Infinite banking concept?

[mweston]

I have been hearing a lot about the "infinite banking" concept lately.  I am vaguely familiar with the concept.  My understanding is that is it basicall a CV life insurance policy (they seem to favor WL) that is funded just below MEC and then a loan is taken from it once it has sufficient cash value.  Am I missing anything? 

[DST]

As I understand the "infinite banking" concept, what you described is correct. Just a different name for a very common concept.

• Maximum funding (just below the TAMRA limits to avoid a MEC) a permanent policy - WL, UL or VUL (Single or Joint Life)
• Using the tax-advantages of life insurance accumulation (FIFO-basis on contributions and "wash" or low-interest loans on growth) to fund financial needs.
• Maintaining sufficient funding in policy to pay internal costs until mortality.

Clients need sufficient cash flow to continue this level of funding for 4-7 years minimum, and should allow the cash value to accumulate for 7 - 10 years, depending on returns. Also, the withdrawals (loans or surrenders) will typically also reduce the insurance face amount.

Similar concept names include, LIRPs, PIRPs and Supplement Retirement Plans.  Also a very common executive benefit: Section 162 Executive Bonus (often using an 83b election).

It can be a great strategy for the right people, but it should be part of an overall financial plan. And, it is not right for everyone.

Dennis T, CFP

[h3232]

i know a partcipating WL company is best for the concept, but does anyone know what company is the best?


For instance the best rates, and commissions, for independant brokers?



Thanks.

[Lucullus]

Some have promoted this concept to mean "borrow against your home and put the money into a life insurance policy". That is a ROTTEN idea, for a number of reasons - some of which should be obvious today.


John Olsen

[Rocket, CFP(R)]

As I understand the "infinite banking" concept, what you described is correct. Just a different name for a very common concept.Maximum funding (just below the TAMRA limits to avoid a MEC) a permanent policy - WL, UL or VUL (Single or Joint Life)Using the tax-advantages of life insurance accumulation (FIFO-basis on contributions and "wash" or low-interest loans on growth) to fund financial needs.Maintaining sufficient funding in policy to pay internal costs until mortality. Dennis T, CFP

The touted advantage "tax-advantages of life insurance accumulation (FIFO-basis)" is equivalent to put your money in a bank saving account, make a withdrawl from the savings account, and the withdrawal constitutes the insurance salesman's "tax-advantages and FIFO-basis". Tell me where I am wrong.

[Lucullus]

Rocket,


The situation you describe is not equivalent to the "infinite banking" scheme. The cash value in a life insurance policy grows on a tax-deferred basis (that is, is NOT taxed as earned). Previously untaxed policy gain can be accessed via policy loans (or, in a universal life policy, withdrawals not exceeding adjusted basis) on a non-taxable basis. (This assumes that the policy is not a "modified endowment contract"). By contrast, a savings account does not enjoy tax deferral. Interest is taxable in the year credited.

The "infinite banking" concept seeks to exploit three tax advantages of cash value life policies:

1. The tax-deferred growth of cash value
2. The non-taxable nature of policy loans and withdrawals to basis
3. The tax-free death benefit

It amounts to using the life insurance policy as a "cash cow". This can work well, in some situations, but, certainly, not in all - or even most, situations. Life insurance protection is not free. Neither is access to the cash value in one's policy. (Despite what some ill-informed critics will tell you, you don't pay policy loan interest to "borrow your own money" because the cash value is not "your money" unless and until you surrender the policy).

Many "SERP" (Supplemental Executive Retirement Plan) arrangements use cash value life insurance, precisely because of the tax advantages. When it works, the executive and employing company are typically in a high tax bracket where the tax-deferred growth inside a life policy is of significant advantage. Often, the corporate dollars used to pay premiums would, absent the SERP arrangement, be subject to tax as retained earnings.

Non-qualified deferred compensation plans often use life insurance for similar reasons.

Savings accounts don't work in those situations.

All this said, I am NOT a fan of the "infinite banking" concept, because of the way in which is is often marketed. I've seen agents suggest to a client that she "tap" as much of her home equity as possible, via a mortgage, and use the proceeds to buy a life policy, which she would then use to produce income. There are several things that can go wrong and DESTROY that scheme - three of which are (a) rise in mortgage interest rate, (b) decline in policy interest rate. (c) both (a) and (b).

It' a scary scheme. But it is nothing like putting money into and taking money out of a savings account.

- John Olsen

[Rocket, CFP(R)]

Thanks John, You are always giving clear precise information. However "withdrawals not exceeding adjusted basis, on a non-taxable basis" is frequently presented as a great benefit is silly. I think it is a general principle in US tax law that withdrawal of basis is non-taxable, because you have already paid the taxes once.

[Bradly T.]

Tell that to an annuity owner - ah, the good old days before LIFO!! What is "infinite" about this scheme/strategy?

[Jah Volunteer]

Using your equity in your home is a horrible idea!!




It is best to use an Whole Life policy that is Participating and Non-Direct Recognition, from a Mutual Ins. Company. It is important to use a base WL and the Paid Up Addition Rider. You want to use the shortest time possible to pay premiums and take it the MEC limit. This allows for fast cash value build up. Instead of two years, like a basic WL policy you have CV in the first year. This is your capitalization period which should strech out for 5-7 years. Than you use the policy loans to make purchase on the big ticket items like cars, business equipment, expenses, etc....instead of financing through a bank (at say 8%) you finance through your whole life. You must pay back the loan with the interest payment you would have paid to the finance company. The point is to recapture the monies spent on interest.....and over someone's lifetime that number could be huge.



It is important to remember not to MEC the policy or it behaves like an annuity and the concept will not work. Whole life is the most efficient tool....don't use UL, VUL, etc. Old School WL with a PUA rider....there is more to the PUA rider and its companies flexibilty.



It is important to remember that whole life is not an investment. It may appear to act like an investment, however it is not. It's insurance. It is insurance that has living benefits. It used as a tool to insure against the eroding forces in life....eg: interest rates, taxes, and opportunity costs. It is a tool that allows some of your monies to remain liquid...that other financial tools do not allow or even better than sources that are liquid due to lost opportunity cost....eg when you use a money market account to buy things that money is transferred into the asset that you bought....and that asset usually depreciates......(that is why it is import to use Non Direct Regcognition and pay your loan back). It is insurance against creditors.....a business owner, medical professional might find that attractive....it is insurance against your own ability to be an income producing asset.....and you are your greatest asset. With the Waiver of Premium rider you can assure your policy gets its premiums paid. And of course last, but not least, it is insurance against your own and ever fruitful time on earth. Some might suggest that it is an holistic financial approach, and if used correctly by the right person could enrich your life for the better.



Its a finance strategy. And everything we do in life, even if we pay in straigh hard, cold Benjamin Franklins is financed.

[the observer]

Correct me if I'm wrong... utilizing the term "infinite banking" is illegal in CA at least and would get someone into trouble, just like it got the guy who came up with "The Ultimate Gift Certificate" into trouble. In CA at least, insurance has be called insurance and not some name designed to make it sexier.

[texasex]

"Opportunity cost is the value of the next-best choice available to someone who has picked between several mutually exclusive choices." (Wikipedia) This is not an "erroding force of life" and can not be insured against. Sounded great though.


Insurance is not an investment, eh? Let's see, if I surrender a policy that has gains, I do pay income tax, right? Kind of exactly like the way any other investment is treated. I KNOW that you can not disguise life ins as anything else, but ieven WL still has investment aspects- taxation of gains, cash value and an annual fee (M&E expenses).



By the way, if you wanted to finance the aquition of a use asset (automobile), compare overfunding a whole life policy (Case A) with placing the same funds in something like an Oil & Gas limited partnership involved in developmental drilling (Case B). The first year tax savings and rapid return of investment with and OPPORTUNITY to reinvest distributons in other income producing assets will blow away the infinite bank stuff...

I like life insurance where it is suitable, but it is not a universal answer for problems, regardless of what the the Infinite Bank or LEAP folks may think...

[brucemc]

With all due respect, it sounds to me like you are all missing the point of infinite banking. While it does normally use a whole life policy, after it is funded the idea is to treat it just like a bank. Want to buy a car, borrow the money from the policy and pay cash. Then make the payments you would have sent to the bank back into the policy. I am not a proponent and have never used this but it seems the dividends kicked out by paid up additions are the real benefit. And removing home equity to invest in a policy is called 'equity harvesting', and has nothing to do with infinite banking as I understand them both. Most sellers of the equity harvesting model were using indexed ul policies, not whole life.

[the observer]

I think nearly all of us understand the concept of "infinite banking"...

I'd be interested to hear from other State licensed agents who have also discovered that calling insurance by any other name to make it sexy is in fact illegal in their State as well.

[Financialculture]

Infinite Banking and other individualized banking systems rely on participating whole life insurance policies, which build up equity and pay dividends.

Thanks

personal financial planning || personal finance budgeting

[davemichelle09@myactv.net]

jah volunteer mentions a very key component in the strategy and that is the use of the PUAR.

The whole life policy by its very nature is much like a mortgage. You buy a $300k house or a $300k WL policy and by making monthly premium/mortgage payments you are building up equity, nothing more, nothing less. Point of explaining that insurance 101 point is that, the Paid UP Additions Rider or PUAR, gives the owner the opportunity to essentially buy paid up insurance dollars or in the mortgage equivalent of buying paid for equity. The paid up insurance dollars now entitles the owner to dividends and interest and increased cash value on the paid up additional insurance. This is accomplished by overpaying a loan back. For example, you borrow $12k from policy cash. Conventional loan term on $12k hypothetically would be $200 per month for 5 yrs.... The IBC would suggest you pay back the $200 per month or even more until the loan is paid of. Then, continue paying into the policy by accessing or utilizing the PUAR. Extra premium or loan payments would be then buying you additional paid up dollars and owner recieves benefits discussed earlier. So by utilizing this strategy, you essentially eliminate the need for conventional loans and pay yourself.

JAH also mentions that this is simply a lifetime strategy of financing and could, if utilized properly over a lifetime save someone literally hundreds of thousands of dollars in conventional borrowing costs. Not a get rich quick scheme but a very conservative approach to financing a lifetime of purchases. It gives an extreme position of flexibility when used correctly.