by Damon Carr, for New Pittsburgh Courier
About a year ago, while on social media, a friend of mine mentioned something on my Facebook page about Infinite Banking. At the time, I had never heard of the term Infinite Banking. However, I had been in banking and personal finance long enough to know that the words Infinite and Banking mentioned together sounded like a hoax. In banking, nothing is infinite! Every product they offer has an expiration date and a cap. I did some research, confirmed my suspicions and forgot. No one came to me to tell me about Infinite Banking. As a result, I didn’t feel the need to discuss Infinite Banking until recently.
Infinite Banking recently appeared 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 started to inquire and endorse this product. It was then that I decided to intervene. That’s when I decided to write about Infinite Banking. Spoiler alert! I think this product is TRASH!
What is Infinite Bank? In short, it is a marketing ploy targeting the borrowing component of a cash value type life insurance policy. Important to note: Borrowing from a cash value life insurance policy is nothing new. It has always been an option. Giving it a name like Infinite Banking, Bank on Yourself, or Lifetime Economic Acceleration Process makes it sexier, looks more sophisticated, and makes it more marketable. Guess what? People are drinking Kool Aid! Keep drinking that Kool Aid, I promise you, it will eventually leave a sour taste in your mouth!
Here is the pitch: Get a whole life insurance policy instead of a term insurance policy. The term is over. It has an expiration date while Whole Life is permanent. Plus, with a whole life policy, you can build cash value. Therein lies the so-called advantage, the sophisticated loophole that allows Infinite Banking. Instead of borrowing money from a bank for emergencies, major purchases, vacations, cars, college, or a house, you can use the cash value as collateral for a loan and borrow from yourself. same. No credit check! Low interest rate! You don’t have to repay the loan if you don’t want to! No taxes!
Let me touch on these benefits:
Term life versus whole life. I wrote an article a while ago called Dropping the DIME on Life Insurance. Google for more details on these two types of insurance. I will just say. The term is MUCH cheaper than whole life. Thus, it enables people to get sufficient life insurance coverage. Most people with life insurance are underinsured. Those who have whole life insurance are vastly underinsured because the premium is TOO HIGH! 80% of all life insurance policies sold are whole life insurance because both the insurance agent and the insurance company make more money than with term insurance. You would think that what is in the best interest of the consumer is the primary driver, not what makes the most money for the company. Finally, 80% of whole life insurance policies sold are redeemed before 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 claim and the bank sure isn’t infinite.
Low interest rate and no tax: I guess this is a relative statement. What do you consider weak? 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 come second to last. Interest rates on these loans average between 8 and 11%. The only higher interest rate is that of credit cards. The interest you pay on the cash value loan goes to the insurance company. I thought the concept was betting on yourself? So why don’t you pay the interest? I know what you’re thinking, you get dividends or a percentage of company profits every year. I’m willing to bet the dividends aren’t 8-11%, which would make it a zero rate wash or loan. So if the dividends are 5%, you are still paying 3-6% interest after taking into account the dividends paid to you. The insurance company makes money on the margin between dividends and the interest rate, not the policyholder.
This makes the insurance company the banker. This makes the policyholder the Infinite Borrower, not the Infinite Banker. It’s not even the worst. The insurance company that mainly offers this product is the mutual insurance companies, which means that the policyholders have a stake in the company. Dividends are profits paid to shareholders. For the company to make a profit, it must overcharge you, the policyholder (customer) to pay dividends to you, the policyholder (owner). Dividends are essentially an overpayment of premiums. This is one of the reasons why there are no taxes. The other reason there are no taxes is that the cash value rarely exceeds the premium paid for the policy. Let it flow! If the cash value does not exceed the premiums paid on the policy, it means you have no return on your money.
You do not have to repay the loan: This is not a true statement. You will repay the loan during your lifetime or upon your death. You are not required to make monthly payments, but interest continues to accrue. If you die before the loan is repaid with interest, this is deducted from the face amount that has been designated to be given to your beneficiaries. The real purpose of life insurance is for your beneficiaries, not you. It is only paid upon your death. By leaving the insurance contract with an outstanding loan, you have in effect left less money for your beneficiaries.
How much can you borrow from your life insurance policy? It varies from company to company, with the maximum that a company can borrow being 90% of the cash value. This means that if your cash value was $10,000, you could borrow up to $9,000. Keep in mind that all loans borrowed against cash value will be capped at 90%. In order to borrow more money after reaching the 90% threshold, you will either have to repay or hope that your account value will increase. It doesn’t seem so endless, does it?
Space won’t allow me to compare how bad the returns are in a cash value policy versus the returns in the open market, but I think I’ve made my point.
(Damon Carr, Money Coach can be reached at 412-216-1013 or visit his website @ www.damonmoneycoach.com)