Opinion on Infinite Banking/Bank on Yourself

I’ll be upfront, I’m very skeptical about this idea.  You can get more info about the concept from more than a few sources – I’m not going to link to them, you can google them yourself.*  I believe the gist of the idea is as follows:

  1. Buy a whole life policy that you can shovel large quantities of cash into without MECing it out.**
  2. Shovel in large quantities of cash.  Build large cash values.
  3. When you need to make a large purchase, make a loan from the cash value of the policy to pay for the purchase.
  4. Repay the loan to the cash value life policy.
  5. Repeat as needed.

I have loads of concerns with this concept.

  1. I think the idea is tremendously complex.  Any time you start putting cash value life insurance into the personal finance equation, things just get more involved.  Some moving parts that need to be monitored using this technique (and this is just off the top of my head) are: cash values, death benefits (which will have to change to avoid MEC), interest rates and fees for the life insurance, details on the loan rules and interest rate, surrender charges and so on.  Many clients aren’t very life insurance savvy and tend to get very overwhelmed.
  2. It’s expensive.  Usually, when you buy a cash-value life insurance policy, the first year’s premium goes to the life insurance agent as a commission.  That’s why most cash value life insurance contracts don’t build any cash value in the first year.
  3. I’m not convinced that the tax savings are worth getting all worked up over.  Sure, the interest earned on cash value is tax deferred, but, how much interest are you really going to earn, anyway?  Let’s say that the return on the life policy is 3%.  And a comparable savings account/CDs are bringing in 1%.  I doubt the tax and yield differential will be sufficiently substantial – especially after costs – to justify the added complexity.
  4. I’m also not convinced that the death benefit is some great bonus to this whole scheme.  If you need life insurance, why not get some separately, say by purchasing term?  I get the sense that the life insurance death benefits will just muddy the water.
  5. There’s a contract involved.  If you change your mind, are you going to bombarded with all sorts of taxes or surrender fees?  I’m not comfortable with the exit strategy on this thing.  Or lack of exit strategy.

Since, in my opinion, the infinite banking idea has yet to prove itself as helpful to the client as it is to the insurance agent, allow me to make a modest proposal:  Instead of using a tremendously complex, possibly impossible life insurance based strategy, why not:

  1. Open a savings account.
  2. Shovel lots of money in, and develop a large balance.
  3. When you need to make a large purchase, use the money in the account to pay for the purchase.
  4. Refill the account with cash.
  5. Repeat.
  6. If you need life insurance, buy the life insurance you need.

Look how simple and inexpensive this is!  Frankly, I like my plan a lot more than the infinite banking idea.

My conclusion:  I don’t think the infinite banking thing is worth fooling with.  If a proponent could provide me with a copy of the life contract, pertinent riders, and a list of all costs and fees, I could do a better, more definitive analysis.  For now, I’ll have to go with what I have, which leads me to avoid the strategy.

*  Judging by the traffic on other sites that are critical of this idea, linking to the site that is being criticized would result in a giant influx of trolls/promoters.  I so don’t want to deal with that.

**  Since life insurance was used as a tax shelter back in the day, a variety of rules were made so that if you over-fund a cash-value containing life insurance policy beyond a certain point, the life policy would become a Modified Endowment Contract.  I’m not going into detail on this, because it give me all sorts of pains (pain in the neck, pain in the… you get the drift.)  The point is that you’re going to need an insurance agent that has a lot going on in his or her noggin to not screw this whole deal up.  And this is very easy to goof up.  Honestly, I’m not even sure the kind of contracts that this strategy call for exist, but let’s disregard that little hurdle for the sake of this argument.

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