~416/monthly) Not to mention I have 1 million in life insurance and use of the cash value of my policy. Doesn't seem to expensive to me.
What I have decided to do is get a Term Life policy. I then invest the difference in the Premium that I would pay in the whole life policy in good mutual funds with low fees averaging 10%. Over time I not only make more money (due to the high costs/commission structure of whole life policies), but when I die I pass my remaining monies on to my family. In whole life, guess where that cash value goes??? To the Insurance Company...
Buying term and investing the difference isn't a bad idea if the projections worked perfectly. The truth is that when you project out your Mutual Funds at 10% per year...you don't really receive 10% per year assuming you will lose money in some of the years. Example...If I started with $1 and lossed 50%...I go down to 50 cents...If I then Gained 50% I would only be up to 75 cents. So what I am trying to say is that when you project out the "difference" to be correct you need to assume you will go backwards some years and have to catch back up. The other problem with this strategy is that in 20 years your term policy will be terminated and you'll only be left with the difference. So that means your beneficiary will only get the "cash value" also. I think sometimes we hear something so often that it becomes reality. But when was the last time anyone sat down and actually proved these strategies to be correct and not just because everyone else says so?
The infinite banking concept sounds good to me, but you said that it's not guaranteed. I read on another site that the dividends paid by the policy are guaranteed. It says "Since the dividend is not an actual 'gain' but is rather a 'return of premium' the dividend is not considered a taxable event. Unlike a divident declared in a security which may lose its value as the stock rises or falls, a dividend declared in an insurance policy can never lose any of its value. Once a dividend is declared it is guaranteed -- it can never lose its value." Then the article goes on to suggest using the "dividend" to purchase additional Paid Up Insurance (no cost for acquisition or sales commissions), so that you have "an ever increasing, tax deferred accumulation of cash values that support an ever increasing death benefit." It says that "as a rule of thumb, a policy will have a blended internal rate of return (the rate of return -- before tax -- based upon the net effect of both the interest and dividend payments to the policy holder) of approximately 6% to 8%. Is this right? Since this doesn't seem to be tied to securities, it doesn't seem to be any risk that the investment will go bust if the stock market crashes -- unless the insurance company does. Any other risks I'm not considering?
The insurance companies typically guarantee a certain %, say 3 or 4%, but then will also pay out a dividend based on how well the company performed over the previous period. So it is not guaranteed that dividends will be paid out, and if they are paid out they can vary. Some insurance companies though have a long track record of paying out steady dividends, and this is certainly something to consider when deciding on which company to use.
Regardless of how the stock market performs you will at minimum get your guaranteed 3 or 4%, but the better the stock market does the higher chance you have in all likelihood of tacking on a nice dividend. There are life insurance plans that are tied to the stock market though, variable life is one such plan, however, Nash discourages the use of these plans for this system. Some people prefer to use the variable plans regardless, but there certainly is a higher risk factor if you go that route (along with the greater potential reward).
If you are seriously interested in the Infinite banking concept I would urge you to sit down with an agent and discuss it with them. They are going to be able to provide you with much more information than I can. Just make sure to use an agent that understands this system as most do not. Here is a link that can help you find a good agent if you want to take the next step: http://www.infinitebanking.org/links/usagents.php
Dividends are not guaranteed. There are two types of whole life..Dividend paying and interest bearing. Nash recommends doing it inside of a dividend paying policy. Most companies guarantee a 4.5% minimum. They then declare an annual yield or dividend which then adds on top of the minimum guarantee. If you did a comparison of a normal whole life policy you would see after about 30 years that they all come in at a 4-6% internal rate of return. That would be comparing the big boys and the smaller companies. So don't let a name deceive you when you buy one of these. The real value in the Whole Life/Infinite Banking Concept is NOT the internal ROR on your cash..It IS the recapturing of lost interest and recapturing of Opportunity cost on that interest. When it comes to picking a product...Don't focus on the projected future of the product...focus on the Guarantees. The projections are meaningless. You also want to find a product that has the maximum flexibility. There are only a handful of products on the market that you can actually design to do what Nash is showing. Most agents don't sell them with that design because it cuts their commission by 70%. If you want more info you can check out my blog..
http://veracityfinancial.wordpress.com/
Eric Ames did a nice balance overview.
The guy who buys term and insvests the difference in Mutual Funds --- Good Luck with that! Dalbar and assoc. showed the average investor returned 2.9% to 3.1% during the biggest Market bull run from 1984 to 2004.
I suspect you also won't have the discipline to pay yourself back. At least a loan arrangemnet with your policy instills the discipline to carry out the plan.
Need money during a market downturn? Either lose your capital and cash out, or wait 3 months to 5 years to recover your investment in order to use it. And don't forget to pay your capital gains.
Take out money from mutual funds, bank accounts, etc. and you lose earnings on the money. At least some WL (not all) providers pay the same dividend scale when money is on loan.
Figure it out for yourself with excel - put $50,000 in an Investment Account and choose rate of return. Then ammortize a car loan (separate from the investment account). Remember, this money is being paid to someone else. Factor the depreciation of the car over 5 years.
With proposals I have run, compared to the IB concept, you need a 12% return every year without loss in the investment account to generate the same capital of IB(cash value plus car. Kind of like a $200,000+ DB for free. I don't think anyone's spouse would object. BTW, over the 3 years I have implemented this for clients, the Insurance companies have paid the dividends as illustrated, but remember, dividends are not guaranteed (nor are stock market returns).
A panacea? No. The guarantees are still only 2-4%. It's only one part of building a financial statement.
It is stable and predictable which is what you want for financing vehicle. Add tax leverage with a leasing equipment LLC for your company. And in Texas/Florida, it's asset protected - beats forfeiting your brokerage account to your creditors in a lawsuit.
If nothing more, you plug one of the major holes in your financial statement (financing depreciating items) without having to risk your capital looking for 12% returns.
I appreciate the blog. This truly is an amazing concept and very creative. We work with people every day who have the "light go on" when we talk to them and explain to them the principles. Though some worry about the cost of insurance, by understanding the concept and how it works you will see that the actual insurance will in essence become "free" if the policy is maximized and written correctly. You see, insurance is an amazing thing, but we have been taught to run from it because of the mere fact that insurance salesman have always sold it to their advantage. If we step back and look at the most advantageous way for the policy holder you will see amazing results. The power is incredible. It will truly blow your mind away and change your life so much for good.
please check out www.becomingyourownbank.com
I'm just giggling at "Rex" and the "buy term and invest the rest" mentality. I started my bank through my perm WL contract and have since bought 6 more plicies as I could comfortably afford the premiums and push them to just sub mec levels on PUA dumps.
Food for thought- pretty much anytime you can even BORROW money and use it to add to your PUA's, there can be a pretty big float from the interest you pay vs what you get in the policy, because as time goes on, the policy becomes exponentially more efficient, offsetting any "losses" you had paying non-deductible interest early on in the building of the bank. For newbies here, start with a low DB WL policiy and fund it as best you can early on. The sooner you can get a higher DB, and the higher premium you can afford, the more opportunity you'll have to fund the policy. This is a 20 year plan for sure, but beats the pants of of any 30-40 year plan of buy hold and pray while watching the tax man come ever closer with his hands out. It ain't gettin any better in the future folks- that's why insurance has been around since the boys first came over to America insuring their ships....
yeah, i'm laughing at rex too. he totally misses the boat on the concept. if you die with WL, your beneficiary gets a death benefit...guaranteed. term rarely pays out. i would be more upset with my small premiums adding up over time, all of which go to the insurance company, and are never paid back to me. with WL, your estate is guaranteed the death benefit, plus you get tax favorable access to the cash value inside of the policy. then in retirement, this nest egg can be spent down.
when you average out the commission that an agent receives for whole life over the entire life of the contract, it's essentially equal to and sometimes less than the commissions on that money being in a mutual fund. it just happens to be that a big part of it comes up front.
i would also like to point out that mutual life insurance companies are able to GUARANTEE a dividend (return of premium) of often between 3 and 4%. however, the actual dividend over the last 50 years has been higher, if not significantly higher, the entire time. through smart, safe investing, insurance companies can provide attractive dividends.
while i'm rambling, i would also like to point out that WL should NOT be the only vehicle that people use to save for retirement. it should be viewed as a safe cornerstone that can be guaranteed to a certain point, and will most likely exceed that point. it should be coupled with 401k contributions that employers match, mutual funds, and other investments.
and finally, nobody should ever short themselves on the proper amount of death benefit because they couldn't afford enough in WL. supplement the difference with term until you can afford permanent life insurance.
there. i'm done ranting. yes, i'm a licensed agent. but these are important topics and i'm glad people are out there discussing them.
Hi All, I've read Nash's book and spoken to a couple agents. I have one very very simple and basic question.
WHEN I take out a policy loan, AM I CHARGED INTEREST by the insurance company or not?
Another way to put this- If I borrow $1000 from my policy, and pay it back over a few months lets say, after I send them checks totalling $1000 -- am I paid up?
It seems like it should be this way with all the talk about "recapturing interest" etc but some agents I have talked with say the Ins company charges interest... which sounds like not recapturing to me.
Thanks!!
KV
Thats a great question. Most policies do have an interest rate attached to the loan. Let's say it was 5%. So in your example here is the way it would work...If I borrowed $1000...I would actually owe the policy $1000 plus 5% which equals $1050. So I would have an outstanding loan balance for that year of that amount. So as I pay back the $1050...$1000 goes to my cash value and $50 goes to the company. BUT while I have the $1000 outstanding...that same $1000 is actually still in my cash value being credited an interest rate. The $1000 I borrowed actually comes from a different pocket than my cash value. So I could be being charged 5% on the same money I am being credited 4.5%...therefore my net cost to borrowing money would be .5%
And on top of that if you borrowed the money for a legit business deduction you might be paying even less in interest.
Each policy and company have varied interest rates they charge and some are variable and some are locked in for a certain time and sometimes even lower as you get older. So at the end of the day this money is still far cheaper to access then paying a tax on any other account to access the money or paying penalties or sales charges. When you run the numbers the LI is the best way to do the banking concept LONG TERM. Hope this helps.
Jeff, Thanks so much for basically the first CLEAR statement of how this thing works that I have seen.
How does one go about finding the best life policies to do this with?
I'd rather shop the policies and then find an agent than find an agent and have him tell me how great his policy is and how horrible every other one is.
Thoughts?
KV
Email me and I could give you some ideas. veracityfinancial@gmail.com
I am learning about this proccess for the first time. Many people I talk to say tht you can only do this if your making 50,000 a year. I am around the 30,000 mark, but am very interested in increasing this value for investments. I am hoping somebody here would know if this is possible. I am good at math, but don't know how to crunch the numbers in this situation. Am I over my head for now or can this work for me?
David go to www.infinitebanking.org and watch their presentation.
www.choose-financial-freedom.com conducted an interview with R. Nelson Nash, creator of the Infinite Banking Concept and author of Becoming your Own Banker. They have some free downloads that are from R. Nelson Nash himself. Take a look, they may help.
Just so you know, the differences in commissions between term and whole life are not as large as the differences in premium dollars paid by the consumer. So you can lay to rest that the insurance agent really cares if you buy term or whole life, a true professional would want to make sure to protect your risk.
A smart consumer would rather build equity and earn a substantial dividend versus renting a policy that the odds say will only pay 5% of the time. I believe the difference lies with the consumer who convinces himself that he will save the premium dollars and smartly invest the rest for himself rather than rely on professionals who are paid to invest full time. Most consumers pride themselves with their premium savings and never follow thru with the succesful investing that is the premise of their argument!
Americans are the 2nd worst savers in the world. And it shows. R. Nelson Nash's concept helps people get empowered and earn back the money they currently throw out the window to the banks and finance companies who lend our money, and not theirs, and earn incredible amounts of money. Why not learn learn to earn that money for yourself? Rhetorical question.
I landed on your blog and to this post while searching for infinite banking information on the internet.
I came across a message board (http://www.ampminsure.org/manage/infinite-banking.html)where the posters are calling the infinite banking system a scam. Is it really the truth? Or are they missing something?
With what I have read here and other places, I am further confused if it is really a scam thing going on here?
Anybody have any concrete evidence please?
Thanks and Merry Christmas!
Good day:
Glad to see that Infinite Banking is getting a fair shake on this website. To the person that asked if IBC is a scam, it certainly is not. Although, you NEED to have a good participating WL policy for this type of activity. I would recommend Guardian, or another company called Mutual Trust Life (Chicago). MTL is on thestreet.com list of 140 preferred companies and both are solid. I myself practice the discipline of IBC and L-O-V-E the control it gives me.
Sure beats "buy and pray" one-size-fits-all Suze Orman crowd type of investing that's for sure!!! :)
I wouldn't call this a scam as much as I'd call it risky. I agree with Rex... Term and separate investments all the way. This concept appears to be a re-wrap of universal life... which granted, has some tax benefits...and if you are truly wealthy can be a nice hedge vs taxes... but has some big risks if you can't meet minimum premium payments, really ugly risks. I agree with Buffet. Unless you fully understand the investment, it's not very smart to risk your future on it.
Firstly, many people seem to think they understand the insurance industry and the products. Dividends in a whole life policy are simply return of premium. Most companies with any prestige in the industry have ALWAYS paid a dividend EVERY yr, some of these companies have done so for over 100 yrs (find a bank with that kind of track record, secondly this entire concept is based upon the use of paid up additions riders inside the policy. The thought process that you can somehow buy term and invest the difference and get the same results shows a simple basic misunderstanding of this concept and the whole life dividend paying policies. Also there is no tax free income abilities within term insurance or investments. The magic of permanent life insurance is the ability to create a TAX FREE INCOME (nothing else can do this). The premiums are based upon over funding (paid up additions) up to the MEC guidelines. The concept is based upon a key formula of DB vs premium and the use of paid up additions rider. It is complicated for anyone who is not fully versed in the usages of permanent life insurance.
I have read lots of comments calling the IBC a scam; I wonder if buying term life and investing in Mutual funds and stocks is where the scam is !! First you need to die inside the span of years your term life is good for; otherwise is a total waist of money; ok you paid to get your coverage but that is the same as a rental, nothing to show after you move out; and then invest in stocks or mutual funds, where is your guarantee that if you hold for the long ride you will be a winner when the only long time period without a big stock market crash was between 1943 and 1972; besides that period the markets will set you back every 13, 6, 5, even a years time when there has been a crash with loses that go from 26 to 49%, not counting 1929 when the loss was 89.6% and every time the markets go backwards, the recovery percentage is exponencialy higher. Factor those crashes in your calculation of your growth and you come out with pitiful results. So do not put down a process that if you are disciplined and honest with yourself it will guarantee the performance and you will be able to count with some money for your retirement. Visit http://infinitebanking.com and http://squidoo.com/financeyourown
I own three companies and EIGHT whole life contracts. A couple on me and my wife and my three boys. I've also insured my business partners. I pay my premiums on all the policies each year and overfund every one of them to the MEC limits. I have policies that already have sufficient dividends to off-set the premiums on the policy. I pull policy loans on a regular basis to puchase equipment for my business, and yes I have bought a few cars with the loans. I pay monthly loan payments to my policies continually replenishing my cash values for the next time I need money. The risk that I have in doing Infinite Banking is what I choose to do with the money when I pull the loan. There are great times to be in the market - I have made money in the market with funds I loaned from my policy. I think buy and hold is silly and I feel for all those who have lost fortunes "investing the difference" in the market. If you're counting on someone to watch your money for you and make you a fortune - good luck with that.(Vegas is in Nevada) Infinite Banking is a beautiful thing. It has done tremendous things for my cash flow, my tax liability and ultimately my bottom line. (oh and yes I have ALOT of life insurance in case the good Lord takes me early.) The family will be O.K
Three cheers for Nelson Nash. Hip Hip ...........
The infinite banking concept is mainly about private contracting among free people! At the core it is the equivalent of a CD secured loan from a bank i.e. insurance company or brokerage firm since they all aggregate money and loan from and borrow against the pool of money i.e. BANKING! Major differende is that this is tax free with a prenegotiated spread from a company that you partner with based on owning your own mortality. Interest rates and spread sheets are meaningless once you get the depth of this process. It has never missed in 200 years and is at the core of the American experience. If companies other than mutually owned insurance companies ever catch on they would quit there useless jobs to get on with help us buy our country and dollar back. Am I pissed, you bet and you should be too that we have been lied to on a massive scale. Your next mission should be to read Pirates of Manhattan by Barry Dyke. I am at genwealth dot net if your care to debate this issue.
All the best,
Another problem with buying term and investing the difference is, when you die, you're not leaving your money on a tax favorable basis. If it's an IRA, they have to settle up with Uncle Sam within 9 months of death, or open up a stretch IRA, but either way, Uncle wants his money. If you leave your heirs with non-qualified investments, they will have to pay taxes on a "step up to basis" basis. With Life Insurance, death benefits are tax-free and are settled outside your estate, which includes slimy probate!!!
IBC with the right company and whole life product is a proven, guaranteed and excellent bedrock for any wealth building portfolio. What is expensive is the money we mindlessly transfer to others (banks, finance companies) that they use as CAPITAL to increase their wealth. IBC show you how to do that for yourself. It's a wonderful thing to have one GUARANTEED dollar doing 2 or 3 different tasks all of which are in your favor.
"Infinite Banking" may not be a "scam", but the way it is MARKETED, in my opinion, IS a scam. You will see promoters play VERY fast and loose with facts and figures. They will tell you that you're paying yourself back the interest that you borrow from the policy, but that's not the case. Your cash value in your policy is your collateral against the loan, but you're paying the insurance company the interest. For example, if you have $10K cash value in your policy and you take out a $10K loan, sure your $10K is still in your account earning interest, but if they quote a 6% interest on the loan, you're paying the INSURANCE COMPANY the 6%. If your cash value in your policy grows at a 5% rate in the meantime, it looks like the loan is effectively 1%. HOWEVER, if you had that same $10K in a balanced portfolio of mutual funds, and then get a $10K loan from the bank at 6%, your mutual funds will appreciate (in general) just the same as the funds would in an insurance policy, so if you get a 5% return on your investment, your "net" interest paid will ALSO look like 1%. They also won't tell you that you'll probably pay close to $10K in commission UP FRONT (spread out over the first year) for such a policy. If you get term insurance, the commission is far less, and if you invest THAT difference up front, it would result in a very nice sum of money years down the road. They won't tell you that either!
"To the question on whether or not the Infinite Banking Concept is a scam, the answer is no. Infinite Banking is just a creative way to use whole life insurance." http://www.vxcb.com Thanks!!
"This same basic idea could be practiced inside a money market account for example,http://www.vcao.net I think sometimes we hear something so often that it becomes reality."
Why didn't you add my last post?
I haven't rejected any comments recently, so I don't think it made it to me. Try reposting it.
Dear anonymous
You are wrong about almost everything you have stated. You are right about one thing...You will pay the insurance carrier an interest charge when you take out loans. But you are only looking at the interest rate thing on the surface. You said if it the cash value grows by 5% yet you are being charged 6% then it is a 1% cost to you right? Most agents selling this idea don't even understand that you will pay interest to the carrier...SAD.
But if you take a look a little bit deeper you would know why it's not a net 1% cost. Example...
If I wanted to pay cash for a 50,000 car...My plan is to walk into my bank and cash out my 4.5% 6 year CD and take the 50k and go buy the car. Before I can cash it out a loan guy comes to me and says "instead of paying cash for your car...take out a 6 year loan for 50,000 with the bank at 5.5%" So on the surface it looks like I would be better off to cash out my 4.5% CDs because it is paying me 1% less than getting a loan at 5.5%. The truth is that when you run the numbers it looks like this...1. Keeping in CDs ...your 50k will grow by $15,465
2. Take out the loan...you will pay $8,816 in interest
So if you would have kept the money in the CD and taken out the loan over the same period of time you would BE AHEAD by $6,649
That is why it can be said you can recapture all of your lost interest on financing major purchases. I dont't know where you get your mutual fund numbers from but the Dow Jones has returned NEGATIVE -1.35% between 2000 and 2008. a little different from your numbers. Iam not sure where you get the number 10k of commission being paid? If you put in 10k of premium into a well built policy a highly paid agent might make 30% or %3,000. If you bought a term policy with a $2,000 premium a good agent could make 120% or $2,400 oh and by the way it took the agent 10% of the time to sell term insurance because of people who don't understand banking we have to spend the time to overcome all the "gurus" and their good advice that has caused millions of Americans to lose half of their retirement. All of your advice is based on the stock market doing well. Kind of Scary.
To any folks out there that think participating Whole Life insurance is a scam, let me pose a question to you... Why do the largest banks in the world carry billions of dollars of whole life insurance on their books as part of their Tier 1 capital? Why aren't they buying term and investing the rest of their money? After all, they're banks! Shouldn't they have the ultimate wisdom on how to grow and preserve money? Companies like Citigroup, who push the "buy term" argument through their subsidiary companies like Primerica, have billions of dollars of whole life insurance in force on their executives. What's the message?
I am very interested in the infinite banking concept, BUT how rich has Nelson Nash become? Did he become wealthy through IBC or is it through his book sales or courses?
Who does this concept benefits and what are the motives for spreading this concept? I guess it's supposed to benefit those who use IBC, but does anyone else benefit?
Nelson Nash sold life insurance for 35 years and now he just charges to teach agents the concept at his seminars. I have spoken to him personally about which companies are best for the IBC concept. He said that the company really doesn't matter much (so NYL, Lafayette or MTL aren't superior to any other company out there) as long as it is participating whole life. He is not pitching any company that he is making money or agent overrides from.
As far as who the policy benefits, it will of course benefit the policy owner. The agents can make good money, but if they are acting in the best interest of the client, their commissions are much lower than they could be...but yet they still can make a decent commission. It benefits agents hugely when their client gets great results financially from it because they will come back and buy more policies and refer them new clients.
But when you read Nelson's book, and when you talk to him personally you can tell that he is a patriot. I'm sure he makes a living selling his concept, but he's very concerned about the nation and the debt it has placed upon itself individually and collectively.
This is a great post. The concept is very unique, and is really a great source of security and control in the economy we are currently in. I am a huge advocate of banking.
There is a good blog that gives a little more detail and makes you think a little more about this concept
http://bank4life.blogspot.com/
I just recently became an Infinite Banking (IB) practitioner (I'm two months into my policy as of 11/12/2009).
After several months of studying and pondering whether IB is worth my time, I became fully convinced that it is. Here are the benefits of IB that convinced me that this is the way to go:
1. Virtual independence from banks: Eventually my cash value will grow big enough to where I will no longer need banks (or other lending institutions) to finance purchases of big-ticket items (like automobiles, electronics, etc.).
2. I set the terms of policy loans: Suppose I borrow from my policy $15k to pay off the entire lease on an apartment. Then I lose my job, resulting in cashflow problems. Because I set the terms of the loan (after all, I own the policy), I can easily defer one or more (or even all) of the monthly loan repayments to a later date (until I get back on my feet). Try negotiating something similar with a landlord and see how far you'll get. It's easy for me to see how this is an invaluable emergency fund. Imagine if someone purchased their home using a policy loan. In hard times, one does not have to worry about bank foreclosure.
3. Mutual life insurance policies pay dividends: This fact right here offers a hedge against inflation. Granted, in the early years of the policy, the dividend payout comes nowhere near the rate of inflation, but as years go by, the dividends will eventuall exceed the inflation rate (disclaimer: dividends are not guranteed, but I did my homework and found that, historically, there has always been a dividend payout). (another disclaimer: My claims about eventually exceeding inflation is based on the illustrations of my policy. Hopefully, the US will not experience hyper-inflations as predicted by some really smart people, like Peter Schiff, Jim Rogers, and Marc Faber). For those of us that are concerned about inflation, especially considering that in the early years of the policy the meager dividend payouts are a weak hedge, consider using policy loans to purchase precious metals. Now you'll have a double hedge.
4. The policy functions as a piggy bank with tax benefits and a death benefit: Because the premiums are payed with after-tax dollars, no taxable event is triggered when I take out a policy loan. Also, the dividend payouts are not taxable (because the dividend is really not a dividend, but is a refund of premium). The policy can be transferred to someone else (your children, for example) without creating a taxable event (I don't think the same applies to a 401k). The death benefit is not taxable.
Keep in mind that IB is not to be used as an investment tool, but rather a different way to finance purchases. It allows you to function as your own bank, and thereby you may set the rules of finance (not the banksters).
-My two cents
I would like to clarify a few things that I keep seeing come up in this blog. I am a Financial Advisor with a top financial company with some of the best whole life policies in the industry.
I can't speak for other companies because I don't know what their commission rates are, but I do want to say that the "fees and commissions" on whole life are not as high as people are lead to believe. Let me explain.
If you buy term or whole life insurance from me in the first year I will be paid about 50% either way; it's just a matter of will you pay more for term or whole? If it's the same death benefit you'll pay 10-20 times more for your whole than your term; so my commission is that much bigger only if you buy that much in whole! Many people own both term and whole. My point is, the concept that we sell whole because it pays better than term isn't true.
I will also say that it is so much more difficult to sell whole than term because the "buy term and invest the difference" concept is the accepted norm it seems. There are many pitfalls of this idea, the biggest being THE TERM DOES SOMEDAY EXPIRE! And no matter what you think now I know TONS of people in their 50's and 60's searching out life insurance from me. Term premiums go up and up, which erode your "side fund." Anyways, that's a whole different comment.
As an advisor who does both insurance and investments let me say this. If you did "buy term and invest the difference" through me versus whole life through me with the same amount of money (ex: term is $500/year plus $9,500 invested vs $10,000/year in to a whole life plan) I WILL MAKE MORE MONEY by you buying term and investing the difference. I will make more money in year 1 buy you buying the whole, by a fair margin, but long term you pay me much more for the other strategy. The reason why is that I'll still recieve a smaller life commission, and small renewals for 9 more years, but I make up the difference with you investing over a lifetime. If say your "sales load" is 3 % (which is low) on a mutual fund every time you invest new money, and annual expenses are about 1 % (also low). I don't get all of this, but all the players do (fund manager, myself, etc). Try 3-4%/year over 30-50 years versus a big hit up front but a much lower rate for the next 9 years...but then nothing after that. That's right, in whole life after 10 years I do not get paid a thing no matter how long you keep your policy.
I sell whole life to clients because I know it is in their best interest, not because of the commission. First and formost my goal is to get my client the right coverage; if they can only afford term that's all we're going to do for now, but we're going to convert some if not all of their term to whole life eventually.
I hope this is helpful to you all. Don't just look at the short term.
If you believe the Infinite Banking Concept is a scam, then you haven't had a true IBC agent show you the whole system and costs associated. I'll agree with author on most of his blog, but the part where he believes whole life is expensive is an incorrect statement. We teach our clients to recover the money that they are paying to bankers, financial institutions and even the IRS by utilizing dividend paying whole life insurance. By focusing on the life benefits instead of the death benefit, directing your financial future to your advantage. It doesn’t take long to realize that “The Infinite Banking Concept” works with anything you purchase, lease or finance. You can recapture the interest, finance charges, insurance and taxes you are currently losing. If you think the Stock Market is going to be your link to future wealth, better take a hard look at all the what has just happen the last few years. Also check out a study done by Dalbar, Inc., a leading market research firm: "The average investor earned only 2.6% annually, even less than the inflation rate of 3.1%.
Whole Life is a GREAT Tool if you can afford the monthly premium comfortably. I have been in it for 5 years and my take is this. NEVER buy Whole Life unless you can over-fund it up to the MEC limits. The Death Benefit in the beginning is meaningless. Buy a return on premium term policy in the mean time to cover your death benefit needs but growing the cash value quickly is the greatest benefit because the death benefit grows as well with it. So if you need a million dollars in life insurance and have 600 or 700 dollars to invest each month buy a $250,000 WL policy and over-fund it to the MEC max then buy a $750,000 return on premium term policy until the WL grows enough DB wise to fit your needs. Also this investment works best for your kids because the initial premium is so low and you can over-fund to the MEC limits for pretty reasonable money. I have a policy for each of my kids and will buy more as I can. Agents will try to sell you "multiple policies" and tell you to over-fund later on, but it is much better to buy a lower death benefit and overfund it to the max at a younger age. Hope this helps.
If you want more details about banking and outside the box (reality) thinking go to my site http://veracityfinancial.com/VeracityFinancialInfiniteBanking.aspx
It has been interesting to watch this post. The IBC process is finally starting to get a little exposure! Sorry Dave Ramsey (-
We just attended a Nelson Nash seminar last week and found it very enlightening and entertaining also. He is definately a patriot and very concerned about our current situation in the US, both economically and constitutionally. I have read all the blogs here and understand why some ae skeptical but after reading his book and attending the seminar I am convinced that IBC is a very good tool but people must understand that there is a time factor involved but if you have the patience and will power to make a vehicle payment for 4+ years or a long term mortgage payment you should be able to benefit very well from this concept. I am 59 years old and wish I had known about this at a younger age as the benefits are greater for a younger person due to the "growth over time" factor. I became interested while searching for an alternative to the 401K mutual fund losses everyone suffered from in the last 2.5 years. Even with the recent recovery I am still down at least 20% from my 2006 levels and further from retirement rather than closer. I am considering pulling all my 401K money out,paying the tax and funding an IBC policy. The biggest issue I have is trying to forego any big ticket purchases for the next 3-4 years while funding the policy. I do believe in the long run it will be the smart thing to do. I would advise anyone to attend Nelson's seminar if they can but at the very least, buy his book and open your mind for a very good learning experience.
Joe R.
I agree that a CV building LI policy is good ONLY if a consumer agrees to 1) Overfund it or b) pay it off in 7 periods. With 80% of America barely being able to afford the minimum premium + given the large gestation period of the policy it's impractical for them unless they can do 1) or 2)
learn more about leverage 101 on my blog
http://witstroll.wordpress.com/2010/04/26/demystifying-economic-leverage-wheres-my-lever/
http://www.choose-financial-freedom.com posted a 3 part series for the Infinite Banking Concept. It basically gives a brief explanation with examples and shows how you can profit like a bank.
Listen up everyone? Infinite Banking is not an investment contract? It's a savings/bank account only for personel / business loans? Investment accounts go up and down and the Infinite Banking account only goes up every year? Try that with stocks or mutual funds! Ha! Ha! Ha!Investments will not work on this concept? Remember, Banking has been making big money for the last 5,000 YEARS!
If you're borrowing money whether they call it yours or not, they get interest - they make money and they pay the tax. The cash value is only non-taxable as long as it is less than what you spent on the premiums. You put in more than you can get out. Again they made the money and paid the tax. You simply gave them the money to enable them to do this. No cash value the first year, because it went to the salesman's commission. No cash value the second year because the company had expenses too. Nothing you can "borrow" the first two years, so what kind of investment is that? And the third year, what an investment! Check the records for yourself. Most cash value policies have a life of about 18 months. Why do you suppose that is? They took the money and ran. Just remember when you write the check to the insurance company, it's ALL THEIR MONEY. You have no separate account - it's theirs. They can decide to do with it what they want. Charge you what they want - read the policy, all of it. They have been doing this for over a hundred years and they have many, many billions in assest. How do you think they got them? Been an insurance agent for a long time. Just another sales pitch by the insurance industry. These companies are relying on your inherent greed. If you really want to make money - stay away from insurance companies. All their products are aimed at making them money - not you! You use insurance for exactly what it was meant for - to replace a loss. If you are set on making money through insurance, buy an insurance company stock.
@ rex, please share which mutual fund you are getting 10% with!! i think anyone here would be interested in that. The problem is you may get 10% here and there but a steady 10% is impossible. Great article by the way, I use the IBC myself and think it's a way better retirement savings vehicle than a 401k or IRA or any other government sponsored retirement plan.
My insurance agent just brought up IBC to me today. My husband and I are in our early 30's, own our own home, and bring in about $60,000 a year between the two of us. I think that I understand the basics of this system. My concern is that it would be difficult for my husband and I to pay out big premiums in the beginning and it seems as if this wouldn't work for us without the big payout ability. Also, my agent seemed to be trumpeting the big DB for our heirs. Frankly, I made the money and I want to spend it in my lifetime. I would be concerned about a big DB now if my husband or I (or both or us) were to pass but down the line, I'm more concerned that we'd have enough money to live our daily lives, have some fun, and afford medical care/nursing homes as we aged. So I guess my question is, is IBC for us if our goal is to have a large amount of money that we can spend at will in our retirement and we don't really have the ability to payout a large amount right now? Sorry if this is too basic for this blog. I also have to say that IBC seems too good to be true and I'm always leary of the next hot investment product. I mean, weren't mortgage backed securities sold as a 'sure thing' too? And who's to say that the insurance companies selling and backing the products wouldn't fail the same as WaMu, Bear Stearns et. al? Would anyone have predicted in 2006 the carnage that was to come? Anyway, just a person on the street point-of-view. Thanks to all if you're still reading.
Hey Anonymous July 5, 2010 9:48 AM
Please put a name in here so it's easier for us to respond.
You haven't done much homework on IBC. Your statements show this.
A properly designed policy will have cash value from day 1. You can borrow against the cv as soon as your first premium check clears your bank account.
You keep calling IBC an investment. IBC is a financing process with customized whole life as the financial tool.
As for policies coming off the books in 18 months...where did you get that info? I set up around 100 new policies a year and haven't had one come of the books in 5 years. I think you keep referring to traditional old school WL policies...they do take a while to build cv and I have seen those go off the books in 18 months.
As for the company controlling your money, they can't just do whatever they want. You have obviously never looked at an actual contract. If you had, you would have read that every "charge" is clarified as to the minimum and maximum.
As for you being an insurance agent, I would suggest you do your due-diligence before talking negatively about something you clearly don't understand.
I believe you are simply confused about the policy build. Most the stuff you have said holds true to an all base traditional wl policy. They take a long time to build cash and do go off the books at a high level.
I am hopeful that you see that I am just pointing out facts and not trying to be rude to you as an individual. Good Luck!
Fellow Canadians, if you are looking for futher insight on the challenges behind the IBC in the Canadian marketplace, including some number-crunching analysis, please visit my blog entry.
Click here for my Canadian Insurance Blog on the IBC
Thanks,
Victor
I am a financial advisor and read Mr. Nash's Book about 6 months ago. Ever since then I have continued to read articles and blogs such as this one about the Infinite Banking Concept. I am now seriously questioning many of the investing principles I have learned and have been using with my clients over the years. Nonetheless, one question I still have is whether or not IBC ends up being better than investing in a tax qualified plan? For example, the real return (or CAGR)of the S&P 500 from 1900-2009 is 9.52%. I found this by using a CAGR calculator at http://www.moneychimp.com/features/market_cagr.htm.
Anyway, if someone has a limited amount of income they can put into their IBC policy or 401k (let's say $1000 per month) can someone give me an example of how the two would compare after 10,20, 50 years? I know they are different concepts but at the end of the day we are all trying to maximize how much money we have in retirement and I would like to learn more about how they compare. Thank you in advance....
To the advisor that wrote in on 12 Nov 2010.
Contact an Insurance company, perhaps Indianapolis Life or Old Mutual (both have working knowledge of this concept [great knowledge on the EIUL]), they can give you some help. Also, no one has had their money in the S&P (which formally started in 1956 or '57) for that long.
Consider, too, that your future(and current) clients can borrow money from one policy to fund their retirement without worrying about selling equities (stocks, mutual funds, etc.) during periods of decline.
The biggest problem is trying to determine which is better: Whole Life {WL}, Universal Life {UL}, Variable UL {VUL}, Equity Indexed UL {EIUL}, etc. Just remember not to "MEC" the plan (over fund or fund too quickly making it a modified endowment contract {basically an annuity}) and to follow the TAMRA 7 pay test- which actually allows you to fully fund the plan in 5 years not 7, if you do it properly. Then look at funding new plans about every 5 years, perhaps using a different type of whole or universal policy. But keep in mind that EIUL can be "diversified" by contributing more than once annually, earning differing rates based on the timing (but don't try to "time" the market).
To those who pick on people who buy term and invest the difference, maybe they have a Return on Premium (ROP) built into their plan.
-Tim
PS The policies will continue to grow the cash value even while the clients are with drawing, just be wary that other than "zero-wash loans" are risky/tricky. And the death benefits have to go up as cash value climbs, per Federal Govt. guidelines. I think TEFRA and DEFRA cover that... I think.
Eric in Cali here.
All this talk, reminds me of the United 1st Heloc loans to pay off your mortgage in 8 to 11 years, without changing your lifestyle.
A revolutionary concept, which to me is like doing to the banks what they've been doing to us. In that equation you are using the power of compounding to reduce your principle, now instead of later. Thus avoid interest. The only scam was that the company charged you $3,000 for a program you could probably re-create with Excel. True, people who paid off their loans in 8 years, saving tens of thousands in the process, probably didn't care about the $3,000. People just immediately thought too good to be true, must be a scam. Good luck getting a Heloc these days though...
Anyways, I have just found this Infinite Banking Concept, and know very little of insurance. Now I am wondering:
1.) Really Rock, you don't have to repay these loans? How does that play out?
2.) Is there a price point at which this becomes viable? Would have to do with income and tax savings yes?
3.) I imagine the loans would be limited to the Cash value I have built up in the Life Insurance policy right? So how is this better than Jeff's example of an interest compunding CD coupled with a loan secured by that CD? Just tax savings? Do tell, do tell.
Thanks in advance, and Happy Holidays to all.
@Eric from Cali
1.) You do not have to repay the loans. Why? My understanding is that a policy loan is not actually against the cash value, but rather against the death benefit. So if you do not repay the loan, it will be deducted from the payout of the death benefit - ya know, should you get struck by lightning or hit by a bus. It is my recommendation that one does indeed pay back any loans taken against the policy.
2.) I do not understand your second question. Sorry.
3a) As far as I know, yes, loans are limited to a percentage of the cash value. But this may not always be the case. Contact an insurance broker to answer this question (one that understands the internal workings of such policies).
3b) I know nothing about bank CDs. The Infinite Banking is not limited to any particular type of financial instrument. Some people absoulutely abhor whole life insurance, so perhaps they would use a CD...or a mutual fund...or a stack of cash stored between their mattresses.
I've been using the IB concept for over a year now (implemented with a whole life policy). My 18 yo daughter is eager to start IB using a checking account.
In any case, the IB conept is awesome!
So I've read Pam Yellen's Bank on Yourself. Through the infomercial, I got the essence of what IB is. I have also heard Part 1 from an IB agent and it all sounds great, but there are 2 issues he didn't answer directly.
1) Let's use a car loan. I can take the loan out from myself for 5.5% against the CV of my policy OR I can go to my credit union and get a new car loan for 3%. What is the advantage in this example of going through myself?
2) I take this at face value that it works and is a get rich slow program, but it is portrayed as "too good to be true." Why would any insurance company offer something where you can get more money back than you put in? Everyone is out to make a profit - I am not arguing that, but even if this is 1% of all policies written, why take an eventual loss on even 1 % of your volume? And after say, 10 years, you could really just walk away and extract the CV, which even on the guarantee only scale shown, will be higher than the premiums you paid?
Thanks in advance.
@ eyetri2
It is not a get rich quick scheme. And in most cases 10-20 years to see full benefits, with longer terms come better results.
The car loan program works if your policy was set up and funded correctly.
The idea is that you can take the money from the cv , pay for your car, then make car payments to your self rather than to a bank. If you want to pay it back with interest, okay, but that is simply not required. Most policies that are set up with reputable Ins Co.'s and financial advisors/agents should have a very low rate on any loan, or a "zero balance" or "wash loan."
A reason for this, if you have a policy (choose your vehicle WL, UL, VUL, EIUL, etc.)then you can use it for a retirement income too. Withdraw loans against you policy or policies without the worry over fees or taxes. See, the loans are loans, not income, so you never trigger a taxable event. Then when you leave this earth, you can pass on the death benefit less your loans to your heirs income-tax free.
As a side note, some companies will separately tabulate your loan amounts, while letting your entire cv continue to grow, and only remove the loans at the time of death.
Again the Insurance Company and the agent/advisor you choose WILL make a difference. You might want to find a program you like and seek out an affiliate, or a person trained by that group, to ensure that you do not over- or under-fund your plan; or fund it too quickly turning it into a MEC or annuity-like vehicle. Then you will pay taxes, because you will only be able to withdraw, and it will be under LIFO last-in-first-out treatment. Simply put, you will pull out all of the interest first (which WILL be taxed) then your principle, which was already taxed.
eyetri2
Hi, Nobody will convince you that IBC is the best financial tool on the market, you have to do your homework. If you like to read, here is the book for you "A Path to Financial Peace of Mind" by Dwayne Burnell.
Car loan is a perfect example how you can grow your policy and a CV to your advantage. Read Dwayne's book,
it's easier read than Nelson's "Becoming your own banker", and you will have most of your questions answered. Building for retirement - Yes, college money -yes, car purchase -yes, growing business, emergency founds, and all others financial needs yes.
Just don't wait to long to start your policy, learn from the others mistakes, myself included.
Why does no one want to answer Part II of my questions? Why would an insurance company have a product where you could actually get more money out than you put into it, even if it does take 10 years? It doesn't make good business sense to do that which is what these all show even at the guaranteed rates.
Second, at year 10, is it as simple as saying, I am done with this and want my cash value that I can walk away with a check equal to the Cash Value at that time?
eyetri2
@ eyetri2
"2) I take this at face value that it works and is a get rich slow program, but it is portrayed as "too good to be true." Why would any insurance company offer something where you can get more money back than you put in? Everyone is out to make a profit - I am not arguing that, but even if this is 1% of all policies written, why take an eventual loss on even 1 % of your volume? And after say, 10 years, you could really just walk away and extract the CV, which even on the guarantee only scale shown, will be higher than the premiums you paid?"
The reason is a one word answer: arbitrage.
Why do banks have skyscrapers with marble walls and Bird's Eye maple desks, while you have vinyl siding ad 1/16" laminate covered cabinets? Same answer: arbitrage.
A bank will take your deposit of $25,000, and promise you a return of 2.25%. They will then put into reserve approximately $0.35 for every $100, and loan it out to some nice couples $5,000 each for a 18.99% Visa. That difference (arbitrage) is pure profit.
Insurance companies take a gamble on when you will die. There are many people that will buy term insurance and not die, or not pay into their whole life policies, allowing them to lapse. There will be no payout, no death benefit, so the insurance keeps that money, they put 1/2 of the premiums in reserve (laws dictate a 1:1 ratio for them) and invest the remainder. Now, the returns that you are shown before you sign on the dotted line are NOT etched in stone. They are predictions based on market performance, because the other 1/2 is invested. They will give you a portion in your cash value, which at some point in the future will also increase your death benefit. The portion that they keep is pure profit, their arbitrage. Because of the difference in the reserve amounts and the fact that lump sums for DB's are paid out (whether the DB's being paid are Term, Whole or Universal policies makes no difference); the reserves are always being adjusted. As a result, the investment plans are looking for small consistent gains rather than homeruns.
I hope that this answers you question.
PS, if you are expecting to take the money and run in ten years, this isn't the plan for you. A carefully designed plan will outlive you and transfer to your heirs. Buying a car, boat or even a house is child's play. You should be able to do all of this and pocket the interest and tax savings that you would otherwise pay and have a fabulous retirement too.
Someone had posted in reply to someone stating that WL tended to go off books at a high rate:
"
I believe you are simply confused about the policy build. Most the stuff you have said holds true to an all base traditional wl policy. They take a long time to build cash and do go off the books at a high level."
What is an all base wl policy? A quick google search states it is a 100% WL plan, which is what I thought this blog was about.
Do all newer WL plans consist of a blend of term with WL?
Thoroughly confused now.
I was all for the WL my agent suggested except now it seems that the CASH value goes to the insurance company, and not the beneficiary. What good is that? Why not put it in some cash deposit, use infinite banking against the cash deposit, as that way at least your benficiaries will get the cash deposit as well.
Thanks
E
Christopher in the third comment:
"
I have a whole life policy that I use as my "Personal Bank" as described by Nelson Nash. My policy is 1 mill and costs me 5k a year. "
I wanted a policy that pays 1 mil in death benefit for Whole Life, and the quoted premiums were 27000 a year. How did you get such a low premium? Do you actually mean UL? I am 33 and a non smoker.
E
@ E
Here is something your agent (or website) didn't tell you: A life agent will get paid based on a mathematical formula concerning your annual premium. Some companies simply pay 1 yr of annual premium plus renewals, some a percentage of annual with annual renewals, etc. and the renewals are typically not big payments. So a larger death benefit = larger paycheck for the agent.
The way to get the most out of your plan is a little counter-intuitive at first. You want to dump as much money into your policy as you can, as quickly as you can, with the least amount of death benefit possible. Why? The amount of money you put into the plan will determine how much money you will be earning interest on. The faster you fund your plan, the quicker you can minimize the "cost" of the plan. The amount of death benefit will determine how much you pay in premiums, and the premiums you pay will affect the agent's commission check.
If you simply are looking for a $ amount of insurance until you get your wl, ul, etc. policy up to $1M in db, perhaps look to a low cost term policy for ten years. You can add a Return of Premium rider (ROP) for a few bucks a month if you like and get your premiums back in a lump sum. Then you can reevaluate the need for coverage at that time. Let me add my disclaimer here, ask the agent if you get premiums only back or if you get premiums plus the rider cost back, because I've seen both.
Okay, at my peril, here is my email: the.tim.k@gmail.com Feel free to ask questions on this page, but specifics differ from person to person. One "magic" policy could work for 99%, but the 1% may need something else entirely. PLEASE don't walk into this blindly. Read a book or two, go to a seminar in your area. Have a plan set out from the beginning and stick to it. We've all heard it before, "If you fail to plan, you plan to fail."
Your family and your legacy are too important to go flippantly buy a whole life policy and hope that the agent treats you right, even if the agent is a relative or friend.
PS In the third paragraph, I mentioned getting your wl policy's db up to $1M. Because the policy is a life insurance policy, the db has to be linked to the cv, so as your cv grows, your db will grow too.
2nd PS In the second paragraph, I mentioned funding the policy quickly. If you put too much in too quickly, you can "MEC" the policy. MEC just means that you lose a lot of the investment side potential of the policy because it will work like an annuity, not a max-funded life policy. Ask your agent about the TAMRA 7-pay test. If the life insurance agent doesn't know what the TAMRA 7-pay test is, leave and find one that does. (The TAMRA test is for funding your policy.)
Anyone? Just wondering why someone else is able to get a WL policy for 6k with 1 mil coverage and mine is 27k.
Thanks in advance
E
E:
My wife and I decided to go with an IB policy. To answer your question about the 6K for a 1M policy, I'll give you some #s from the sample of my illustration. It's described much better by an insurance agent, but I will do my best.
There is a simple formula that insurance companies use to see the maximum amount of insurance you can have, be it term or WL. It's your salary x a factor as determined by your age. So if you made 100K/yr, with you in your early 30s, you can have a DB up to 25x your current salary, or $2.5 Million, in any form of term, UL, or WL. If you lie and want 4 million, the ins. cos will figure it out and then you will have no insurance.
Part 2 is what you asked about. A proper IB policy will minimize the death benefit and the WL policy part and EMPHASIZE the paid up riders. Each company does it a little differently but using the example of a 2.5 M DB, an IB policy will look like:
WL - 14K/yr for $1M base
10 year term rider: $700/yr
Paid Up riders: $45K/year which gets you another 1.5M in DB, but is really done to emphasize the CV
So, the answer is I don't know how someone could have gotten a policy for 6K. To get the 1M # from this just divide everything by about 1/3, but that still puts you at about 20K per year. EVentually they could do just the 6K just so the initial PUA/CV they put in is not sucked out to continue to pay the premiums, but as far as I understand it, something is not right.
Hope this helped.
As you seem to be the resident expert on the IBC, why didn't you state that the commissions are approx. 60% less than normal, as we write the contract with the minimum allowed death benefit so we can overfund the policy maximizing the clients ability to have more of their cash readily available. This may be why most agents don't want to sell them this way. With that said, the IBC isn't for everyone and specifically if you do need a high death benefit available. ...pf
Pete, I believe your comment was meant for me “your resident expert.” It came to my email anyway, so I will assume it was meant for me. I put your comments in "Quotations"
"why didn't you state that the commissions are approx. 60% less than normal"
You are right in the fact that commissions on a banking policy are 60% less; in fact it can be as much as 80-90% less.
"This may be why most agents don't want to sell them this way."
In my experience it's not "want" but "can't" afford to do it. I have producers who contact me about the banking concept and the first thing I mention to them is their cut in pay to do it this way. Most of them bow out right then and tell me either (if they are newer to the biz and or an average producer) "My spouse is certainly going to make me get a real job now" or (if they are a successful veteran) Why would I take a cut in pay now when I have successfully doing it the other way for 30 years."
The producers that I have seen give it a try usually don't stay with it long. The biggest reason is that their business model has too much overhead and can't be profitable with the huge cut in compensation. That doesn't even consider that they may not be good at explaining the concept and miss sales because of it. It is hard enough for the consumer to understand it and if you can't give clarity then it's a loss for both parties.
"the IBC isn't for everyone and specifically if you do need a high death benefit available"
You have been in line with your statements up to this point. There a multiple ways to design these policies. When someone designs a basic banking policy, it certainly lacks death benefit. There are ways to increase the death benefit to a desired amount for the client with very little increase in premium outlay. Most of the policies don't have this ability but a few do.
I hope this helps Pete.
"Your Resident Expert"
Questions from consumers (who aren't going to waste my time by gathering info just to take back to another producer)and producers (who are honest and don't pretend to be consumers)are always welcome...
I can't believe I have to state this...it just seems like basic ethics and honesty:(
veracityfinancial@gmail.com
I am in the process of structuring my IBC policy right now. Its a $100k base policy with a $500k 20 yr term rider to expand the MEC limit to $22k. We plan to seed in $60k over the first 4 years. But my question is about the MEC limit after that. Since I'll be paying $3600 after that, won't I be wasting $18k in MEC limit? Could I just drop the 20-yr term rider to save the money for more PUA's? Thanks...
@ Drexelbond
Each policy is different. Each carrier has different interpretations of the MEC limits. Some are conservative and others more liberal. You will likely have to pay the base and term for 8 years to stay away from a MEC status. A lot of policies will make you keep the minimums up for the term of the policy. If you can get enough cash values built up then the policy can be self funding also. So if you don't want to pay your minimums for years 5-8 then make sure you have enough cash values to use for the minimum funding. If the policy allows you to make it reduced paid-up (without becoming a MEC)in the 9th year then you could stop paying completely and avoid a MEC status.
Good Luck,
www.bankoutsidethebox.com
This was a great discussion on IBC. Thanks to all who have commented it was very eye opening.
We just started our IBC last month. I would like advice on how to get my daughter who is turning 21 on board.
Thanks
msparks
This system wasn't created for life insurance policies. I tell people all the time, if you can find a better place to do this then I'm all ears.
Life insurance is just the best place to do this. There is no better place to put your money where you can have access to it, it's safe, it has tax advantages.
Everyone keeps comparing this to investments which is ridiculous. This isn't an investment. This is only a vehicle. Most people that do this put their money in a life insurance policy and then turn around and invest that money into something else. Life insurance is a savings vehicle not an investment vehicle.
When you start to look at it that way, you'll realize a few things. Compared to any other savings account life insurance wins... hands down.
You can always access your money for investment purposes, and you will have a tax write off for it. In most cases you will make more money from an investment doing it through a life insurance policy than without... the tax advantages are unparalleled.
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