Infinite Banking Objections, Answered
Have you heard about Infinite Banking, but somehow feel left with a bad taste in your mouth and you’re not sure why? We are airing some of the biggest Infinite Banking objections most people have in regards to whole life insurance.
So, whether you’ve heard that it’s trash value insurance, it’s more expensive than term, it takes years to grow your cash value, the returns are garbage, or that the insurance company keeps your cash value when you die … and these dangers you’ve heard about whole life insurance may have also sounded believable, we’ll talk about each.
Today, we’re walking through a specific listener question that outlines probably every one-liner objection you’ve ever heard about whole life insurance.
So, if you want to understand the facts, find out the truth, and make educated decisions about life insurance and your finances … tune in now!
Table of contents
Why We’re Answering Infinite Banking Objections
Frequently on our podcast, we receive comments from people who have infinite banking objections. Either they don’t understand whole life insurance, or they have misconceptions of what it can and cannot do. Sometimes, these comments can be downright argumentative.
We get it, we do. There’s a lot of financial advice out there, and much of it is conflicting. We’re not in the business of convincing people who simply want to argue, however, we do hope that by answering some of these Infinite Banking objections, we can truly connect with people who are open-minded and want to understand.
Claim #1: IBC is a Gimmick
A common Infinite Banking objection is that it’s a tactic or gimmick to “sucker” people into buying whole life insurance. Typically, people who make this objection believe whole life insurance to be a scam. This, however, stems from a fundamental misunderstanding of life insurance, and why people can and do want life insurance. This idea also highlights a particular misunderstanding about what IBC can and cannot do.
We address many of these claims in our blog post, “Is Infinite Banking a Scam?” However, we wanted to touch on the idea here, too. IBC is not just a gimmick, it’s a concept that can be applied to how you use whole life insurance. Infinite banking, essentially, is a concept that guides the design of a whole life insurance policy, as well as the usage of leverage.
It is not a get-rich-quick scheme, a magic solution, or an infinite pool of money. It is a school of thought that one can apply to your money. Some of the primary principles of IBC are liquidity, leverage, and uninterrupted compounding interest. Whole life insurance happens to be an ideal asset for applying these principles and more.
[11:35] “Gimmicks don’t last.”
IBC, however, has lasted.
Whole Life Insurance
On its own, whole life insurance is an incredibly valuable asset. It’s permanent insurance that helps families create a legacy and leave an inheritance, while also protecting income and assets. Having a death benefit, for many people, is priceless. It provides for your loved ones when you’re gone, by not only providing a financial cushion but actually giving families the freedom and time to grieve without worrying about finances immediately.
The best way to ensure that this death benefit occurs is by having permanent insurance in place.
The living benefits of whole life insurance—the cash value component—are an added benefit that can help individuals and families do the most with their finances. The cash value is like a savings component because it gives policyholders access to a portion of the death benefit while alive. Using policy loans to access your cash value is where IBC comes in.
Claim #2: Whole Life Insurance is Too Expensive
It’s also commonly reported that whole life insurance, compared to term insurance, is far more expensive. And although whole life insurance has higher premiums, we wouldn’t call it more expensive. Here’s why…
Whole life insurance is permanent insurance. That means that so long as you pay your premiums and keep the policy in force, a death benefit is guaranteed to pay out—either to your beneficiaries upon your death, or you upon endowment.
Life insurance is a transaction, and because whole life insurance is essentially guaranteed, insurance companies must charge appropriate premiums. The premiums help pay for the cost of insurance. However, insurance companies also choose to give policyholders access to some of the death benefit as they pay premiums. This is your cash value.
Is Term Insurance Truly Cheaper?
Term insurance, on the other hand, is so inexpensive because the likelihood that you will use it is extremely low. Insurance companies sell term insurance to people when they may feel like they need more protection, yet are also the least likely to die (and therefore use the insurance). They pay very few claims, so the cost simply isn’t as high.
You could pay thousands of dollars for term life insurance, and never have anything to show for it (aside from peace of mind, which is priceless). However, with whole life insurance, you get liquidity, certainty, and growth that is not correlated to the stock market. It’s not an investment and it’s not designed to be. It’s a place to warehouse your wealth so that you have certainty, which makes all of your other assets or investments all the better.
As a wealth creator, here’s what this really means: as soon as you switch your lens from a short-term to a long-term—dare I say lifetime focus—whole life insurance becomes the most robust and extravagant savings tool imaginable.
Owning vs. Renting
Homeownership can be a good comparison to life insurance. Whole life insurance is like owning your home. It may be more expensive, but every time you make a payment, you build equity. Cash value functions much the same as equity (but better, because the bank doesn’t control it).
On the other hand, term insurance is like renting. You’re paying each month for the basic function, but you’re not really working toward anything. Paying rent gets you no closer to owning the home, and you build no equity.
Whole life insurance and term insurance are very different products. While they both provide a death benefit, the function is different, therefore the cost is different. It’s not apples to apples, and we shouldn’t treat them as such.
Claim #3: Whole Life Insurance is Built on Empty Promises
We read a comment on YouTube that insisted that the client is “promised” everlasting insurance and a lucrative cash value that doesn’t actually deliver.
To this, we’d say yes! In fact, it’s not just promised, it’s guaranteed. Life insurance is a contract, so when you agree to pay premiums, the insurance company agrees to provide you with certain benefits, guaranteed. There’s nothing sneaky about it.
However, we’ll admit, there’s no promise or guarantee that your cash value will be lucrative. Again, this comes from a misunderstanding about whole life insurance and IBC. This isn’t an investment. Rather than promises of riches, life insurance companies guarantee you won’t lose money. In fact, they guarantee that the floor of your cash value will increase every year. You’re even guaranteed to earn a minimum interest rate.
This is not a scheme for riches, it is an alternative to storing money in the bank. This alternative offers more certainty than the FDIC provides for bank accounts, and a better interest rate than most banks (which hover around 1%). Not to mention, you have the opportunity to leverage your cash value for actual investments, while leaving your account to grow uninterrupted. However, life insurance alone will not make you rich.
Claim #4: The First Few Premiums Are Agent Commissions
There’s a common misunderstanding that whole life insurance agents are slimy because they earn a commission on life insurance. This feeds into other misconceptions like cash value doesn’t build up in the first few years of owning a policy, because your money is directly lining your agent’s pockets.
This simply isn’t true. As IBC practitioners, we are very involved in the design process of policies to help people have the most available cash value possible from year one. In fact, many of the policies we design make 60% to 85% of the cash value available in the first year.
It is true that part of the drag on the policies in the first year is the commissions that are paid out to licensed agents. However, the other people who are paid from first-year premium include the actuaries who design life insurance, underwriters who assess applications, all the service personnel, and other costs it takes for the insurance company to run a business.
[24:10] “It’s no different than the concrete guy that pours your driveway. They are getting paid to provide you [with] goods and services. And a majority of that is getting paid upfront.”
This is no different, in fact, than term insurance. Even term insurance would be much cheaper if the insurance companies didn’t have to pay all of their home office personnel. This isn’t a case where the evil insurance agent is scheming with the evil insurance company to steal your money.
You can learn more about high cash value policies in our post on privatized banking policy design.
Claim #5: The ROI is Garbage
What we can tell, through a combination of first-hand experience, illustrated projections, and actual historical data, this is not true. For example, if we were to look at a policy designed in the 80s, still in force today, we can compare the available cash value to the premiums paid into the policy. When we do this, we can confidently say that these whole life policies, depending on the company and how they were structured, have about a 3% to 6% NET return. This happens because of the non-guaranteed dividends and guaranteed interest.
In fact, this claim doesn’t even match up with what we can see in policies issued during this current low interest rate environment.
A YouTube commenter referenced a consumer report that shows an apparent 1.2% ROI “after fees and commissions.” So we did the research. And the report this commenter refers to actually points to a 1.5% guaranteed annual return. And we concur–this is true, as is defined within a life insurance contract. There is a minimum interest rate guaranteed to all policyholders. This is not the dividend.
The dividend, while not guaranteed, is historically reliable. Even though insurance companies do not have to pay a dividend every year, every one of the insurance companies we represent has paid a dividend each year for over a hundred years consecutively, on top of the guaranteed interest rate.
The consumer report goes on to say that this 1.5% isn’t as much as the 10-year treasury. The report was released in 2015 when treasuries were 2.2%. Now, however, 10-year treasuries are around 1.74%. And between 2015 and today, the treasuries even dipped below 1% at one time. So it’s not an accurate blanket statement to say whole life is incapable of keeping up with treasuries.
Claim #6: The Cash Value Isn’t Included in the Death Claim
Unfortunately, there’s a huge misunderstanding that cash value and the death benefit are two separate things. This is, in part, due to the language that many people use around cash value. However, the cash value is the net present value of the future death benefit. You can think of it as the portion of your death benefit that is available to you today while you are alive.
So, rather than two separate buckets of money in a whole life insurance policy, you actually have one. Say you have $1 million of death benefit and $100,000 of cash value. Your death benefit is not $1.1 million, it’s still $1 million, and $100k is how much of it you can access.
Cash Value is Like Equity
As we mentioned earlier, cash value is like equity in a home. If you sell your house, you will not get your equity and your home value, you’ll just get your home value, which includes your equity. Does that make the equity or owning a home worthless, or a scam?
Another thing to understand is that the death benefit is the future value of your premiums, calculated by the actuaries of the company. When you pay your premiums, they won’t give you full access to the death benefit because you haven’t paid that much yet. Your premiums are designed in a way that they are meant to pay for your death benefit by the time of endowment. If your premium is $1,000 then you’ve only paid for a small portion of your death benefit, accessible to you through your cash value. This allows you to have living value as well.
Claim #7: You Have to Borrow Against Your Own Money
You borrow from the insurance company using your cash value as collateral. However, you can withdraw your money as well. However, in most cases, we recommend borrowing against your policy. It’s actually a highly efficient way to use your money, in many instances.
Borrowing against your cash value is similar to a home equity line of credit because as you repay the loan, you can use the cash again. In the interim, your policy is still accumulating uninterrupted compound growth thanks to interest and dividends.
If you wanted to, and your policy had enough cash value, you could take a loan for $100,000 each year, for example. When you do this, you take the insurance company’s money, and they put a lien against your cash value for that amount. Then, let’s say you buy a rental property, using the income to pay back the loan. Then, the next year, you could repeat that process all over again. You could keep doing this indefinitely. This allows you, as the policy owner, to recycle the same money over again, rather than simply using it once. In the meantime, you create cash flow for yourself.
Putting the same money to work over and over again is only possible if you maintain control of your capital. You never give up your cash and put it into someone else’s hands. Instead, it remains at your service, able to be collateralized over and over again.
This recycling provides for your money to multitask and increase its velocity.
So no matter how many times you recycle the money your policy continues to earn uninterrupted compound interest, allowing you to earn a return in two places at the same time. This is the power of velocity.
Yes, you are paying loan interest, however; you are also earning interest on the same money even when you borrow against it. This is called arbitrage and is exactly how banks make money.
Claim #8: Just Because It’s an Established Product, Doesn’t Mean It’s a Good One
Yes, whole life insurance has been around for over 200 years. Whole life insurance existed before the United States. There is a good reason you do not see “snake oil” on the shelf or being purchased/used (although our YouTube commenter believes snake oil is still available).
The bottom line? The market decides what is valuable.
It’s easy to take pieces of a whole life insurance design and use it out of context to form your own narrative. However, the popular financial talking heads are not being fully transparent. There’s a reason Dave Ramsey talks down to the people on his show or berates any opposing viewpoints (in the rare instance he allows them on his show). This way of interacting gives Dave full control of the narrative, in a way that suits him.
We’re not out to suggest that there is one correct financial path for everyone. However, when you look at all the moving parts of IBC and whole life insurance, it’s clear that there are benefits to the people who use it. We’ve provided ample evidence in this article alone.
Claim #9: Only Those Who Don’t Sell Insurance Can Be Trusted
Our Youtube commenter continues by saying the following:
“My sources are Motley Fool, Consumer Reports, Dave Ramsey, Suze Orman, Clark Howard, Marko Financing, Minority Mindset and a slew of others WHO AREN’T INSURANCE SALESMEN who tell the truth about trash value insurance. In fact, Motley Fool was named (for the umpteenth time) financial advisor of the year. They have a beautiful video here on YouTube by their senior advisor telling people not to buy trash value insurance. You care to discredit them?”
[52:52] “Once again, I want to say that when you’re looking at these people, do they have any certifications, do they have any licenses? And in most cases, they don’t… If you have these licenses, you have to follow the law. If you don’t have these licenses, you can basically say whatever you want.”
We are not in the business of providing one-size-fits-all service, in the way that some of these “gurus” do. Our business model is geared toward wealth creators who have specific goals and needs, and we work on a case-by-case basis to solve those problems. We don’t even work with everyone who reaches out to us, because we have to be the right fit. We don’t work with people we cannot help.
Almost anyone providing education or advice is compensated when you follow their advice. This isn’t wrong, however, most if not all the people you refer to as “not insurance salesmen” are salesmen of other services. They are not unbiased. It’s important to question the financial experts you take advice from.
Claim #10: Dividends Are a Return of Overpayment
“Overpayment” is the language used by the IRS to classify dividends. However, not all dividends are overpayment. Let’s dig into this. The reason dividends are classified as a return of premium, in part, is because they’re not guaranteed. When you pay your premiums, the insurance company takes some of that money and invests it. All investments, even conservative investments, are an “unknown.” Since the insurance company, and the IRS, do not know the exact amount of dividend that will be paid based on these investments, they’re classified this way. However, make no mistake: dividends are the profits of the company, paid to owners of the company, which includes policy owners. If dividends were simply a return of premium, we wouldn’t see cash values exceed premiums paid the way we do.
This statement about dividends simply being a return of premium would be true if the only dollars coming in were premium dollars. However, insurance companies aim to be profitable, and they do so by investing conservatively in assets like bonds and commercial real estate.
Claim #11: Cash Value is a Scam
Here’s the last claim from our YouTuber. In the comment, they state the following example of how cash value works:
“Here’s the best scenario comparable to a Cash Value “investment.” Open a savings account with me and I’ll let you BORROW against your money up to 90%. Keep in mind, the first 4 years of payments, I keep as “fees.” Around year 5, you’ll start to accumulate some CV. If you miss a monthly payment, your account is closed and I KEEP your money. Thus, any money you borrow, it will take 3 to 6 months and I charge 6% interest. Does that interest go to your account to build the CV? NO!! I keep it. Here’s the kicker: when you die, I keep your money. Sound like a good plan to you? It’s the SAME CONCEPT. How dare you tell people that CV is a good “investment.””
Let’s start with the simplest response: we do not call cash value, or even whole life insurance, a good investment. The reason being? It’s not an investment. It’s an insurance product with a savings component. And when you can properly apply IBC to whole life insurance, you can have safety, liquidity, and growth.
We encourage you to think of investments and savings as two separate buckets of money. After all, the money that you store should be money that is not at risk. The purpose of storage is that the money is there for you when you need it. You don’t want it to drop in value. Investments, on the other hand, are for growth. They typically, however, have some risk involved.
Whole life insurance is guaranteed not to drop in value. That’s the baseline for why it’s a good place to store cash.
“Paying Yourself Interest”
Next, let’s unpack the interest portion of this comment. The commenter is right about this, and it’s important for people to understand. When you borrow against your cash value, you are using the life insurance company’s money. The interest that you pay is to the company, and not to yourself (because you’re not actually using your money). This is on the loan contract when you take a policy loan.
Where this may confuse is in the way Nelson Nash, creator of IBC, talks about paying interest. He often encouraged people to pay more than the base interest. So if your interest rate is 5%, he’d encourage you to pay at 10%. What this does is supercharge your policy as a PUA. That’s all it is.
Dissecting the Claim
Ultimately, one of the big holes that we see in this commenter’s Infinite Banking objections is the accumulation of cash value. You can start accumulating cash value from year one.
Your life insurance does not get closed if you miss a premium payment. Nor does the insurance company keep your money. There are actually many ways to cover a missed premium on your life insurance policy. While you cannot skip all of your premiums forever, you have many options that make this asset flexible.
Finally, the purpose of whole life insurance is to have whole life insurance. The death benefit is the point of insurance, and the cash value is a living benefit that’s included. It’s your equity in the policy. If you pass away with an outstanding loan, the company doesn’t withhold your death benefit. They pay the entire benefit, less the outstanding loan. This is standard.
[1:05:35] “I think we all could benefit from becoming teachable. Being humble enough to ask questions in a way that we seek to learn. Let’s just commit to doing that… and continuing to raise the bar on what we are able to know so that we can do better with the information that we have.”
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