Infinite Banking, Is it cut out to what it is said to be?
Rental Property Investor · Pittsburgh, PA · Member since 2018 · 150 posts · 50 votes
Does anyone have serious experience with using the Infinite Banking Concept or Bank on yourself concept to invest in real estate? The only people I talk to that love it are trying to sell me policies.
I am having difficulty seeing the benefit of Infinite Banking from a policy loan standpoint, which is my biggest selling point. Salespeople talk a lot about the VELOCITY OF MY MONEY In the policy...
If my policy is receiving dividends at 4% and I am getting a loan at 5% to buy a real estate asset that kicks out 10% return... that is called negative leverage. There is no other way to put it.
If I just saved that money and put it right into real estate than I could do better, instead of using this capital vehicle
I've heard that this is a 100% return on my money from people in the prosperity economics movement, 5% to 10%(100%), which is false, because it is still a loan?
What am I not seeing?
@Clayton Hepler
I own multiple high cash value life policies in my family and I use them for multiple purposes, including real estate purposes. If one understands them and if they are designed correctly, they are better than any qualified plan and they are the best place to store your cash to build capital.
And if you store enough capital to build a big enough “bank”, then the loan provision beats any commercial bank loan out there to go capitalize on investment opportunities.
If you ever want to chat on the phone about them, shoot me a message.
Thanks,
@Clayton Hepler
You can often get a loan for lower rate than the interest credited.
Also the loan interest could be tax deductible.
So as a whole you are getting some interest arbitrage plus some additional tax deduction in addition to making your money work out of the policy in some investments.
You are making your money work at two places at the same time.
@Mike S., where do you see that loan interest could be tax deductible? Could you give me an example?
Interest arbitrage, in what sense?
@Mike S., where do you see that loan interest could be tax deductible? Could you give me an example?
Interest arbitrage, in what sense?
If you take a loan out from the policy directly it should not be deductible.
However, you can easily obtain a loan from a bank using your cash value as collateral. If you use the proceed of the loan for investment, the interest on the loan are investment expenses and are deductible.
If your cash value grows at 5% while you take a loan out at 4%, you are making 1% out of your cash value. That is interest arbitrage.
You can check some example there: https://innovativeretirementst...
@Mike S., I am trying to use it as a down payment.
@Clayton Hepler the interest would be deductible if used for business purposes including real estate.
I think Mike is stating if you take a loan out on your property, its tax deductible. Not from a life insurance policy. How expensive is this insurance policy? I know term life and whole life aren't the same but I can get a million dollar term life policy for about $40 a month and I'm not young. The rest of the money can go into a 401k or IRA and you will do much better. Its not uncommon for people to have a 5 year IRA average return of 15% right now and you generally can borrow from a 401k should you want to do so also. Those pushing the selling of the policies are looking out for the commission and not necessarily for you. Do you really need whole life because when you retire if your investments will be plenty for the family?
Update: Greg, interesting. Good observation on the policy interest deduction.
Does anyone have serious experience with using the Infinite Banking Concept or Bank on yourself concept to invest in real estate? The only people I talk to that love it are trying to sell me policies.
I am having difficulty seeing the benefit of Infinite Banking from a policy loan standpoint, which is my biggest selling point. Salespeople talk a lot about the VELOCITY OF MY MONEY In the policy...
If my policy is receiving dividends at 4% and I am getting a loan at 5% to buy a real estate asset that kicks out 10% return... that is called negative leverage. There is no other way to put it.
If I just saved that money and put it right into real estate than I could do better, instead of using this capital vehicle
I've heard that this is a 100% return on my money from people in the prosperity economics movement, 5% to 10%(100%), which is false, because it is still a loan?
What am I not seeing?
Two things here to note:
1) a participating life insurance policy with a mutual company will have two sources of income. There will be guaranteed interest as well as a dividend. For example a company I work with right now offers a 4% guaranteed interest rate as well as a dividend
2) Dividends are not pure interest. Meaning if you have a 5% dividend that is not always working out as a full 5%. With that said, if your interest is 4%, your loan is 5% the dividend doesn’t exactly need to move mountains.
Note: if you want to get the full dividend regardless of your loan stays you’re looking for an insurance company with non-direct recognition loans. Vs. a direct recognition loan. There’s debate in the industry which is better If you have a lot of money being pulled regularly I recommend non-direct.
Even if you’re earning a net of around 2%, you still have the added velocity of the investment.
hope that helps.
I think Mike is stating if you take a loan out on your property, its tax deductible. Not from a life insurance policy. How expensive is this insurance policy? I know term life and whole life aren't the same but I can get a million dollar term life policy for about $40 a month and I'm not young. The rest of the money can go into a 401k or IRA and you will do much better. Its not uncommon for people to have a 5 year IRA average return of 15% right now and you generally can borrow from a 401k should you want to do so also. Those pushing the selling of the policies are looking out for the commission and not necessarily for you. Do you really need whole life because when you retire if your investments will be plenty for the family?
Update: Greg, interesting. Good observation on the policy interest deduction.
Hi Chris, I’m a licensed life insurance agent in 18 states (ie. I’m biased). I know a little more about these policies than the average agent. A few things I’d like to point out for you:
1) I make WAY more money selling term policies (in fact my website is Term Life Guidance) much quicker. It takes about an hour for me to sell someone a term policy. A specialized cash value policy can take a lot more work.
Also, the average life insurance client buys 7 policies over a lifetime.
My specialty is writing insurance policies on people who have complex health problems. It’s amazing how much insurance coverage you feel like you need before and after you get sick. I have been in business long enough that I’ve seen people before and after their health turns. It’s often a desperate moment.
My wife and I have lost a child. It’s a terrible thing. It is hard knowing how unexpected loss affects your family. I know more of what my wife will need if I were to pass, because I saw her reaction to our daughter.
2) The term expensive is interesting. If you get 20 year term policy for $40/month you’ll pay $9,600 for that coverage. Because, for 98% of people - they’ll never see a penny of that back.
With that said, term insurance, even with whole is an absolute necessity as you build wealth.
The cost of a cash-value optimized policy is significantly more, but within a few years (depending on the details) the policy should be worth what you paid plus additional growth with time.
3) A whole life policy or indexed Universal Life policy will never lose money. Once you get paid interest or a dividend- it’s yours forever. The value never goes down unless you pull money out of the policy.
4) Investment accounts pay a lot more in fees than whole life policies. The SEC has noted that a 0.75% difference in fees on a portfolio of $100,000 will cost an investor $30,000 over the course of 20 years.
Properly funded whole life policies pay a one time small commission on the principle invested. Investment accounts pay every single year they’re managed.
There is a benefit as well to making tax-free money vs. a taxable investment account.
5) the average IRA return the past 5 years was 7%. Surprising since the S&P did 15%. You're looking at historic growth the past few years. The S&P does not grow 15%/ year on average.
If you die, your IRA doesn't magically pay out the full amount. That's what you'd need life insurance for. If your investing goes as planned, you're right you shouldn't need life insurance, but life insurance isn't for things going right. It's a hedge against things going wrong (including with your investments).
What if your needs change and you can’t get insurance in the future? If you get sick and need long term care and can’t afford it the state will take your investments.
6) No reasonable advisor should tell you one over the other. No one thing works for all people. Look, if you don’t make enough money to have concerns about reducing taxable transfers, then you should buy term and invest the difference.
Whole life premiums should never keep you from investing in a 401k or IRA, but if you die while a child is about to go or in college, there's going to be some serious tax ramifications. RMDs for a beneficiary are rough when you're trying to get college help.
My 3 year old daughter has a rental house, an investment account, and a whole life policy (the IUL is next). The reason is - they all work and they hedge each other.
You can buy a $50,000 policy for a 2 year old for like $8k over the course of a few years if you pay it off early and it will continue to grow in value with a dividend. I may be sensitive to this, but children need life insurance for multiple reasons. It could be the concern of being uninsurable for the future, or just making sure they always .
Buying these policies is not for everyone! Buying a life insurance policy, just like investing in an IRA will not make you rich. It is a place to reserve and grow wealth.
I’ve never had someone call me up angry because they got a whole life policy. I have had several people upset because they didn’t take out more coverage.
Probably more than you ever wanted to know. Just understand that just because something may not make sense for you doesn’t mean the product will not be useful for someone else.
I think Mike is stating if you take a loan out on your property, its tax deductible. Not from a life insurance policy. How expensive is this insurance policy? I know term life and whole life aren't the same but I can get a million dollar term life policy for about $40 a month and I'm not young. The rest of the money can go into a 401k or IRA and you will do much better. Its not uncommon for people to have a 5 year IRA average return of 15% right now and you generally can borrow from a 401k should you want to do so also. Those pushing the selling of the policies are looking out for the commission and not necessarily for you. Do you really need whole life because when you retire if your investments will be plenty for the family?
There are a few differences between a 401k or IRA and the cash value of a life insurance policy.
First of all, all your insurance premium are after tax, so you should probably compare it to a ROTH 401k or ROTH IRA.
You are limited in the maximum amount that you can put into your ROTH IRA ($6,000/year if your AGI qualifies) and ROTH 401k ($19,500/year). There is no limit in the life insurance premium that you can put in (technically there is a limit to keep it a non MEC, but it is based on the death benefit and age, and you can choose the death benefit you want).
In a ROTH 401k you will have to take minimum distribution. In a ROTH IRA and life insurance cash value you don't.
If you take distribution before a certain age or without a qualifying event in a ROTH 401k you will get taxed and get a penalty. You can withdraw money (but you shouldn't ever) or get a loan out of the cash value (the preferred way) in a life insurance policy anytime.
ROTH account legislation may change before you retire and the RMD and or tax may change too. Life insurance is a contract.
While you take a loan out of the cash value, the cash value is still in your life insurance and continues to grow on the full amount!!! A loan out a 401k does not grow when you take it out.
You are limited to $50k loan out of a 401k and have to amortize it back over 5 years. There is no limit on a cash value amount loan out of life insurance. You decide on your repayment, you can even not repay it back if you choose so as it will be deducted from your cash value if you die.
If you die in your earlier years, your heirs will get a life insurance payout that will be way above your contribution. If you die in your later years, the payout will be closer to your contributions plus return (the cash value).
In retirement, it is often said that you don't want to withdraw more than 3 to 4% per year out of your 401k or IRA to make sure that it will last. The loan rate that is considered safe out of cash value life insurance policy is closer to 8% per year as your cash value continue to grow on its full value.
It is true that the fee of a whole life or IUL life insurance policy are front loaded and it make no sense to use these vehicles if you expect to surrender the policy within 5 years. But in the case of a maximum over-funded policy, if you average the fee paid over 20 or 30 years, you will notice that it is lower than most of 401k plans.
Now, WL or IUL life insurance policy are complex products that you need to learn how to use properly. If you are not disciplined about it, you will waste money. It could be as easy as making your monthly or yearly payment, but you have to make them. The best way to build these offers is with a plan to make a constant amount of payment for a number of years. If you want to change the amount every year, your policy won't be optimized and the ratio cost/return will increase. When you decide to stop paying premium, you will have to make a change to lower the death benefit to the minimum non MEC value to lower the cost during retirement. If you want to increase the premium, it is often better to open a new separate policy for the additional amount.
Do you want to put all your money into a permanent life insurance policy: probably not. But using it to funnel most of your money, while taking a loan out to reinvest it is a smart way that can increase your return. Also, it could help with asset protection, as life insurance cash value is often protected from creditors by state law.
Using the numbers that you stated, you are correct, The Double Play does not make sense. But I think you have it backward. The arbitrage is the other way in the real world.
4% represents the Guaranteed Rate for most Whole Life companies, not the dividend that they actually pay. Don't focus on the Guaranted Rate, its not a real number. Its simply the worst-case growth rate that the company is willing to put their name on. Since the cash value represents the policy owner saving up their own death benefit over their natural life expectancy, the insurance company has a vested interest in your cash value growing as quickly as possible.
And even with today's low Cap rates on IULs, the "expected" interest crediting, based on a 30-year lookback, and assuming interest rates stay as low as they are today, is still between 5 and 6%. You can get a policy loan or a cash value line of credit at less than 4%.
Using the numbers that you stated, you are correct, The Double Play does not make sense. But I think you have it backward. The arbitrage is the other way in the real world.
4% represents the Guaranteed Rate for most Whole Life companies, not the dividend that they actually pay. Don't focus on the Guaranted Rate, its not a real number. Its simply the worst-case growth rate that the company is willing to put their name on. Since the cash value represents the policy owner saving up their own death benefit over their natural life expectancy, the insurance company has a vested interest in your cash value growing as quickly as possible.
And even with today's low Cap rates on IULs, the "expected" interest crediting, based on a 30-year lookback, and assuming interest rates stay as low as they are today, is still between 5 and 6%. You can get a policy loan or a cash value line of credit at less than 4%.
Lets say I gave you a check for $300,000 today for a policy. How much of that $300,000 would go to fees? What type of policy coverage would that buy? Would I be able to get a loan or line of credit immediately against that policy? If so, what dollar amount would they give? I am assuming since the loan is secured by my policy that I don't need to offer any other collateral or even reason why I am taking the loan. What is the payment plan on this loan - is it some percent of principal plus interest?
You can't really put a one time payment in a policy and nothing later without creating a MEC. You will want to fund your policy over at least 5 years of equal payments.
Let's say that you put $300k a year for five year. In a properly set up max over-funded policy, you should have immediately (or a few weeks later) around 85% of it in the cash value. Some insurance companies will let you borrow all of it immediately. Some will have a lock out for the the first year or two. There is no repayment plan on them. You can pay back as you wish (interest only, principal, nothing). If you go to a third party bank using your cash value as collateral, most of them will let you borrow immediately up to 90% of the surrender value, with interest only repayment around prime rate. There is no personal collateral to it, just the cash value of the policy. These loan can be obtained very quickly (a week or so, with almost no underwriting).
So the first year you can get a bank loan of approximately $230k. The second year, your cash value will be around $525k (using a 6% return) and your total max outstanding loan would be up to $472k. The third year your total max loan will be around $730k. At year 5 you will have put in $1.5M and max loan would be around $1.3M with a cash value around $1.4M.
At year 8 you will be able to get a bank loan above the $1.5M that you put in while your cash value will be around $1.7M. Nothing very terrific, but if you wait a few more years the compounding it fantastic. And that is without even looking at the loan making it own profit in outside investment.
Regarding the death benefit that you will get with such a premium, it will depend on your age, health and risk profile.
@Thomas Rutkowski, I have been unable to find any such companies that offer lower than 5% on loans. I am only focusing on whole life too.
In addition, I see that companies “register” dividends of 6% but have to use some of the % to pay for administrative? Which takes it down to 5%.
@Clayton Hepler
I just got introduced to the infinite banking concept through Paradigm Life. I had a lot of questions and resistance to the idea. I bought a policy for myself and my wife to try it. I'm thinking about getting whole life for each of my kids also with the idea that I can borrow against their cash value until they start paying the premiums and prove financial responsibility.
One thing that helped convince me was that when I asked my wealthier friends about cash value while life, they all own several policies and intend to fund more. Usually people who are good at making money don't buy more of bad investments.
I think of my whole life policies as a guaranteed legacy to my kids that I can borrow against. Like a tax free savings account that I can store my cash reserves, access quickly with little penalty, and will pass to my heirs tax free with no probate. I'm told it is protected from bankruptcy and doesn't need to be disclosed to a potential lender. Frankly I hate borrowing money from banks so I look forward to the day when I have enough cash-value to be my own banker.
I got quotes from 4 different life insurance salesmen before I bought. And I believe the right
salesman is probably more important than the insurance company or quoted rate.
@Thomas Rutkowski, I have been unable to find any such companies that offer lower than 5% on loans. I am only focusing on whole life too.
In addition, I see that companies “register” dividends of 6% but have to use some of the % to pay for administrative? Which takes it down to 5%.
You won’t see loan rates below 5% in whole life you will in IULs. Thomas and I differ a little in our approaches. I think there are times while life makes sense and times IULs make sense.
Like I noted above no dividend from a whole life company pays a dividend as pure interest they declare the dividend, but have proprietary ways to apply the actual amount paid out. You can’t compare dividends to each other, you’ll have to look at illustrations side by side.
For whole life policies I like fraternal companies. The dividends tend to be a little healthier.
Good luck!
@Clayton Hepler
I just got introduced to the infinite banking concept through Paradigm Life. I had a lot of questions and resistance to the idea. I bought a policy for myself and my wife to try it. I'm thinking about getting whole life for each of my kids also with the idea that I can borrow against their cash value until they start paying the premiums and prove financial responsibility.
One thing that helped convince me was that when I asked my wealthier friends about cash value while life, they all own several policies and intend to fund more. Usually people who are good at making money don't buy more of bad investments.
I think of my whole life policies as a guaranteed legacy to my kids that I can borrow against. Like a tax free savings account that I can store my cash reserves, access quickly with little penalty, and will pass to my heirs tax free with no probate. I'm told it is protected from bankruptcy and doesn't need to be disclosed to a potential lender. Frankly I hate borrowing money from banks so I look forward to the day when I have enough cash-value to be my own banker.
I got quotes from 4 different life insurance salesmen before I bought. And I believe the right
salesman is probably more important than the insurance company or quoted rate.
Joe,
I’m glad you gave it a try! There’s a real debate in my world if you get WL policies for kids with the intent of building cash value.
I personally have done it for my daughter. I believe the purpose behind WL for kids is cementing their insurability and buying up cheap coverage.
The argument against it is that children don’t get preferred rates on insurance because they don’t have as much medical history. This to me is just not a compelling reason to wait.
Again, I like Fraternal companies anyway. I especially like them for kids because you can get added benefits like Orphan payments, scholarships, living benefit payments... it’s a nice little free benefit. And, as I said before they tend to do better with dividends.
@Thomas Rutkowski, I have been unable to find any such companies that offer lower than 5% on loans. I am only focusing on whole life too.
In addition, I see that companies “register” dividends of 6% but have to use some of the % to pay for administrative? Which takes it down to 5%.
If your intent is to leverage the cash value for real estate investing, then you shouldn't be using a policy loan anyway. You should go to a bank and get a cash value line of credit. These are typically at Prime, which is well below 5% right now. The interest on a policy loan is not tax deductible.
So if you are utilizing a poorly designed policy whole life and not gettng the tax deduction for the interest, you are probably right, its not going to work for you. I covered this in my weekly webinar last week: The 3 Key Success Factors for The Double Play.
1. You need a properly designed and maximum over-funded policy. You know you have this when your cash value to premium ratio is about 85% or better.
2. You need to access the cash value in a tax-advantaged manner.
3. You should use the right policy type. For any two policies with the same death benefit and the same premium, an IUL will outperform a WL because its cash value earns a portion of the "equity premium" whereas WL simply earns a "debt market" return. Both work off of the exact same mortality tables.
Also, its not fair to state that the fees will take a 6% dividend down to 5%. The fees could eat up all of the dividend and more in some years and based on poor policy design. You need to understand the underlying fee structure of the policy. There is a premium charge that is related to the amount of premium, there are Policy Issue Charges related to the Death Benefit amount and only assess during the surrender charge period, and finally the actual mortality charges. These vary as a percentage of the premium or growth based on whether the policy is minimally-funded (typical whole life) or maximum over-funded, or anywhere in between.
@Zachary Paschke
The guy that got me introduced me to the infinite banking concept said he pays all of his (minor) kids the max from his llc that is tax free. If they work (do what he tells them to do). Most of their wages goes into funding their whole life policies which he controls. He also has family meetings about every single property he buys and will not do a deal unless every family member agrees. Since he is the beneficiary of all the policies, he controls the money and has the option of writing someone out of his will if they don't demonstrate fiscal responsibility.
I also like Nelson Nash's concept of skipping a generation. So that grandparents fund their grandchildren's policies. It is amazing how cheap a WL policy is for an infant. And equally amazing how the cash value compounds (tax free) over 20 years.
"A good man leaves an inheritance to his children's children" Proverbs
WL guarantees that my kids will get something when I die. I'm hoping that the growing cash value will serve as an incentive for my kids (and grandkids) to learn how to invest and manage assets.
@Zachary Paschke
The guy that got me introduced me to the infinite banking concept said he pays all of his (minor) kids the max from his llc that is tax free. If they work (do what he tells them to do). Most of their wages goes into funding their whole life policies which he controls. He also has family meetings about every single property he buys and will not do a deal unless every family member agrees. Since he is the beneficiary of all the policies, he controls the money and has the option of writing someone out of his will if they don't demonstrate fiscal responsibility.
I also like Nelson Nash's concept of skipping a generation. So that grandparents fund their grandchildren's policies. It is amazing how cheap a WL policy is for an infant. And equally amazing how the cash value compounds (tax free) over 20 years.
"A good man leaves an inheritance to his children's children" Proverbs
WL guarantees that my kids will get something when I die. I'm hoping that the growing cash value will serve as an incentive for my kids (and grandkids) to learn how to invest and manage assets.
For sure. When you pay kids - it’s a huge savings. I would also max out Roth IRAs for them too.
Godspeed brother.
@Clayton Hepler
I own multiple high cash value life policies in my family and I use them for multiple purposes, including real estate purposes. If one understands them and if they are designed correctly, they are better than any qualified plan and they are the best place to store your cash to build capital.
And if you store enough capital to build a big enough “bank”, then the loan provision beats any commercial bank loan out there to go capitalize on investment opportunities.
If you ever want to chat on the phone about them, shoot me a message.
Thanks,
@Thomas Rutkowski, I have been unable to find any such companies that offer lower than 5% on loans. I am only focusing on whole life too.
In addition, I see that companies “register” dividends of 6% but have to use some of the % to pay for administrative? Which takes it down to 5%.
If your intent is to leverage the cash value for real estate investing, then you shouldn't be using a policy loan anyway. You should go to a bank and get a cash value line of credit. These are typically at Prime, which is well below 5% right now. The interest on a policy loan is not tax deductible.
So if you are utilizing a poorly designed policy whole life and not gettng the tax deduction for the interest, you are probably right, its not going to work for you. I covered this in my weekly webinar last week: The 3 Key Success Factors for The Double Play.
1. You need a properly designed and maximum over-funded policy. You know you have this when your cash value to premium ratio is about 85% or better.
2. You need to access the cash value in a tax-advantaged manner.
3. You should use the right policy type. For any two policies with the same death benefit and the same premium, an IUL will outperform a WL because its cash value earns a portion of the "equity premium" whereas WL simply earns a "debt market" return. Both work off of the exact same mortality tables.
Also, its not fair to state that the fees will take a 6% dividend down to 5%. The fees could eat up all of the dividend and more in some years and based on poor policy design. You need to understand the underlying fee structure of the policy. There is a premium charge that is related to the amount of premium, there are Policy Issue Charges related to the Death Benefit amount and only assess during the surrender charge period, and finally the actual mortality charges. These vary as a percentage of the premium or growth based on whether the policy is minimally-funded (typical whole life) or maximum over-funded, or anywhere in between.
@Thomas Rutkowski, banks(fickle as they are) allow using cash value as collateral for down payments?
It sounds like exactly what a bank will not want, leverage over leverage?
You don't have to take my word for it. There are dozens of posts from mortgage lenders that state that you can use cash value for the down payment. The way you access the cash value is via a policy loan, though, as you know, many people incorrectly refer to it as "taking money out of the policy".
Its a beautiful thing: infinite rate of return.
I was also introduced to Infinite Banking recently. I'm really intrigued by it and wanted to run my plan by the knowledge that's on display on this thread (@Mike S., @Zachary Paschke, @Thomas Rutkowski). I rehab homes and often receive large chunks of funds from private investors. Rather than let that money sit in a checking account, my plan was to use it to pay the premiums and/or loans made from my life insurance account. This way, in addition to making those funds work, I'm also building the value of the policy which can be used to fund other real estate deals. Thoughts? Am I on the right path?
Thoughts? Am I on the right path?
I believe you are. The global concept is to funnel all your free cash flow through the insurance first, and when you need it to borrow from the cash value.
I was also introduced to Infinite Banking recently. I'm really intrigued by it and wanted to run my plan by the knowledge that's on display on this thread (@Mike S., @Zachary Paschke, @Thomas Rutkowski). I rehab homes and often receive large chunks of funds from private investors. Rather than let that money sit in a checking account, my plan was to use it to pay the premiums and/or loans made from my life insurance account. This way, in addition to making those funds work, I'm also building the value of the policy which can be used to fund other real estate deals. Thoughts? Am I on the right path?
You can do something like that. It would take a little time to build up. You can’t drop a lump sum in on day one and pull 100% out day two. There is some seasoning time you’ll want the money to sit and work. You could definitely work it out so that you could make it work.
That kind of plan would work better with an IUL than a Whole Life policy. The longer you have the money the better.