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.
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/
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.
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.
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.
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?
