Author Topic: Infinite Banking Concept/Bank on Yourself/Etc  (Read 2640 times)

tdprice12

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Infinite Banking Concept/Bank on Yourself/Etc
« on: February 17, 2019, 10:23:47 AM »
Hi everyone,
This is my first post. I recently listened to Sam on the Art of Manliness podcast, and I've read the blog off and on for a few years now. Hearing him on the podcast made me want to get back to reading more regularly. I'm 29, been married for 3.5 years, and finally finished up physical therapy school and have been working as a PT for a couple months now. I'm working on getting my financial life together, and a concept that has intrigued me over the past few years is the Infinite Banking Concept. I'm strongly considering using this as my primary means of wealth building going forward. I'm curious to know if anyone on here is familiar with the concept, and I would love to hear your thoughts on it. For those who are unfamiliar, here are the main points that I've been learning about as I'm researching it.

The concept is built around using a dividend paying whole life insurance policy as your cash vehicle. BEFORE YOU FREAK OUT AND WRITE IT OFF, JUST READ ON. I know that basically no financial "guru" seems to support whole life insurance in any way, but I haven't seen any of the mainstream financial experts address the infinite banking concept head on.

With these policies, you have a GUARANTEED rate of return of 4-6% each year. Obviously, this isn't as aggressive as what you would hope to get in the stock market, but it is guaranteed. As we all know the stock market may gain 15% in one year only to lose it the following year. The way I see it, you get the safety of a CD or bond, but much better rates of return.

As you build up cash value in your policy, the end goal is to be able to use the policy as your own personal bank so that you eventually never have to go take out a loan from a bank ever again (obviously this will take a long time, but I love the sound of getting to that point eventually).

Let's say you have $30k in cash value in the policy after 5 years. You can take out a loan against the policy for the full amount of your cash value for say a new car, house down payment, investment opportunity, etc. (As a side note, you don't have to go through any approval process to get the loan, it's essentially the same as making a withdrawal from a checking account) The real beauty of this whole system in my mind is that your policy will continue to gain the 4-6% interest on the full amount that you have in the policy as if you had not touched the money at all. You also get to set your own terms in regards to paying back the loan that you take out against the policy. You don't pay any interest to the company at all and you can take as long as you want to pay it back. The only time there would be a penalty is if you never pay back the money, and at that point, they just take the amount out of your death benefit.

In addition to this, the other advantages that I've seen are that you don't pay taxes on the dividends that you get because they are actually paid to you as "overpayment of premiums", so it seems like a very tax efficient system (this become very important when you reach retirement and start using the dividends to live off of). Also, don't forget that it's life insurance, so you're building up a nice death benefit along the way.

In summary, the way I see it, this is an incredible combination of liquidity, safety, tax efficiency, and growth, and I don't know of another product that can match this system in all three of those categories.

The main downside that I see is that your cash value is less than what you have actually put into the policy for the first few years - this is where they take out their fees. In most projections I've seen, you have access to about 70% of the cash you've put into the policy in the first year. This increases slightly until you "break even" in year 5. Yes, this kind of stinks, but this is a long game. When you start looking at the projections 25 years down the road, taking a small hit at the beginning looks totally worth it.

With this layman's summary, what am I missing? What questions should I be asking? What are the problems you see? In my perfect world, I will eventually use this system to start my own business, invest in real estate, save for kid's college, etc.

Admittedly, some of the proponents of this system have made it seem really cheesy, and frankly it often comes off as "too good to be true", but I've been doing quite a bit of research, and I can't find any concrete evidence that it isn't a good tool to use. Most of the ones who talk badly about it don't go into any detail about why they dislike it.

Also, the whole reason I came here to ask this is because I felt like it really fit into what Sam described on the podcast. He specifically mentioned at one point looking for things that will provide a 4% return safely. So I wanted to hear if anyone here had any experience with the product.

Thanks everyone. Glad to be joining in on the discussion! Sorry this was a little lengthy.

Dadvolution

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Re: Infinite Banking Concept/Bank on Yourself/Etc
« Reply #1 on: February 18, 2019, 09:22:10 AM »
Having worked in Insurance in a past life this statement " You don't pay any interest to the company at all and you can take as long as you want to pay it back." is generally false. I can not speak for all whole life policies, but for the company I used to represent it was around 8%. If you have credit that is a really crappy percentage rate to have to pay back.
 However there is no real timeline to pay it back and if you reinvest dividends into paid up term policies (which you can cash out without penalties and may be what the proponents of this idea were actually referring to). There is a way to make these work but you really need to sit down and have a long discussion with your agent, and make sure he know what he is talking about,  as the loan has gotten many of my former clients into a jam where they essentially had very little policy in effect when things were all said and done. Unfortunately for them the person who had serviced their policies prior to myself was either a poor communicator, lied to the client or the client did not listen.

Tailwind

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Re: Infinite Banking Concept/Bank on Yourself/Etc
« Reply #2 on: April 10, 2019, 12:59:02 PM »
tdprice12,
From what I've read and studied, I think you're right on in your thinking. And the fact that you're 29, and thinking long term, good for you man! The compound interest over that period of time will do great things for you!
Something I appreciate about these contracts is the guaranteed increase we see after the first few years where our equity increases above and beyond what we deposit in them that year. We literally can create a machine that cranks out more money than we put in! And we get control and access of that principle and increase to fund our investment opportunities or emergencies that may pop up.
The originator of the concept, Nelson Nash, was a creative genius in this regard. And over his lifetime he proved that it worked. He literally "succeeded from the system" and became his own banker. It's been over 35 years since a member of his family has had to rely on outside financing.
Something to keep in mind though, in really low interest rate environments, it may serve you to use other peoples money and keep yours for another opportunity. I know someone who bought a car through the dealership, financed, it was just over 1%. One of those "0 Down 0%" loans. They did the math and realized that it was really just over 1%, but that's pretty cheap money. That allowed them to keep that 20,000 in their own financing system to be used for another opportunity. Borrowing from the insurance company and collateralizing your Cash Value might cost you more than the 1% cost of using the banks money in that situation. But, interest rates will not always be this low. So putting this plan in place, and thinking into the future, will serve you very well.
Nelson Nash came up with this idea when interest rates were very high in the market, if you haven't read his first book "Becoming Your Own Banker" I highly recommend it. Interest rates raise and lower, but the need for financing never goes away. So again, good for you.
And you're right thinking that the relatively small cost up front to start this system becomes pretty much a non issue when you think long term. Just imagine any other business you would start up, there's always going to be an up front cost. In this case you are starting a finance business. Once it's built, you've then created a machine that is GUARANTEED to become more efficient over time. It will produce more and more wealth and equity for every dollar you put in. I hope you've had the opportunity to look 20 and 30 years into the future with these illustrations to see what they'll do for your family.
I had the opportunity to see Nelson twice in 2016 while I was investigating this concept. I was just a regular old insurance pusher up until that point. I took about 8 months studying economics and actuarial science behind the concept before I left the agency I worked for. It's an incredible concept. Try to find people or advisors who are close to Nelson or have been mentored by him or one of his students. Nelson was a self proclaimed economist long before he ever did anything with insurance. You'll now find many many Austrian Economists who can back these concepts. Did you know that he almost did not publish his book? It's true, he couldn't find a single insurance company to back him. The finance and insurance industry as a whole does not teach this or understand it. They didn't design it, they didn't create it. But now days, 19 years later, you'll find all kinds of "number guys", CPA's even, who can prove the narrative, or validate this concept as well in case you are more of a numbers guy. And some insurance companies have intentionally changed their software and their contracts to be more suitable for this concept. At one of the seminars I attended, a representative from one of these companies presented him with an award for his efforts in the industry. That was neat to see an insurance company be so on board. Other insurance companies tolerate it. That matters also. There are relatively few companies who do a good job designing these contracts. The vast majority of insurance companies are looking to earn profits for their shareholders and executives, not putting benefits in place for us the policy holders.
CPA's, Attorneys, Financial Advisors, and entertainers on the radio, can not disprove what he taught. Many of them in fact become teachers of this concept by trying to prove it wrong. Once they understand it, they can't deny it.
So good for you. Feel free to reach out with any questions or if you would like links to videos or articles that may address a particular aspect of the concept. I love it. It's extremely freeing.
Nelson always said, "Don't be afraid to capitalize, Think long term, And whatever you do, DON'T STEAL THE PEAS!!!"
Happy Banking!!

polama

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Re: Infinite Banking Concept/Bank on Yourself/Etc
« Reply #3 on: April 11, 2019, 11:52:27 AM »
...
With these policies, you have a GUARANTEED rate of return of 4-6% each year. Obviously, this isn't as aggressive as what you would hope to get in the stock market, but it is guaranteed. As we all know the stock market may gain 15% in one year only to lose it the following year. The way I see it, you get the safety of a CD or bond, but much better rates of return.
...

There's never a free lunch, and if somebody is guaranteeing twice the rate of treasuries, something's up.

The calculations I found are about 2.5% IRR on whole life. The key is that the guaranteed rate of return is on the cash value portion (after premiums/fees are removed). With a $10K CD, I'm getting the 3% return on the the entire investment. You'd get 6% every year, but only on a portion of the money you're paying out. Now, the premium does buy you life insurance, so the IRR is great if you die tomorrow, but in the long run it appears to fall down towards 2 - 2.5%. You can run the numbers on a specific policy you're considering.

As the other posters alluded to, it's also probably not actually free to borrow the money back out.

Now, that's still positive ROI. But it's about what a high interest savings account pays out, and I can just take that money out and use it for whatever I want. Once you replace the 5% guaranteed return with 2%, I just don't see anything special in this plan beyond what saving and investing accomplishes.

Tailwind

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Re: Infinite Banking Concept/Bank on Yourself/Etc
« Reply #4 on: April 11, 2019, 04:02:46 PM »
...
With these policies, you have a GUARANTEED rate of return of 4-6% each year. Obviously, this isn't as aggressive as what you would hope to get in the stock market, but it is guaranteed. As we all know the stock market may gain 15% in one year only to lose it the following year. The way I see it, you get the safety of a CD or bond, but much better rates of return.
...

There's never a free lunch, and if somebody is guaranteeing twice the rate of treasuries, something's up.

The calculations I found are about 2.5% IRR on whole life. The key is that the guaranteed rate of return is on the cash value portion (after premiums/fees are removed). With a $10K CD, I'm getting the 3% return on the the entire investment. You'd get 6% every year, but only on a portion of the money you're paying out. Now, the premium does buy you life insurance, so the IRR is great if you die tomorrow, but in the long run it appears to fall down towards 2 - 2.5%. You can run the numbers on a specific policy you're considering.

As the other posters alluded to, it's also probably not actually free to borrow the money back out.

Now, that's still positive ROI. But it's about what a high interest savings account pays out, and I can just take that money out and use it for whatever I want. Once you replace the 5% guaranteed return with 2%, I just don't see anything special in this plan beyond what saving and investing accomplishes.

While that may be true with many whole life policies, I believe he is specifically referencing Participating, Dividend Paying Policies, offered by Mutual Companies. In that case, the IRR is between 4-6. Especially taking into consideration the last 20 years, not just the lower interest rates we're seeing now. And we must factor in the tax exempt status. When compared to a "high yield" CD or savings account, where taxes are paid on the increase, then the difference favors the Insurance Contract.
BUT! And this is a HUUUGE BUT! The more important point to consider is access and control of the equity within the contract. Being able to collateralize that equity and put it to work outside of the policy where it may earn much more than a measly 4%, is the major point that deserves attention. The Infinite Banking Concept referenced by the original post is not about a Product, the major emphasis is on the process of how we manage the money. It just so happens that the best place to accumulate that capital or equity, is in one of those policies. And not only because of the guaranteed rate of growth, but many other contractual guarantees make that contract one of the best places to store or accumulate capital. The author was always ready to admit that if a different/better contract became available, then he would gladly accumulate money there. As we all should.

polama

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Re: Infinite Banking Concept/Bank on Yourself/Etc
« Reply #5 on: April 12, 2019, 07:42:25 AM »
In that case, the IRR is between 4-6.

In this market? If they're paying well above AAA bonds, it's definitely not risk free like the OP was looking for. Since unlike almost every other financial instrument I can't just get a quote without giving out a phone number I can't calculate IRR directly. But I still don't think there's a free lunch here, and that you're getting at best market value for your money.

Which would be fine. Market value is market value. But not something to make me prefer this over the alternatives.

Quote
When compared to a "high yield" CD or savings account, where taxes are paid on the increase, then the difference favors the Insurance Contract.

Most of us pay 15% on long term capital gains, so maybe a half percent on a CD. But then I can spend that money without paying interest. Nevermind 401K's, IRA's, tax free muni bonds

Quote
BUT! And this is a HUUUGE BUT! The more important point to consider is access and control of the equity within the contract. Being able to collateralize that equity and put it to work outside of the policy where it may earn much more than a measly 4%, is the major point that deserves attention.

But you can get collateralized loans on most things. With a 401K you even pay the interest back to yourself. If I'm putting this money to work, I could do it directly in a self-directed IRA without paying any interest.

Once you borrow against the cash value, you're paying net interest. So it's no longer +4-6%, it's maybe -3% plus whatever you earn on the borrowed money. But in that case, why not just invest my money directly? You can get well above 4% out of the policy. But that's by taking risk. Which might not pan out, leaving you out your policy.

Paying interest on your own money to avoid taxes could make sense. But I still don't see any magic here. It's just getting hopefully a reasonable return on investment and trying to profit off a collateralized loan, with some tax advantage mixed in.

Tailwind

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Re: Infinite Banking Concept/Bank on Yourself/Etc
« Reply #6 on: May 09, 2019, 01:37:35 PM »
I don't know how to put your comments in fancy quote boxes, so here goes.
I realize you can borrow against funds in other accounts, like a 401(k), two main reasons off the top of my head, why people prefer these contracts over 401(k)'s as a financing tool, is their tax exempt status. When we consider economic trends, and expected demographic shifts over the next 30 years, having money protected against taxation may be the best tool in your portfolio.  And the ability to leverage the funds without interrupting the compound interest growth would be the second reason. I'm not positive about this, but off the top of my head, if we continually process loans out of a qualified plan, we'll be resetting the compounding, right?
I don't follow AAA bond rates, again I don't propose this as an investment, it is one component within a financing system, so I don't compare it to vehicles where money is designed to sit and grow. But if 5% is "well above AAA bonds" then so be it. These types of policies have always been safe places to accumulate/store wealth. Going back 200+ years. There is no element of risk, like what you consider when looking at investment opportunities. The IRR is very stable, just a conservative return over the years. And you're correct, there is no free lunch. Someone who buys this policy is not getting anything for free, most people just don't understand how these policies/contracts work. Of the thousands of insurance companies in the country, there are very few left today who offer these contracts still. So no surprise that most agents/advisors don't understand them. Those people are being taught how to sell insurance by companies who don't offer these particular contracts. That's all.
The crazy cool thing about these participating/dividend paying policies, is that this young man, from the original post, I think he said he's 28, it's very likely, if he chooses the appropriate contract, that the new money he adds to the contract in 15 or 20 years will not only go directly to the growing equity within the asset, but it will DOUBLE as it's credited to the total cash equity within that policy. What I'm saying is that if he schedules 10k each year as his payment, then his equity will increase by 20k at that point in the life of the policy. GUARANTEED. Remember, this is taught as part of a financing system. He has total access and control of that equity. So he does whatever he wants with the 20k. He might use it in another investment, maybe a down payment on a house he wants to fix and flip, whatever he wants. So he can receive that increase, AND still use the money how he wants. This is an incredible way to fund investments/expenses. I know of no other contract that is guaranteed to do that.  One author put it this way, "think both". You can have your savings base increase, your capital base will continue working for you, and you can still make the investment you're looking at.
I don't know of anything else that has those guarantees, to get better over time, protection from taxes, protection from lawsuits and judgments, tax free wealth transfer to our heirs, and gives us total access and control of the equity to leverage for other investment opportunities.
If someone is going to be "managing money" for only 5 more years of their life, and they are NOT concerned about estate preservation, then maybe this isn't for them. But most contracts I've seen show more annual growth in the contract than the amount deposited by the 4th year. It's starting to show that trend of being more efficient over time, and by year 10 it's better, by year 20 it's much better, 30 years down the road it's an incredible ENGINE OF WEALTH. A great comparison would be a machine that had an upfront cost, a payment plan over the first 3 years, then starting in month 37, any money you put in the front slot would be increased and stored inside until you needed it. If you keep putting money in the front, then it will keep putting A LOT  more money in the basket inside. If you stop putting money in, then the equity inside won't grow as fast, obviously. But then the day comes, when you put 10K in the front, and this machine adds 20k to the basket inside.  There ya go. Simple.
I heard another person describe it like an incredible car. Engineered to be MORE EFFICIENT over time instead of less. The kicker is that this car will cost more upfront than the cars that most other people drive. But after the first few years, as it becomes more efficient, it will begin to put out an ever-increasing percentage higher amount of energy than what you put in. So you still fill the tank each month, and at the end of the month, it is putting out more energy than what was put in. It becomes so efficient that you can plug it into your other cars, or your neighbors cars, or your house, you get the idea. It puts out more than it's puts in. And since you get to use the output, and the output is increasing exponentially, you continue to put in what you're accustomed to putting in. Now one day you're done driving, you just want to sit on the porch and relax. This car now provides the energy to live comfortably at home. It has a lot of built up energy to pass on. If you don't use it all before graduating this life, then it will go to your heirs WITHOUT THE GOVERNMENT INTERVENING. (Do some research about how wealthy families transfer wealth and you'll see that this is the best solution to the generational problem our government has created). And when you ask how much energy it has to give back at this point, you just have to ask, how much energy did you put in? Now if you sold off your excess energy to your neighbors the way you should have, then a lot of the energy you put into this car was actually the payments from these other people and/or investments you participated in. It was not simply cash/income out of your pocket.
I hope those analogies make sense and help you see what these advisors are teaching when they talk about the "Infinite Banking Concept". Obviously if you are only going to be driving a car for a few more years, and you don't care to create something that you can pass on to your heirs, then this may not be the best strategy. But if you know someone who is planning on driving a car, or managing money in their life for more than 3-4 years, maybe tell them about this vehicle. It's a great way to manage our money.
-Happy "Driving".

Tailwind

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Re: Infinite Banking Concept/Bank on Yourself/Etc
« Reply #7 on: May 09, 2019, 01:54:15 PM »
While I'm fine to try to answer questions and address concerns here, I don't check it that often. And of course it's tough to put up pictures n drawings and numbers. But if you email info@tailwindwealth.com, then we can talk more about it and go through the numbers on gotomeeting or a video or something.  :)