by Damon Carr, For New Pittsburgh Courier
Approximately one year ago, while on social media, a friend of mine mentioned something on my Facebook page about Infinite Banking. At the time I’d never heard of the term Infinite Banking. However, I’d been working in banking and personal finance long enough to know that the words Infinite and Banking mentioned together sounded like a hoax. When it comes to banking, nothing is infinite! Every product they offer has a maturity date and a ceiling. I did some research, confirmed my suspicion, and forgot about it. No one was coming to me inquiring about Infinite Banking. As a result, I didn’t feel the need to address Infinite Banking until recently.
Infinite Banking recently came up on my Facebook Page for the second time. There was one person in particular who swore by Infinite Banking. As he explained Infinite Banking, people began to inquire and endorse this product. It was then I decided to chime in. It was then I decided, I’ll write about Infinite Banking. Spoiler alert! I think this product is TRASH!
What is Infinite Banking? In short it’s a marketing ploy targeting the borrowing component of a cash value type of life insurance policy. Important to note: Borrowing from a cash value life insurance policy is nothing new. It’s always been an option. Giving it a name such as Infinite Banking, Bank on Yourself, or Lifetime Economic Acceleration Process makes it more sexy, appears to be more sophisticated, and makes it more marketable. Guess what? People are drinking the Kool Aid! Keep drinking this Kool Aid, I promise you this—it will eventually leave a sour taste in your mouth!
Here’s the pitch: Get a Whole Life Insurance Policy instead of a Term Insurance Policy. Term is finite. It has an expiration date whereas Whole Life is permanent. In addition, with a Whole Life policy, you can build up a cash value. Herein lies the so-called benefit, the sophisticated loophole that allows Infinite Banking. Instead of borrowing money from a Bank for emergencies, large purchases, vacation, cars, college, or a house —you can use the cash value as collateral for a loan and borrow from yourself. No credit check! Low interest rate! You don’t have to pay the loan back if you don’t want to! No taxes!
Allow me to address these benefits:
Term Life Vs Whole Life. I wrote an article a while ago titled Dropping the DIME on Life Insurance. Google it for more detail on these two types of insurance. I’ll suffice it to say. Term is WAY cheaper than Whole Life. Thus it affords people to get sufficient life insurance coverage. Most people with Life Insurance are under insured. Those with Whole Life Insurance are grossly underinsured because the premium is TOO HIGH! 80 percent of all Life Insurance Policies that are sold are Whole Life because the Insurance Agent and Insurance Company makes more money on it than they do on Term Insurance. You’d think what’s in the best interest of the consumer was the primary driver, not what makes the most money for the Company. Lastly, 80 percent of Whole Life Insurance policies that are sold are surrendered prior to death. Why? Either they couldn’t afford the HIGH premium payments (lapse) or they finally saw the light. Safe to say, Whole Life isn’t as permanent as they make it out to be and the banking surely isn’t infinite.
Low Interest Rate and No Taxes: I guess that’s a relative statement. What does one consider low? If you were to compare interest rates on student loans, car loans, mortgages, personal loans, loans against insurance policies (Infinite Banking) and credit cards. Loans against Insurance Policies comes second to last. The interest rates on these loans average between 8-11 percent. The only interest rate that is higher is credit cards. The interest you pay on the Cash Value Loan goes to the insurance company. I thought the concept was banking on yourself? Then why aren’t you paying Yourself the interest? I know what you’re thinking, you get dividends or a percentage of the company’s profit every year. I’m willing to bet the dividends aren’t 8-11 percent which would make it a wash or a zero interest loan. So if dividends are 5 percent, you’re still paying 3-6 percent in interest after factoring in dividends paid to you. The insurance company is making money on the margin between the dividends and the interest rate, not the policyholder.
That makes the insurance company the Banker. That makes the policyholder the Infinite Borrower, not the Infinite Banker. That’s not even the worst part. The insurance company that primarily offers this product is Mutual Insurance companies, meaning the policyholders have an ownership interest in the company. Dividends are profit paid to the shareholders. In order for the Company to earn a profit, they have to overcharge you, the policyholder (client) to pay dividends to you, The policyholder (owner). The dividends are essentially an overpayment of premiums. That’s one of the reasons there’s no taxes. The other reason there’s no taxes is because the cash value seldom ever exceeds the premium paid for the policy. Let that sink in! If the cash value doesn’t exceed the premiums paid on the policy that means you got zero returns on your money.
You don’t have to pay the loan back: That is not a true statement. You will pay the loan back either while you’re living or when you die. You’re not required to make monthly payments but the interest continues to accrue. If you die before the loan is paid back with interest, it’s deducted from the Insurance Face Amount that was designated to be given to your beneficiaries. The true reason for life insurance is for your beneficiaries not you. It only pays out upon your death. By leaving the insurance policy with an outstanding loan, you in effect left your beneficiaries less money.
How much can you borrow from your life insurance policy? It varies from company to company with the maximum allowed to be borrowed by any company is 90 percent of the cash value. Meaning if your cash value was $10,000, one could borrow up to $9,000. Bear in mind all loans borrowed against the cash value will be capped at 90 percent. In order to borrow more money after reaching the 90 percent threshold, you’d either have to pay down or hope the value in your account increases. That doesn’t sound so infinite, does it?
Space will not allow me to compare how bad the investment returns are inside of a cash value policy when compared to investment returns in the open market but I think I made my point.
(Damon Carr, Money Coach can be reached @ 412-216-1013 or visit his website @ www.damonmoneycoach.com)