The Infinite Banking Concept is not complicated.  It is actually quite simple – accumulate your wealth in an asset that you have complete control over and that is guaranteed to increase in value.  Then, through wise leverage, finance the things of your life – family, business, etc.  In this you retain complete control over the terms of every purchase and capture the opportunity cost of those purchases.

It is simple, but it does require a paradigm shift and requires rethinking your thinking.  Because changing how we think is difficult, many people feel the need to sensationalize IBC or they try and come up with analogies or explanations that reveal one truth but do also muddy the waters.

Some also misrepresent it in order to disparage the concept to in favor of the conventional financial paradigm.

This is the fourth of a series of articles addressing some of these misconceptions, misrepresentations, or over-sensationalized statements.

This particular gimmick is most common among those attacking the Infinite Banking Concept™ and especially Indexed Universal Life salesman – it is portraying IBC as nothing more than using “wash loans”.

What is a “wash loan”? A “wash loan” is a term for a life insurance policy loan where the interest rate charged on the loan is equal to the interest rate credited to the cash value used as collateral.

For example – the terms of your insurance contract say there is a 5% interest rate on loans and the interest credited to the policy is also 5%.  The interest earned on the loaned amount is canceled out by the interest owed on that same amount. Regarding the interest it is a “wash”. The math might look something like this:

This claim demonstrates a fundamental misunderstanding, confusing the process of IBC with a product.  It also shows a lack of understanding of the mechanics of dividend paying Whole Life Insurance with a mutual company.

First and foremost, this claim ignores the primary thing you are accomplishing by Becoming Your Own Banker – which is taking control of the banking function.  You set the terms of every purchase and capture the interest  into your family economy.  You retain the opportunity cost you would have lost paying cash.  You can look like a cash buyer to any seller, you know the cost of financing, and you can negotiate every purchase from a position of power.

Yes, Nelson’s epiphany moment came from having a large real estate loan with a variable interest rate and when rates increased in the early 80’s his payments increased significantly too.  He was in trouble because he lacked control.  By using his policy cash value to assume the debt from the bank, the lower interest rate allowed him to save money on repaying the debt.  But the biggest benefit was getting the bankers off his back so he could have breathing room to act. 

The interest rate with his policy loan could have been the same, or higher, and it still would have made sense to assume the loan and take control.  The arbitrage was just icing on the cake.

The “wash loan” claim also demonstrates a lack of understanding on policy mechanics.

Non-participating whole life policies, like those sold by stock companies, have a single rate credited to them for their growth. You pay your premium for the contract, the premium goes into the general fund where it is invested and used to pay out death benefit (mortality expenses) and operating expenses.

That guaranteed rate is essential to meeting the guaranteed death benefit.  If the insurance company credited $0 instead of charging you interest on a policy loan, then the contract present value would never meet the guaranteed future value.  I’ll give the salesmen the benefit of the doubt that this is not what they think happens.

Instead, they are probably claiming it is a wash from an accounting sense.  Yes, you paid interest in this column here but it was cancelled out in this other column.

This guaranteed rate is typically between 2-4%.  Loan rates on non-participating policies are typically above that.  One major company charges 2% above the guaranteed rate.  Another charges a fixed 8%.

I have not seen every company or every product – but I have yet to see a non-participating policy where charged interest is cancelled out by the guaranteed rate. 

Participating policies, by contrast, pay a dividend.  This dividend can be used to offset the premium, but for the purpose of IBC it is directed back into the policy by purchasing Paid-Up Additions

With these policies, the argument goes that 5% loan rate + a 5% dividend rate cancels out and is a wash.

The declared dividend rate is just one variable in a formula that determines the volume of dividend a given policy receives. Dividend is a function of mortality, expense, and investment experiences. With any rate, you have to ask “of what” to calculate the volume for a meaningful understanding.  

The dividend rate is not 5% of policy cash value or 5% of cumulative premiums paid. A policy with $100,000 cash value with a 5% dividend rate does not receive a $5,000 dividend.  It could receive less or it could receive more…much more, depending on the profitability of the company in that year.

The declared dividend rate is just one variable use to calculate the volume of dividend a given policy receives. Because of this fact, it is meaningless to compare dividend rates between companies and a completely invalid to try and multiply the dividend rate by any part of your policy to estimate your dividend.

Just to demonstrate this, one of my clients pays $15k in base premium + $25k in PUA to one policy.  With the first anniversary, the policy was credited a $3,000 dividend with a declared dividend rate of 5.3% dividend rate. 

$3,000 of $40,000k (total premium) is 7.5%…not 5.3%

$3,000 of $15,000 (base premium) is 20%….not 5.3%

$3,000 of $25,000 (cash value) is 12%….not 5.3%

During that first year he took a total of $15,000 in policy loans, repaid $8,000.  He paid $220 in interest (which was a 5% interest rate at the time), was credited the aforementioned dividend, and cash value increased by a total of $6,000.  He also saved $2,000 by paying cash from using policy loans for various purchases.

Does that sound like a “wash loan” to you?  Even if the received dividend was half that or the charged interest was doubled, IBC is much more than a “wash loan”.

The Infinite Banking Concept is not about rates of return, or arbitrage, or wash loans. It is about control.

Veritas non verbum venditoris

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