Truth, Not Marketing
In July of 2022, Policy Genius published an article titled Infinite banking life insurance: What is it & can you make money? touting to tell “the truth about infinite banking.” But do they tell the truth or is it just marketing for conventional thinking?
The article tries to come off as neutral and informed, cutting through the hype of social media influencers. It then ironically references a rapper and tiktok “influencer,” who calls himself “Wacka Flocka Flame,” 4 times, while only mentioning Nelson Nash and the book Becoming Your Own Banker once. Other than 3 “financial experts,” the only item listed in the reference section of the piece is an article from the corporate finance institute – the reference list states it was “Accessed August 02, 2022.” Considering the by-line states “Published July 15, 2022”, I found this to be quite odd.
The author describes IBC as “buying a certain type of life insurance — whole life insurance — and borrowing money from it over a long period of time instead of using a traditional loan or dipping into your savings account.” This is done with “the goal [of] increasing cash flow by borrowing against an existing policy as opposed to a traditional bank.”
Already we see no consideration of the banking function. In fact, the author never discusses the banking function in the article. Of the 18 times she uses the word “banking” every single one of them is paired with the word infinite, in reference to IBC.
Maybe she thinks “borrowing against…a traditional bank” is the banking function? This is not to mock her grammar, as I’m quite sure someone could find issues in my writing as well. While we know what she is saying – referring to taking a loan from a traditional bank – precision in language matters and a lack of precision of terms continues throughout the article.
An accurate definition IBC is
The use of dividend-paying whole life insurance with a mutually owned company to take control of the banking function in your life, recapturing the interest and finance charges paid directly to other banks or indirectly by paying cash.
I am further convinced that she has not read the book because she focuses on IBC as a product, repeatedly using the phrase “infinite banking life insurance.” Yes, the definition I gave states “dividend-paying whole life insurance” – a product. Despite this, the Infinite Banking Concept is a process not a product. If you buy a branch of your local bank and just let the money sit in the vault and never loan it or use it (the truth of fractional reserve banking aside), you are not banking and can’t rightly call yourself a “banker”
You can apply the same process as IBC using other assets – HELOCs for example, and other so-called “permanent” insurance products such as IUL – but these each have significant flaws when used (a subject for another time). It just happens that today, of all the financial products and tools presently available, dividend-paying whole life insurance is the best product for taking control of the banking function.
The author then moves in to “5 things you need to know about infinite banking life insurance.”
1. You’re not really taking a loan from yourself
She is correct here. When you pay premium, the dollars paid become the property of the life insurance company. In return you receive increased equity in an asset. That asset is your life insurance contract which has a guaranteed future value and a constantly increasing present value – called “cash value.” This is the amount that if you chose to surrender the policy, sell it back to the insurer, that they would be willing to pay you after considering all their costs and the premium you have paid to date. There is no account, like at your bank.
The insurance company permits you to take loans up to that present value. The present value minus any loan balance is the net present value.
In doing so, the life insurance company gives up the ability to invest that money somewhere else, so they charge an interest rate to the policy owner for these loans. What the author does not mention is that this interest rate is different from that of your local bank or credit card. Interest is not amortized, compounding monthly. It also has a maximum interest rate they can charge – 8% in most states.
Policy loan interest is simple interest that compounds annually. This simply means interest is calculated and accrued based on the daily loan balance but is only added to the loan balance once a year. If you take a policy loan for $10,000 with a 5% rate and make no payments, your interest will be $500 in the first year and the beginning balance for year 2 is $10,500. But your bank isn’t going to let you not make payments, so let’s assume a payoff plan of $299.71/mo. for 36 months applied to both the policy and the bank loan. That 5.000% rate on your policy loan is equivalent to a 4.573% bank interest rate.
Not only does the author make no mention of the difference in how it is calculated, but she just stops there as if paying interest is a bad thing.
Remember, you finance everything you buy. You’re either paying interest to the bank or giving up interest you could have earned. But is paying that interest to YOUR “bank” – a company you own – bad thing?
When you pay that interest to the insurance company, you are contributing to the profitability of a company you own, which in turn contributes to the dividend you receive, which in turn buys more Paid-Up Additions or PUA (a term the author doesn’t even mention) resulting in more death benefit, which means your cash value has to increase at a faster rate to meet the future value.
2. You have to pay commissions and other fees
Instead of discussing what is actually in the book or talking to an authorized practitioner, the author goes to TikTok. “The idea is that you might as well take a loan out from your life insurance policy to pay off credit card debt, because when you repay the loan, including interest, the whole amount will get routed back to your own investments.”
The author here has or had a life insurance license for 4 years according to her bio, but it appears she doesn’t recall the training for that. Not only is the interest simple interest compounded annually, as mentioned above, but life insurance policy loans have maximum interest rates defined by each state, usually around 8% (check your contract).
Credit card interest rates can easily exceed 20% even approaching 30%. Consider 22% on your credit card, compounded monthly, versus 8% compounded annually. If you have a policy in place with any cash value, yes you “might as well take a loan out from your life insurance [company, using your policy as collateral] to pay off credit card debt”. You will pay significantly less interest and get out of debt faster.
As described above, she is correct – the interest paid is not going to you, it is going to the insurance company. A company you own and that pays you dividends.
Then she briefly gets into commissions. Oh no, commissions. I’d like to ask her if she works for free. I’d like to ask her if she is ok with the ever-increasing assets under management fees she pays on her stocks, mutual funds, 401k, etc.
She, a life insurance agent herself, quotes another financial professional saying “When you dig into the actual costs, people don’t realize commission on this stuff [the whole life policies] is 50% to 70% of the premium “
Yes, the agent can receive 50-70% of the FIRST YEAR premium, decreasing substantially over the next handful of years until it reaches a rather paltry amount thereafter. Additionally, these are paid by the insurance company, they are not taken out of the premium. Surely, she, a life insurance agent herself, knows that. If you paid $1,000 in premium but $500 of it was commission, your policy would be behind the required growth for cash value to equal death benefit by age 121.
It is not that 50% of the premium goes to your policy and 50% goes to the agent. That is not how premiums are calculated. All businesses have overhead expenses. The commissions are overhead, factored into the premium charged.
Compare this to the assets under management or other fees the author is apparently ok with. The 1% assets under management fee for your 401k or mutual funds is constantly increasing (assuming your account increases in value. But even if you lose money they still take 1%). And those fees are taken directly out of your account, breaking compounding.
A life insurance policy is not an investment, I’m not making a comparison there. Just pointing out that any demonization of commissions is irrational.
The expert she interviewed continued, “there’s just nothing here that is unique that you can’t do yourself without the cost.”
Let’s review what we have so far. An asset, with guaranteed values and guaranteed growth, that is always worth more than we have paid, that we can collateralize at an advantageous interest rate (especially compared to the usury of credit cards) in order to finance our lives.
I’d like to see this expert do all of that himself. If he can, he should create it and market it because in the words of Burt Reynolds, he’s sitting on a gold mine.
3. You’re not really making extra money for keeping an overpriced policy
Again, we see a complete lack of understanding of the Infinite Banking Concept. The author is clearly thinking of it as if it is an investment. Which it is not. It is not about making money or increasing cash flows or income. It is about recapturing the interest one is paying to banks and finance companies (BYOB, page 3).
The term dividend originated in the life insurance industry and was later co-opted by the rest of the finance industry. Yes, a dividend is properly classified as a “return of premium.” The expert interviewed continues, “That means that if you and I own [a policy] through a dividend-paying company, you and I just paid more this year than what we should’ve, and they’re just returning it back to us as shareholders.”
However the dividend is not simply a “refund for overpayment” for that year. If that’s all it was, cumulative dividends could never exceed the cumulative premiums paid. But if you look at a properly designed policy designed by an NNI Authorized Practitioner you will be able to see that cumulative dividends can in fact exceed cumulative premium.
When an insurer realizes a profit through higher than expected returns on investments, a portion of that profit is retained in the general fund and reinvested to continue growth and ensure stability, and the rest is divided among the owners (shareholders for a stock company and policy holders for a mutual company).
If you are an owner of the company, and you’ve already received dividends equal to your premium, you still receive future dividends when the company is profitable.
4. You need to put a lot of money into your account before you can take a loan
This is a complete fabrication. And this section is logically inconsistent – opening with how much money you need to pay to be able to take loans, but then in the third paragraph correctly acknowledging that it is the time that matters.
First, it is not how much premium that you paid that determines your ability to take a loan. Premium paid only affects how much you can take a loan for.
If you have built $100,000 equity in your home, the bank will not let you take a HELOC for $200,000. They’ll probably only let you take a loan for $50,000
If you have built a cash value in your policy of $50 then you can take a loan for $50. Unlike the HELOC, where you’re limited to probably around half the equity, you can take policy loans up to roughly 100% of the cash value.
Building that cash value does take time. Time required to reach a desired amount to finance a particular purchase can be reduced with the use of a paid-up additions rider. Which the author never mentions in the article.
A base only policy (with no PUA rider) builds cash value slower, but will pay higher dividends in the long run (assuming it is with a mutually owned dividend paying company).
With a Paid-Up Additions Rider, the company allows you to purchase smaller, single premium life insurance policies that are additive to the death benefit of the base policy. Because they are fully paid up, the cash value is available immediately.
It can be tempting to manipulate policy design for a high early cash value. But this can be short-sighted and, at the cost of increased dividends in the long run, reduce the ability to pay premium in the future, and increase the risk of the policy becoming a MEC.
If you work with a NNI practitioner, together you will find the policy design that balances long-range growth and short-term needs and goals. You can typically have 50-70% of the first years’ premium available as cash value within 30 days of having the policy in force.
At least they acknowledge it is not a strategy to get rich quickly. No one who has read the book has ever said it was.
5. You’re paying for one of the most expensive policies on the market
This is yet another fallacy based on single point analysis and short-sighted thinking. In fact, this entire claim is, according to the NAIC model Unfair Trade Practices Act false advertising and misleading.
In a required continuing education course on ethics for insurance professionals it states “a comparison of a term policy and a whole life policy based only on premium rates obviously is misleading and incomplete”. Yet here I am, forced to respond to an insurance professional making exactly that comparison.
Term insurance is renting life insurance. At the end of the term you have no more death benefit.
Whole Life insurance is owning a policy. The death benefit is permanent.
For the sake of an analogy, let’s assume someone has invented a vehicle will last indefinitely, not the modern junk with planned obsolescence. He offers two methods for customers to enjoy the use of this vehicle.
1) You can pay $200/mo. for 30 years (term policy). After which you have the choice to either return the vehicle to the manufacturer or renew the contract for 30 years at $3,000 a month.
2) You can pay $1000/mo. for 65 years, after which you own the vehicle. And when you die that vehicle can be passed on to your children.
Which one is more expensive?
If all you do is consider the monthly payment of the first term sure, option 1 is cheaper. But if you consider everything else, that no longer holds. In the case of whole life insurance those other factors are the guaranteed payout of death benefit, ability to build equity and leverage cash value. Does option 1 still seem cheaper?
All life insurance companies use the same mortality tables for calculating required premium for a given age, health rating, term and death benefit. The variation largely comes from how good they are at managing investments and the company’s overhead costs.
Without getting into the actuarial math – maybe in another post – here are some basics to understand.
The shorter the term of a policy, the lower the premium. The longer the term, the more risk the insurance company is accepting.
The older the insured the higher the premium. As you age, the closer you are to natural mortality and the chance of your death increases.
If they offered such a thing, the premium for an 80-year term policy for 41 year old (to age 121) will be the same as a 41 year old buying a whole life policy for the same death benefit. This is because the risk of having to pay the death benefit is the same: 100%. The only difference between these two policies would be the Whole Life policy would build cash value and the owner could take policy loans, while the term would not. Which one is more expensive?
If you buy a 30-year term policy on your 30th birthday, how much death benefit do you have the day after your 60th birthday? Zero. And all that premium paid is gone. A sunk cost.
How much death benefit do you need at that point? If you say zero, I’d ask if you really do not have anyone or anything you love? You should be working at least 5 more years past 60 (but probably more like 10-15 given social security’s insolvency). If you die, leaving your spouse behind, you might need 10x your annual income in death benefit to support her.
If you die, that is 10-15 years’ worth of tithe your church won’t receive.
Purchasing a policy at age 60 to replace your economic value to your family and church is going to be a lot more expensive than if you’d had a whole life policy from the beginning.
That is nothing to say of the living benefits offered by Whole Life. And how do you quantify the value of being able to control the banking function in your life?
The author and the expert continue their attack on whole life insurance, completely ignoring the non-forfeiture options in the contract, which I would expect a licensed life insurance agent and certified financial planner should be able to explain.
These are options that allow the policy owner to keep the policy in force when life circumstances change. The first options are based on how the dividend is handled – in addition to the option of purchasing PUA that I’ve already mentioned, the policy owner can also elect the dividend be used to reduce or eliminate premium payment due, or they can receive the dividend as income.
The owner also has the option to have the policy changed to “Reduced, Paid-Up”. With this option, the death benefit is reduced such that the premium paid to date is sufficient to render the policy fully paid for. No more premium can be paid. Dividends are still collected, if applicable, and can still be used to buy PUA. Cash Value still increases to meet the future death benefit. You can still take policy loans.
Just acknowledging these non-forfeiture options renders this 5th point invalid. If the dividends are received, is Whole Life really more expensive? If dividends received exceed premium paid, is Whole Life really more expensive?
After that, this article just turns into a “buy term and invest the difference” advertisement. They urge the reader to give up control of their money to someone else and yet again, they compare Whole Life to an investment.
They also set up a false choice, as if buying Whole Life insurance is mutually exclusive with other investments. First, they compare it to a Roth. You can fund your Roth with a loan from your cash value. No, you can’t use the same dollar to buy life insurance and fund your 401k. But this is because you never receive control of the 401k contribution. It is withheld from you. But that does not mean if you buy life insurance then you can’t contribute to your 401k. If you want to invest in Gold, or real estate you can do that with loans from your policy.
A cited expert does correctly point out that you can “borrow money from your 401k.” But this is again an apples to oranges comparison. When you take a loan from your 401k you are limited to $50,000 or half the value whichever is less. The value of the loan does reduce the value of the account, break compounding and therefore reduce future values. The loan also has a fixed repayment plan with penalties.
None of which is true of a Whole Life policy loan.
In one life insurance licensing textbook it states, “the primary reason for buying life insurance is to protect a family when a family member dies.” This is the only reason the author and the experts acknowledge. The textbook continues in the next sentence, “it can also be used to protect a business, transfer wealth from one generation to another, provide retirement income, and serve as a source of financing.”
One of the interviewed experts unironically concluded, “The reality is that people who know this tool the best are the agents who sell it.” I’m sure the author and the experts have the client’s best interest at heart. But they do their clients a disservice by being so uninformed about these products.
At the end of this I realized Policy Genius is not an educational resource. It is a insurance sales market place, and their articles are just another form of marketing. Given that term insurance is the most profitable product for insurers by rate, with 97% of policies never paying out, I can only wonder if that has anything to do with the opinions expressed in the Policy Genius article.
James Madison used to sign much of his correspondence with a motto “Veritas Non Verba Magistri” translated “Truth Not the Word of the Teacher”. Take the time to vet this concept your self. Don’t just accept the conventional thinking. “The Infinite Banking Concept is not complicated, it is just different from the way the majority thinks and behaves” (BYOB, page 4). But it is a major paradigm shift. Rethink your thinking, seek out the truth of IBC, and see your entire financial world change for the better.
Semper Reformanda
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