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Why Infinite Banking isn't just an insurance sales pitch

February 21, 2017

 

As an insurance sales person, I'm often asked, "Isn't Infinite Banking just a sales pitch for you to make lots of money?"

After a moment of silence, I begin to explain why it's not and the fact that in selling insurance through the Infinite Banking (or Bank on Yourself, etc.) concept, I'm not making nearly as much money as selling a traditional whole life policy.  While there are other types of permanent policies that can be used, I'll just use some rough numbers using the whole life product that I normally recommend to illustrate.  

 

To begin with, commissions on a traditional whole life product are normally about 50%.  They are high and that is built into the cost of the insurance product.  A well designed product in the Infinite Banking world brings commissions down to about 18%.  So, an agent makes much less selling this type of a policy.

 

Next, what is the advantage to the consumer and why is it not just a sales pitch?  As those who have purchased such a policy know, the long term yield of such a policy is about the same as a decent short term bond fund.  Tax advantages and other individual factors change the comparison, but the basic numbers support this range.  So, the consumer is definitely not doing something foolish with the money. 

 

In addition to the reasonable return, the whole life policy has several advantages to a traditional short term bond mutual fund.  Loans against the policy can be used, often at a net zero interest rate, to fund whatever purchase (including investments in other vehicles) that the consumer wants.  There is also the life insurance benefit that I don't even discuss with clients until we've made the comparison to other potential uses of the money.  

 

The real downside of such a product for some people is the seven or so years that it takes to break even in the insurance product before it makes sense to use the money.  

 

The upside is that the money belongs to the consumer at all times.  Loans against the policy can usually be done with a phone call and no application process and the policy remains in force (although death benefits reduced by the amount of the loan).  

 

Those who advocate to "buy term and invest the difference" normally do not evaluate the benefits of being able to use the cash in a policy for other purposes.  In addition, they rarely mention the downside of a term policy ending and then the consumer needing to either purchase another term policy or the fact that a term policy is almost never used, which is why they are so inexpensive.  

 

Given the recent volatility and questionable returns of the stock market, even a stock market investment is not clearly preferable to a guaranteed return with a life insurance benefit that lasts past age one hundred.  In addition, the number of people who need life insurance longer than planned has increased.  One of big problems with the "buy term, invest the difference" strategy is that it is not guaranteed, but is sold like a guarantee.   For example, if you are one of the unfortunate people who began investing somewhere between 1999 and 2001, you've made about 4% or so on your money in a S&P 500 index fund.  Some will say that will improve over time, but that's not guaranteed.  Yes, I cherry picked some dates, but as one who began investing when my boys were born in 1999, I feel that pain.  

 

While I can't say that this concept is right for you, I hope I've shown that it isn't stupid and it's not a rip off or sales tactic just to sell life insurance.  This is a viable way for people to use their money with tax free dividends and provide a life insurance benefit with a reasonable return, much of it guaranteed.  

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