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Does Infinite Banking Work?
Is Infinite Banking Legit?
Is Infinite Banking a Scam?
What does Dave Ramsey think of Infinite Banking?
Is Infinite Banking a Real Product or... just another pitch for Whole Life Insurance?
(We evaluate) You decide!
Infinite Banking, otherwise known as Bank on Yourself , is a controversial use of life insurance that involves utilizing the cash value of a participating permanent life insurance contract to fund purchases such as houses and autos.The concept is dependent on the build up of reserves in the cash account and the accumulation of dividends from the insurer. It also requires consumers to stay in good standing with these insurers by making their large whole life premium annual payments.
The Basics of this Article:
It is high time that this site produce an article about one of the more popular and trendy methods of life insurance: Infinite Banking. Infinite banking also goes by the name Bank on Yourself.
Editors Note: For the record and to be clear, unlike many websites that provide information on what "Infinite Banking" is, this site and this insurance agency do not sell or subscribe to the concept of infinite banking. We review this concept or idea because we get this question often.
Define Infinite Banking?
I would define infinite banking as a concept that involves buying whole life insurance and using the policy dividends and the policy proper as you own personal bank. In this concept the bank is the fully funded whole life policy. In other words the infinite banking concept is the idea that you become your own bank by using your whole life insurance policy. The infinite portion of the term I believe is intended to be descriptive for marketing purposes. As in it lasts forever. Although no life insurance policy that I am aware of truly lasts forever. Eventually in one way or another the life policy matures and the contract must end.
Other Names for Infinite Banking?
Infinite Banking goes by numerous other names: Bank on Yourself is the most popular. Doubtless new versions and terms will pop up sometime soon.
The Special Ideas for Infinite Banking:
Infinite banking concepts seem to similar to whole life insurance policies with the following characteristics:
The financially strongest insurers.
Participating Policies.
Whole life policies that understand the concept of infinite banking.
The use of Paid Up Additions Riders, sometimes abbreviated PUAR.
Policies that practice Non Direct recognition.
Lastly policies that pay out higher dividends.
For the record, five out of six of these are what each and every whole life insurance agent prefers selling. The one that is not as widely sold is the non direct recognition and for good reason. (More on this later.)
The Hidden Secrets of Bank on Yourself:
The concept of infinite banking generally falls into the idea of using whole life insurance as your bank or a special product sold by the Bank on Yourself people. The Bank on Yourself experts tend to be relatively vague with naming the insurers that they use. On multiple sites they claim access to 'special policies' whose details are not known at this time. (I will use the terms 'hidden' and 'vague' for good reason in this article as there is not a lot of 'actual' information on the concepts from the Infinite Banking folks.)
It is claimed, that these policies carry benefits that the experts don't know about. As an independent insurance agent - I welcome anyone sending me a legitimate "special policy" that demonstrates these special qualities that make Bank on Yourself contracts true standouts. Heck I might start selling them myself, it they are a good solid product and make sense for consumers.
I have seen numerous articles on the internet that propose to demonstrate the Bank on Yourself Incredible policies whose cash accounts grow in the very first years. But this so called evidence contains no insurance companies name on it. In fact the Bank on Yourself people even mention that only "five companies" out of "1500" Life Insurers qualify as infinite banking options.
Until such time - this article will stick with the general concept of bank on yourself and infinite banking.
The Appeal of the Infinite Banking Concept:
The bank on yourself appeal seems to be based on several concepts. Here is the shortlist:
These seem to be the big five reasons that are alleged over and over again. Fight the banks.
Why the Appeal of Infinite Banking is Dangerous:
As far as I can tell the appeal of infinite banking is one that talks down the use of modern financial products such as 401Ks and mortgages and pushes what I can only call a secret way of creating your own bank. This is a very dangerous concept. When information is secretive, it is not open to as much scrutiny. The issues with it tend to be much harder to see. Would you buy a secret car that consumer reports had not reviewed?
More Details on Bank on Yourself:
Buy Non Direct Recognition Whole life insurance policies who regularly pay dividends from insurers that are highly rated. They also generally suggest to use PUAR riders and use insurers that practice non direct recognition. The concept 'may' involve over funding said whole life insurance.
The Issues with Bank on Yourself and Infinite Banking:
Of note you will see that I have not added a section titled Pros and Cons of Infinite banking, because I do not see enough pros. In other words there are far more negatives than positives.
First off, lets start with the highly rated part. I have shown that there are about 120(ish) A+ and A++ AM Best Rated companies in the US. That is not a lot. Therefore there are not that many "secret products" that exist out there. The notion that some insurance agent knows, exclusively, of a secret product out there is questionable.
Second - choosing to buy whole life insurance from companies that pay dividends, is not a horrible concept. I have explored this concept numerous times in various articles on this site. The use of whole life insurance as a savings account is not entirely terrible, but it does have some major issues.
First off whole life is exceedingly expensive when compared with term life insurance.
Second, whole life does not pay out amazing returns.
Third, whole life requires premium payments for just about your entire life. In theory you can choose to not make payments to a WL policy once the policy becomes fully funded. However if your are using the policy for contract loans than that is extremely doubtful.
Fourth, a disgusting percentage of people that purchase whole life insurance cancel it in the first ten years.
Fifth, whole life insurance policies pay out a large amount of commissions to the insurance agent (me.) These commissions, or marketing expenses as the insurers term them, lower dramatically the return on this so called investment in the first five years.
Sixth, which is closely aligned with point five, is that whole life policies only pay dividends on the money in your cash account, not the total money paid in. This is a source of much confusion with consumers so I feel that it needs to be pointed out. In fact numerous insurance agents do not seem to understand this basic concept either.
Seventh, Whole Life Insurance policies do not, usually, have the same amount of insurance backstop such as FDIC insurance. This topic is very complicated as its state dependent and the backstop coverage comes from vastly different entities. Suffice it to say the coverage that you may have at a bank account is different than with an insurer. (This last point is not to say that you cannot save money with whole life insurance but rather it might not be as safe as some would think.)
When compared against Buy Term and Invest the Rest whole life returns usually are much lower. I realize that the infinite banking people are taught that their investment returns are tax free, but so are investments in Roth IRAs, Roth 401Ks, HSAs, and 529s. Second, dove tailing off the previous topic, the rates of return from "best in class" insurers are lower than stock market returns. Third, whole life insurance cash value is pretty difficult to gain access to. It is not as simple as getting the money from a bank account. Fourth - whole life insurance policies are not great at handling financial down years for clients. Years when you have a huge medical bill and you cannot afford the high yearly premium. Yes, insurers can handle them, but they crater the overall return of the policy when you use the cash value to attempt to make your yearly premium. Fifth, whole life insurance is a financial product you will, at least theoretically, use forever. This is not the case with most other financial products that I am aware of.
Next the use of PUA riders, as in Paid Up Additions is not a bad thing necessarily either. For people that do buy whole life policies they can be a good concept, but of course it depends on how the rider works with a given insurer. Can you change your election in the future, can you skip years, does it cost money to have this rider?
The idea that you should only buy a whole life policy from a dividend paying company is one that I support, at least if you are going to buy a whole life policy. The entire point of owning a whole life insurance policy is 1. to insure yourself forever and 2. to have a company that reimburses you for staying with them for sixty plus years. PUAs are a good solid thing.
The use of Non Direct Recognition companies is a complex topic and is not one that is agreed upon in the world of insurance specialists. You will find many insurance agents that are not even aware of the difference while the other half are split on which is best. Basically a direct recognition insurer pays you a lower dividend when you take out a loan against your policy. A non direct recognition insurer basically does not care and does not calculate this. They just pay you the same dividend percentage regardless.
When you look at it this way - Why wouldn't you want the non direct recognition insurer? Well most companies that pay out dividends (or at least the best ones) are Mutual Insurers who have no stock holders. These mutuals return excess profits direct to their stake holders - the policy owners. Therefore the policy holders that are not taking out loans, are in a way subsidizing the ones that are. At a certain point, having more policy holders take out loans affects the bottom line and reduces Everyone's dividend.
In other words the more people that take out loans the lower the dividends. So non direct recognition companies are pretty much willing to pay out lower dividends. If you really wanted to maximize your wealth why would you want this? There just is not free lunch.
The concept of over funding your whole life insurance policy is one that may or may not be used with infinite banking but is one that many agents suggest. The idea is to overpay your yearly life insurance bill, assuming the company will allow for this.This general concept has merits. By buying a smaller life insurance policy you will end up spending less on marketing and sales costs. Sales costs are commissions. This will allow for a much faster build up of your cash value account. Potentially even a cash value build up in the first couple of years. However this has negatives. By buying a lower life insurance policy face value you will have a lower coverage, at least from the beginning. So you will not have the full life insurance in force from day one that you may desire. There is no free lunch here either.
As you can see some of the basic concepts in infinite banking are not totally wrong, some are slightly off. However when you put the whole concept together it is not one that I would touch with a ten foot pole. Why would I not suggest this infinite banking concept. For numerous reasons.
There you go - five major issues with Bank on Yourself. Please note as I have already stated, I did not feel that a Bank on Yourself Pros and Cons list was deserved due to what I believe to be lack of positives. I am certain that I will soon hear from the bank on yourself advocates about why I am incorrect. I welcome your comments about this secretive system.
Why I do Not Suggest Infinite Banking and Bank on Yourself:
First off, Whole life insurance does not make a lot of people rich. In fact when taking into account inflation, whole life insurance has probably lost more people money than people who have made money. According to the Wall Street Journal about 40% of whole life insurance policy owners cancel them before they die and within ten years. Almost all of those people lost money. For the remaining 60% of the people a few more of them will cancel in the next ten years.
Second, the Charts Have it. I have seen hundreds of life insurance guaranteed and assumed cash value charts. Trust me when I tell you the cash values in these things grow very very very slowly. Almost anemically. Not that the slow growth is a bad one, but one in which its not conceivable for me for most people to pull any real money out of these things until years ten plus. For many that pay just the typical yearly premium it is more like year twenty.
Third, there are not that many A+ and A++ rated mutual insurers. If you were looking at a term policy, I can easily suggest that you use A or even A- insurer in many cases, but not with a whole life insurance policy. With permanent life insurance, since you will have this policy forever and apparently it will be your bank, you need only the best and most select insurers and there are just not that many to choose from.
Not ones that have a long history of paying dividends. Does having a smaller list make me think that this whole concept is a scam? No, but it does make me question which insurers they would use. Many of the very finest whole life insurance companies only use their own insurance agents- New York Life, and Northwestern Mutual are two that come to mind. Also on the property casualty life side that includes State Farm and USAA. Many others though are not open towards working with independents.
Remember when we discussed secrets. Since individual states regulate insurers all insurance companies are on public record. There is no real place to hide a 'secret insurer' option. If an A rated life insurer existed, please trust me when I tell you that I would know about them.
Infinite Banking is really putting a lot of eggs in one basket. In many ways this is the opposite of diversifying. Your Mortgage, Your Bank, Your life insurance = all from One Insurer. That sounds concerning. What is the level of insurance that these insurer have for your policy. Insurance companies do carry a bit of financial backstop through the various state insurance plans but it is arguably not as robust (for cash value life insurance), for consumers in comparison to the FDIC insurance on savings accounts..
Closely tied to this, but not quite a point on its own is the issue of separation when you want it. Don't like your internet bank, move your money. Getting bad customer service from your mortgage company, refinance. Your 401K provider not taking your calls - move the money. How do you do this when your life insurance, your mortgage, and your savings account are all tied up with a lifetime insurance product?
My fifth major issue with Bank on Yourself involves the lack of clear information about it. The infinite banking people are pretty secretive and this is a huge issue for me. Why would you want to tie your financial fortunes to a non fully pier reviewed product? Have you ever gotten a second quote for a job around the house? I do, I do it all the time. It can be hard to do this when the exact plan is hidden or secretive.
Sadly in the world of finances, there are no shortcuts. There is no one magical product that will save the day. No back alley that will help you cut corners. The fact remains that using best in class and proven services will win your financial plan. The entire infinite banking concept just looks and feels like a shortcut.
The Shades Have it- Is Infinite Banking a Scam?
Psst- Wanna here a secret about getting rich? If that phrase does not scare you - maybe nothing will. Investment concepts that are not fully disclosed to the public are not open to the same set of scrutiny and probably more likely to be a scam. I would be very careful handing your money over to any get rich type schemes. Is infinite banking a get rich quick scheme, perhaps, perhaps not? Maybe its a get rich slow scheme, but it does seem secretive and scam like..
So -Is Infinite Banking a Scam? I do not believe that it is quite there. I don't see it as a complete fraud. It does contain some legitimate concepts, but.... it is scam like. Perhaps the best term to use is "shady." I believe that the infinite banking concept is shady.
I would suggest that you avoid Infinite Banking. In fact unless you are one of a select few types of people, I would avoid whole life insurance in general.
Who are those people that could consider whole life (but not infinite banking):
As an Insurance agent, these are "our" opinions about the best uses of whole life insurance.
Yes there are probably some more legitimate reasons out there for people to consider whole life policies. However those are the major ones and the best choices. What about Universal Life Insurance? With the advent of Indexed Universal Life Insurance we generally are of the same opinion. These policies build value very slowly and typically at a lower rate. In addition their complexity makes them hard to approve of.
The Real Road to Wealth Creation:
When is the last time that you heard that the real road to wealth creation was to borrow money? Yes, it is certainly possible to borrow money and earn a bigger return on it, especially if you invest it in McDonald's at the earliest stages, but this is not common. In general taking out a loan to start a business or buy a car or even a house will cost you more than just buying it outright.
Most of the financial pundits tend to agree on one thing: Save more than you spend. Don't take out loans for almost anything other than the purchase of a house. The infinite banking concept is somewhat the opposite of this. It is basically suggesting that you can become wealthy by taking out loans from yourself. However this seems rather backwards, why take out a loan if you already have the money?
Save your money before you buy a car and pay in cash. Yes at some point you will need a mortgage and hence a loan, but you can easily buy a simple and affordable one and pay it done quickly. Why get yourself into some scheme that requires a lifetime of high payments?
Although we are not financial advisors, our opinions on the world of weatlh creation is much the opposite of the Bank on Yourself / Infinite Banking concept:
For consumers that are able to complete all of these things and still have more money to invest... considerations such as rental properties, higher fee / higher exposure investments can make sense. Even potentially considering a whole life insurance policy.
However it should be noted that most people that have completed all of these financial action items and are doing these things each year, will probably be saving in excess of $30,000 each year per year. Likely their net worth in easily over $1,500,000.
Those are of course, just some of the nuts and bolts that we would suggest as opposed to a bank on yourself philosophy. In general insurance is best used for risk management and not investments. Avoiding high cost investments are another commonly cited methods or slowly increasing your wealth. In general this seems to be the wave of the future. Some might remember something called a load charge when purchasing mutual funds? Those days are mostly gone. Consumers can now purchase inexpensive and cheap index and ETFs.
What do Dave Ramsey and Suze Orman have to say about Infinite Banking:
A simple search of Dave Ramsey and the term Infinite banking does contain much direct information either in favor or against Bank on Yourself concepts. However both Dave and Suzy (Orman) generally argue against buying whole life insurance. So it is not necessarily incorrect to assume that they both do not agree with the concepts of Infinite Banking.
Dave Ramsey is quoted as having said that "cash value life insurance is one of the worst financial options out there!" We at WholevsTerm do not 100% agree with this statement. However we are not that far apart on his opinion. It is not a good option for most Americans.
The same can more or less be said about Suze Orman's opinion about this secretive way of building your wealth. Suze has again and again said that she does not like and does not support Infinite Banking.
Both Dave Ramsey, Suze Orman, and Clark Howard have all publicly stated their support for simple and inexpensive term life insurance.
Conclusion to Is Infinite Banking a Scam:
We have reviewed a conceptual definition of both infinite banking and bank on yourself. We have looked at the theory of it. We have demonstrated how the product could in theory work. We have shown you the major issues. We have explained how the theories of bank on yourself are not all that unlike numerous other whole life insurance sales concepts.
We have avoided using actual numbers mostly because almost none of the purveyors of this product produce them. Therefore we are left with just ideas. We have avoided linking to these purveyors, on purpose. We have proposed a better financial solution. We have stated, emphatically, that we do not believe that Infinite banking does not work. At least as advertised.
Now it is time for you to decide. Would you rather "invest" in a secret concept or... stick with the open and frequently debated concepts.
A Conflict of Interest?
Some could argue that since I do not sell bank on yourself / infinite banking and do sell what you could call the competition term life insurance, than I have a conflict of interest. To those I would have to point out, that I could in theory, sell whole life insurance policies this way. I am licensed. The same license that it takes a term life policy can also sell a whole life policy. The issue is that I just do not believe in it.
I have run and rerun the whole life numbers, and frankly: I do not see the value. Yes, if you are really wealthy I see it. By my calculations you must earn on average, consistently earn over $300,000 to $400,00 per year for decades for whole life insurance to be of real value.
Remember what Benjamin Franklin Said: "A Penny Saved is a Penny Earned."
Questions about Infinite Banking and Bank on Yourself:
Have a question about our ideas - please kindly send them along. Do you have more details, actual numbers- by all means please forward them. If you have a question please either email us or put your question in the comment box below.
sales at marindependent.com
