Anyone familiar with Infinite banking through whole life insurance?

[onebadrubi]

I was told about this today as something too look into.  I know extremely little about it, but was basically told it's way to build up a life insurance policy and the more money in and out the higher the life insurance. 

I am going to start reading on this soon, but figured I'd come ask the experts....at Hogville of course!  haha. 

Thanks for any thoughts on this.  What I've been told it seems to have no down fall, no tax benefits or down falls, but just a way to funnel money and help build a whole life policy. 

[je100]

I know the concept from a very high level - not extremely familiar with the details.

My concern revolves around how returns are created.  I know that insurance products - unless tied to stock market or some other higher risk securities - will create very little in the way of returns to the owner.  Returns are probably comparable to CD's or Treasuries, or some other low-risk vehicle.

Whether one can borrow from himself (from a Life Policy) then, matters little if some value is not created within the Life Policy. 

My red-flag detectors go off when I hear about these complicated schemes.

[Vantage 8 dude]

I know the concept from a very high level - not extremely familiar with the details.

My concern revolves around how returns are created.  I know that insurance products - unless tied to stock market or some other higher risk securities - will create very little in the way of returns to the owner.  Returns are probably comparable to CD's or Treasuries, or some other low-risk vehicle.

Whether one can borrow from himself (from a Life Policy) then, matters little if some value is not created within the Life Policy. 

My red-flag detectors go off when I hear about these complicated schemes.

Know little about the structure of the program. However, I do know this: in the investment world the best idea is typically K.I.S.S.-keep it simple, stupid.

[onebadrubi]

Reading the last few nights on it.  It doesn't really appear there is returns to be had.  It just appears that if you have large sums of cash flow throughout the year(say self employed guy making tax payments), then moving those types through this vehicle might create a life insurance policy for virtually nothing.  However, I am having a very hard time graspying it being just that simple, it's definitely not free, and not a tax deduction from what I can tell.

It definitely appears to be a nice way for capital if need be as well. 

The angle it was brought up to me in, was I make 2-5 large tax payments a year, if I were to move the money through this policy it would for little to not cost create a whole life insurance policy for me.  Interesting from that point of view, but still can't grasp the idea. 

[je100]

Reading the last few nights on it.  It doesn't really appear there is returns to be had.  It just appears that if you have large sums of cash flow throughout the year(say self employed guy making tax payments), then moving those types through this vehicle might create a life insurance policy for virtually nothing.  However, I am having a very hard time graspying it being just that simple, it's definitely not free, and not a tax deduction from what I can tell.

It definitely appears to be a nice way for capital if need be as well. 

The angle it was brought up to me in, was I make 2-5 large tax payments a year, if I were to move the money through this policy it would for little to not cost create a whole life insurance policy for me.  Interesting from that point of view, but still can't grasp the idea. 

I'm with V8 on this one - too many moving parts.  On the insurance side, term policies (if you actually need one) are going to be a better value most likely - as long as you're not old, and in that case, you can make a case for not needing much life insurance.  On the investment side, fund as much as you can in a regular brokerage account with TD Ameritrade, purchase a Vanguard index fund in the account and go on with life.  You'll likely have more death benefit than you would have had with a whole life policy, and your actual investment will generally return more long term - which seems to be the time frame for these infinite banking schemes.  Pay tax as you go on the dividends and Cap Gains (which are favorable), and you're set.

You'll still have even better access to your money, without the headache and pitfalls of life insurance loans.

Having said that, I may be missing something.  But I doubt it.

[hog.goblin]

You have to ignore the "infinite banking" term to truly understand what you are looking at...that's just one philosophy of several that use whole insurance.

I don't have my insurance license, but I passed the insurance exam many years ago during a slow summer back when I still had "off seasons" and time to burn.  I decided I liked knowing more about insurance but didn't want to sell it.

I met with an insurance client last fall who pushes this theory and employs it for his own family finances.  He didn't use the phrase "infinite banking" or any other catch phrase, but kept talking about being his own bank (which I think has also become a catchphrase in the industry).

I'll try to provide some helpful detail without being too long-winded.

The most important part of the conversation is whether or not you are buying a good permanent insurance product that will provide solid returns.  If you believe that, then you put as much money as you can into the policy to build up cash value so that you can borrow against your own policy rather than borrowing from the bank (whether to buy cars, houses, etc.). 

Of course it takes time and cash to get anywhere because the first 2+ years are eaten up by fees.  You will also have to open new policies or amend existing policies since over-funding a permanent policy can convert it into a modified endowment contract (which voids the tax benefits).  Essentially every premium covers the cost of term coverage and the cost of the investment, and the ratio of these two must stay within a range, requiring you to increase term coverage in order to increase investments into the policy.

The idea is if you build up $100,000 into a taxable brokerage account, you can't access the money without paying taxes (capital gains, plus paying tax on the interest and dividends every year).  Lower tax rates on cap gains and dividends has countered this, but the extra 3.8% and 5% Obamacare surtaxes have harmed totaled returns for higher income folks.

The insurance policy is tax deferred, and the borrowing of funds "from yourself" can be tax-free if you play by the rules.  The downside is that you are always paying it back and can't truly enjoy the money free and clear until you die.  The counter is that you eventually don't need the money, or you can borrow it when you do and repay it slowly.  And it will eventually be an asset that transfers to your heirs free and clear of estate tax, income tax, and probate.

The key is the product you use to take advantage of the technique.  If you choose a product that performs poorly, this will end up very badly.  You have to to truly commit a ton of cash flow or you aren't going to be able to borrow.  An insurance company that does not practice direct cost recognition gives an opportunity for interest rate arbitrage.

It's complex.  It probably works best for people with a solid stream of current and future income, but aren't good savers or investors.

My client who is doing it makes less than $125,000 a year, but will consistently make $100,000 - 115,000 a year, and has a $2M policy.  After a few years he was able to buy a new truck with "cash" and pay his loan back to his own account.

I'm rambling now, but it also helps to be young.

[HawgWild]

Thanks for the explanation.

[onebadrubi]

You have to ignore the "infinite banking" term to truly understand what you are looking at...that's just one philosophy of several that use whole insurance.

I don't have my insurance license, but I passed the insurance exam many years ago during a slow summer back when I still had "off seasons" and time to burn.  I decided I liked knowing more about insurance but didn't want to sell it.

I met with an insurance client last fall who pushes this theory and employs it for his own family finances.  He didn't use the phrase "infinite banking" or any other catch phrase, but kept talking about being his own bank (which I think has also become a catchphrase in the industry).

I'll try to provide some helpful detail without being too long-winded.

The most important part of the conversation is whether or not you are buying a good permanent insurance product that will provide solid returns.  If you believe that, then you put as much money as you can into the policy to build up cash value so that you can borrow against your own policy rather than borrowing from the bank (whether to buy cars, houses, etc.). 

Of course it takes time and cash to get anywhere because the first 2+ years are eaten up by fees.  You will also have to open new policies or amend existing policies since over-funding a permanent policy can convert it into a modified endowment contract (which voids the tax benefits).  Essentially every premium covers the cost of term coverage and the cost of the investment, and the ratio of these two must stay within a range, requiring you to increase term coverage in order to increase investments into the policy.

The idea is if you build up $100,000 into a taxable brokerage account, you can't access the money without paying taxes (capital gains, plus paying tax on the interest and dividends every year).  Lower tax rates on cap gains and dividends has countered this, but the extra 3.8% and 5% Obamacare surtaxes have harmed totaled returns for higher income folks.

The insurance policy is tax deferred, and the borrowing of funds "from yourself" can be tax-free if you play by the rules.  The downside is that you are always paying it back and can't truly enjoy the money free and clear until you die.  The counter is that you eventually don't need the money, or you can borrow it when you do and repay it slowly.  And it will eventually be an asset that transfers to your heirs free and clear of estate tax, income tax, and probate.

The key is the product you use to take advantage of the technique.  If you choose a product that performs poorly, this will end up very badly.  You have to to truly commit a ton of cash flow or you aren't going to be able to borrow.  An insurance company that does not practice direct cost recognition gives an opportunity for interest rate arbitrage.

It's complex.  It probably works best for people with a solid stream of current and future income, but aren't good savers or investors.

My client who is doing it makes less than $125,000 a year, but will consistently make $100,000 - 115,000 a year, and has a $2M policy.  After a few years he was able to buy a new truck with "cash" and pay his loan back to his own account.

I'm rambling now, but it also helps to be young.

Hog. thanks for the explanation.  See, your analogy/client, if all I can do is establish a "piggy bank" to borrow money from then I am not interested.  Now what would have my eye on something of that nature is if it could be established to purchase something much larger later in life, say large sum of land or something like that, maybe. 

I think I am still missing the "audience" something like this appears too, unless it is simply just the people who it helps savings for. 

[je100]

Good explanation.

Hog. thanks for the explanation.  See, your analogy/client, if all I can do is establish a "piggy bank" to borrow money from then I am not interested.  Now what would have my eye on something of that nature is if it could be established to purchase something much larger later in life, say large sum of land or something like that, maybe. 

I think I am still missing the "audience" something like this appears too, unless it is simply just the people who it helps savings for. 

I really don't see it either.  Sounds like there's some forced savings discipline built in to the thing.  But on the other hand, it sounds like there are constraints on maximum contributions as well - cash value divided by death benefit.  Which, if that is the case, the primary benefits can only really be manifested if death benefits increase beyond what most likely are needed.  Which would seem to drive up insurance costs higher as well.

[hog.goblin]

The sales is pitch is more of "you'll save a ton of interest that you aren't paying the bank"

It's my opinion that the forced savings is likely more beneficial than that, for those who need it that discipline.

I agree je, the insurance cost could get out of control quickly.  My client has over $2M in coverage (and climbing every 18 - 24 months) and he only needs $1M to $1.5M even by the most generous standards.