[Excerpts from this post are taken from Larry’s book, Beyond Peace In Christian Finances: Accelerating Past Average With Your Money Plan]
The Whole Life Versus Term Life Debate
In Financial Peace University, Dave makes it clear that he hates whole life insurance products. He encourages everyone to buy term life insurance and then invest the difference normally paid for a whole life policy. There are many in the personal finance world chanting the exact same mantra. I get it. I understand most of the reasoning behind the debate.
When I first heard about the whole versus term life insurance debate around 2004, I immediately bought a decent amount of term life insurance to protect my family. Then, I turned around and canceled my variable universal life (VUL) policy that I had been suckered into by a “friend” and his buddy life insurance guy a few years earlier. I was too ignorant back then and didn’t understand the various forms of life insurance. I had no clue on “good” and “bad” forms of life insurance. Fast forward a few years. I now have in place a newer, larger, quality, twenty-year term life policy. I have peace of mind knowing my wife, four daughters, and son will have the resources they need if something happens to me.
Bank On Yourself: The Infinite Banking Concept
A few years after buying this latest term policy, I ran across several books and blogs recommending a new financial product (which is really an older way of doing life insurance) called the Infinite Banking Concept (IBC). The basic idea behind IBC is the reality that most American families will finance large ticket items such as cars, college, and homes. When financing these items through conventional banking methods, borrowers are throwing away thousands of dollars in interest that they could be recapturing for their own personal benefit. When properly set up, an IBC utilizes a form of permanent, whole life insurance to create a personal “bank” of money to borrow from, that also has some tax advantages tied to it (assuming that the Federal government doesn’t mess with these policies in the future).
Let me say upfront that I currently do not have an IBC. At the time of my writing this book, I’m still in the research and investigation phase. My first impression after reading several books and web articles on IBC is that the concept and its application in this way are intriguing. The idea of building up a storehouse of wealth over several years in which the person, in theory, becomes his or her own bank seems rather ingenious to me. But, because I have heard the whole Dave Ramsey rant on whole versus term life insurance for so long, it has taken me a while to process the concept.
In the article “My History With IBC,” economist Robert P. Murphy, PhD addresses the problems that Dave brings up about whole life policies:
… Dave Ramsey is a radio talk show host who (admirably) counsels people on how to get out from their crushing debt load, through obvious but crucial things like making out a budget, communicating with one’s spouse on financial affairs, etc. Ramsey is very entertaining and I can certainly understand why his show is so popular. However, Ramsey absolutely has it out for whole life (and other types of permanent life insurance) policies, advocating instead that people “buy term and invest the difference.” For example, in a post from his website, Ramsey implies that you won’t have any cash value for the first three years of a new policy. He goes on to explicitly say that the rate of return on your money is much higher in mutual funds, that you won’t need life insurance after 20 years if you follow his plan, and that the insurance company keeps your cash values when you die, giving your beneficiary only the death benefit.
Every one of these (typical) objections is either misleading or downright false, at least when it comes to Nelson Nash’s IBC approach of using whole life policies. First, if you set up the policy properly with a “Paid Up Additions (PUA) rider,” then right off the bat, a portion of your periodic payment is buying a chunk of fully paid-up life insurance. Thus, your cash value begins rising immediately, and you can begin borrowing against your policy right away (if you need to).
As far as comparing rates of return, again the problem is that Ramsey is viewing permanent life insurance as an investment, rather than a cash flow management strategy. Yet even if we use the standard tools of financial analysis, it is a non sequitur to point out that a mutual fund is expected to have a higher 30-year (say) average annualized rate of return, compared to the internal rate of return on an insurance policy’s projected cash value growth. Such a bald statement ignores the difference in risk between the two strategies. (Whole life insurance policies have guaranteed minimum rates of return. Do equity-based mutual funds have that?) Ramsey could just as easily “prove” that nobody should ever buy a corporate bond, because stock issued from the same company will always have a higher expected return…
By making these comments, I’m not “proving” that more life insurance is always the best thing to buy, from a conventional “asset class” allocation perspective; otherwise we would have the absurd result that everybody should put every last dollar of his wealth into life insurance policies, with nobody owning stocks, bonds, real estate, or precious metals. (Obviously somebody has to own a share of corporate stock or a piece of real estate, and that ownership must be voluntary. So their prices adjust to make it attractive for someone to acquire and hold.) All I’m making is the modest point that in Ramsey’s critique of whole life and related insurance policies—when he compares them very unfavorably with “buy term and invest the difference in mutual funds”—he isn’t even attempting to set up an apples-to-apples comparison of the two strategies. He’s pulling one set of statistics—internal rates of return—out of context and trumpeting them as if they’re decisive, when the actual situation is much more nuanced.
When IBC policy holders take out a policy loan to personally finance large sums of money, they must set up terms of repayment with interest. The purpose of repayment with interest is in order for the policy to generate the benefits of the storehouse of wealth system. The good news here is that policy owners are paying themselves back with interest. They are able to bypass the greedy, overpaid executives in the large corporate banks in New York City. This is the beauty of IBC.
Potential Uses for Your Storehouse of Wealth
As I continue doing research on IBC over the last several months, I’ve been asking myself a bunch of “what if” questions such as:
- What if I established an IBC, let that policy mature for a few years, build up a storehouse of wealth, and then put this money to work creating more streams of income that create more streams of income?
- What if took out a policy loan for a decent amount of money, used it as a down payment for a bargain rental property, and started some new streams of income this way?
- What if I took out a policy loan to buy an existing business that had decent cash flow to it already?
- What if I used a policy loan to do some peer-to-peer lending?
I do see the potential to use an IBC as a personal storehouse of wealth to create even more wealth. This money could be put to work at higher interest percentage rates and create multiple streams of income. My own next step in the process is to speak directly to a trained professional in setting up an IBC policy.
IBC Core Details
Here are some of the core details of what I understand about the Infinite Banking Concept. First, the policy (or policies—multiples can be set up for family members) must be established in mutual insurance companies. Second, these policies are not the “run of the mill” whole life policies. They are a very specific, specialty product: high-premium, dividend-paying, whole life insurance policies. Third, seek out trained professionals who know the specific mutual insurance companies as well as the technicalities to set this up an IBC properly. Check out the resources at the end of this chapter to find these professionals. Fourth, it will take a few years (perhaps 3 to 5) of premium payments to establish a policy in a position to be a storehouse of wealth. There are methods to speed up the cash value of a policy to tap into these benefits earlier than this. I recommend speaking with a certified professional in IBC to uncover all the many options.
Fifth, when requesting a policy loan, it is just a matter of filling out a form to request the money—and it will be available a few days. The insurance company won’t ask a bunch of personal financial questions or check credit scores like most lending institutions. The insurance company administers and guarantees the value of the collateral. The company actually doesn’t even care if you repay the policy loan. They will simply deduct that amount from the cash value/death benefit of the policy. But, the policyholder cares if it’s repaid, because repayment with the terms chosen accelerates the growth of the policy. Sixth, an IBC policy shouldn’t be viewed an investment vehicle. It should be viewed as a cash flow management strategy with many unique benefits. Seven, creating an IBC policy (or policies) in a family is a way to move away from the corrupt, fiat money system of a central bank. It creates a personal privatized banking system. This is the key distinction and benefit of the IBC. Conventional, commercial banks create money “out of thin air” as well as create all sorts of national financial problems. A privatized banking system such as IBC is based on actual cash values created within the policy.