Infinite Banking Concept Myths
If you’re reading this you fall into 5 groups of people.
- You have no idea what The Infinite Banking Concept is
- You have heard of it, but you’re not 100% clear or certain on it
- You have heard of this and you are not a fan
- You currently practice this concept
- You sell and market this concept
So what is it?
Simply put, the Infinite Banking Concept (IBC) is the use of a dividend paying whole life insurance policy that is structured to have a very high early cash value that can immediately be borrowed against while still earning dividends.
I call it The Sacred Account because what I’m going to share with you in this article is actually different than almost every version you’ve heard about regarding The Infinite Banking Concept.
That’s really all it is. It doesn’t sound too exciting on the surface level because well…it’s just life insurance at the end of the day right?
Well not quite! I personally have well over 6-Figures in my IBC and it is my #1 source of reserves.
So to better understand this concept, we must first understand its purpose.
What does it actually produce for me?
Well for one, it produces a tax free death benefit that will pay out no matter what, to whomever I choose. As a husband, this means if I don’t achieve Financial Freedom for my wife and family before I die, it’s guaranteed for them anyways. The best way to win the game? Rig it. Life insurance allows me to do that. My family will be financially free no matter what. As a business owner, it allows me to take care of the families of my employees and also reimburse the cost to my company of employing someone. I can insure my employees so when they die, a portion of that death benefit goes tax free to their loved ones and a portion of it goes back to my company so I can recuperate the salary I paid them while they were alive and then use it to replace them. A death benefit is actually the primary purpose of any life insurance and this is something marketers skim over because they don’t want people to get turned off by the words “life insurance”.
Second, it protects my cash. What from?
a. Losses. The funds I put into the cash value of my IBC life insurance policy can never be lost. They are in fact guaranteed against loss.
b. Taxation. The funds I put into my IBC life insurance policy can never be taxed again. The IRS can’t touch it.
c. Creditors. In most states, the cash value of a life insurance policy are protected from creditors and bankruptcy. This means that the account can’t be garnished, seized, or have a lien placed against it from a creditor.
d. Lawsuits. In most states, cash value in life insurance is also protected from lawsuits. If I’m sued and lose, they cannot touch my life insurance.
e. Opportunity cost. The problem with cash is I can’t have it and use it to. If I spend a dollar, I can’t invest that same dollar. If I save a dollar, I can’t save it and simultaneously invest it. For the most part in life a dollar can’t be in more than one location at once…unless you’re using life insurance. The funds in my cash value earn a positive 3–5% compounding annual rate of growth (tax free) and I can simultaneously borrow against those dollars, paying a net interest cost of 1–3% and still get the 3–5% growth. This means I can use my money in multiple locations at once! I can be earning 3–5%, borrow and pay 1–3% and then take the borrowed funds and invest them at 8–12%. I’ll dive into the mechanics of this in a bit!
Third, it puts me on a forced savings plan. The #1 way to guaranteed I save money? Automate it just like taxes! An IBC policy should have a monthly automated withdrawal from my bank account so that the funds automatically come out without me doing anything. Over time, that really builds up fast and it ensures myself and my companies are solvent at all times.
Simply put, if I put $1 into an IBC policy, that $1 will grow at an average of 3–5% tax free. I can borrow 70% of that same dollar with a net interest cost of 1–3% (while still earning 3–5%) and then I can use those borrowed funds to invest, self-finance things, etc.
Here is the problem. Most people who market this don’t actually know how it works and they also confuse the important facts of what the purpose of this strategy is with the interest things that can be done with it.
Let’s look at some of the myths and problems with the IBC concept.
- The idea that you earn a 5–6% dividend.
While this might be true on paper (an insurance company will pay 5–6% in dividends usually) this isn’t what most people actually earn. For one, the dividend is based on how much whole life insurance death benefit I own. That amount can vary because I want a blend of whole life insurance death benefit and term life insurance on a properly designed policy, combined with cash value contributions. That’s 3 different places my cash is going toward and only 1 of them earns a 5–6% dividend. Which means my $1 is not earning 5–6%, only a portion of it is.
Second, the dividend is a gross rate, meaning that there are other costs and fees that will be subtracted out of it before I am crediting the net dividend. Those fees and expenses might be 1–1.5% so on a gross dividend of 6%, my net might be 4.5%. It is all 100% based on structure and varies from policy to policy, but that’s a good rule of thumb.
So, a portion of my funds will produce a dividend, a larger portion of my funds will produce a guaranteed interest rate (usually 3–4%) and a very small portion of my funds are just going to cover insurance costs and expenses. All in all? I’ll average 3–5% per tax-free over the life of my IBC policy, not 5–6%.
2. The idea I can borrow from myself and earn a positive profit spread on my own loans. This is actually 100% false and anyone saying this doesn’t understand at all how the IBC works and likely doesn’t own one themselves (or if they do, they don’t use it often or haven’t had it long).
The first point I want to establish is you aren’t borrowing from yourself. You are either going to borrow from the insurance company or from a bank and you are going to use your life insurance as collateral. It’s no different than using a Home Equity Line of Credit, but with life insurance. If I put a HELOC on my house, I’m not borrowing from myself. I’m borrowing a percentage of the value of my home from the bank and my house secures the loan.
The second point I want to establish is that when I borrow, I will pay interest to the party I am borrowing from. I am not paying interest to myself. I am paying interest to a bank or insurance company. An insurance company is going to charge me a 5–6% annual simple interest rate.
The third point I want to establish is that when I borrow, I will not earn a positive profit spread on my loans. At least not if I don’t pay myself back. Why? Because if I’m earning a 3–5% annual growth rate and my loan costs 5–6% then I am paying more than I’m earning. It’s costing me the difference between my interest rate and what my actual rate of growth is.
In my opinion, this is the #1 concept with those who market the IBC concept. They’ll tout slick marketing phrases like “Pay 5% interest to borrow from yourself while the insurance company pays a 6% dividend”. Nope. That’s not how that works.
So if I lose money when I take loans, why would I do this at all?
Because you never take a loan and then not pay it back! That’s banking rule #2.
Rule #1 is to always have deposits (which is like me putting my income into my IBC policy).
Rule #2 is loan the deposits at an interest rate to those who can and will pay them back.
So when I take a loan from my policy, I immediately establish repayment terms with myself. You see, the loan is a line of credit and the interest is based on the daily average balance of my outstanding loan. So if I borrow and never pay myself back, I will pay the full 5–6% interest rate to the insurance company. But if I borrow and pay myself back each month over a specific term, each month I am reducing my outstanding loan balance. Therefore the 5–6% interest rate is being calculated on a smaller dollar amount each month. 5–6% interest on a smaller number is a smaller cost of interest. So by paying my loan down and off over a period of a few years, I pay less and less dollars in interest. If I take the total dollars I paid in interest and calculate that actual cost against the initial dollar amount of my loan and the time period it took me to pay myself back, it’s not going to be 5–6%. It’s going to be much less. For me, my actual interest expense is about 1–3% per year. Because I always pay myself back!
Now here’s the great thing, in this instance paying my loan back is the same function as saving money. It’s not like a car payment or a mortgage where once I make the payment I never see that money again. No, when I make the payment, that payment immediately becomes available for me to borrow against again because this is an open line of credit! So more payments back to myself = a higher savings rate.
These are the main myths, but I’m going to list a few more here!
- Not every whole life policy can do IBC. In fact, only about 6% of whole life insurance policies in force in the U.S. have loans against them right now. Which means 94% of whole life insurance isn’t being used for this concept. Why? Because most insurers do not cater to this concept and do not want people taking policy loans. When a person borrows against their life insurance, the insurance company must issue the funds to them for the loan and sure they earn 5–6% in interest, but the insurance company can earn a hell of a lot more on other things. There is an opportunity cost to the insurer on issuing loans and because of that, most of them don’t prefer their policyholders to take loans.
- Most agents have to be willing to take a 300% commission reduction to sell this. It’s more work. It requires way more skill. It requires after the sale service that doesn’t exist with most life insurance (an ordinary life insurance sale doesn’t need to be serviced unless the person dies or tries to cancel. This requires service many times per year). An insurance agency is going to teach its agents to sell what is most profitable and is the least work. This is the most work and the least profitable.
- Proper design is its own skill. Knowing the concept and having a life insurance license doesn’t even begin to scratch the surface of the IBC concept. Someone offering this must be an expert on the insurance company’s illustration software and underwriting process. It’s easy to talk big on social media with sexy marketing phrases but can you actually deliver? Most can’t and don’t know the first thing about illustration software or underwriting guidelines. Without that component you’re buying empty promises and probably a bad design from an agent who can’t do much for you after you sign up.
- The initial illustration is literally worthless. This goes for any cash value life insurance. Illustration are made up and mean nothing. What you want to look for is actual historical performance and financial strength of the insurance company you’re going with. This is called an in-force illustration. An in-force illustration is a real life report showing a real policy that shows how much was actually put in and how much it actually grew to today. This is different than a sales illustration which shows what it would have been in the past if the past repeated again in the future. We aren’t in the past and the past isn’t going to repeat itself exactly into the future. Our agency works with select insurers because they can produce in-force illustrations on policies they’ve had in force for decades now and we can see real performance in real life. Not just hypothetical sales illustrations that don’t mean anything. Each year we offer in force illustrations to all of our clients so they can see what they put in and what they have now.
- Setting up an IBC policy isn’t even half the battle. Using it is. It’s like buying a new supercar and having no clue how to drive. You need education and someone to teach you how to take loans, fund your policy, pay yourself back and invest and self-finance things. My team does that. I know literally 1 other person who does this in the entire industry. Anyone will sell you a policy, but do they have the first-hand experience and willingness to help you on the back end?
- Most insurance policies aren’t user friendly. Did you know most companies will only let you add extra cash to your policy once per year, if that? Most of them discourage loans so when you go to borrow, it’s a pain in the ass. There are specific forms you need to request and fill out to automate your loan repayments. Insurance companies don’t practice IBC. They offer life insurance. Only 6% of policies are even being borrowed against, let alone for IBC. Insurance companies don’t cater to me and you while we practice this concept and so you need a professional who can address that and play the middle for you.
- You cannot and should not borrow for “retirement income” or “vacations”. Again, if you borrow and don’t pay yourself back, you will lose money on your loans in almost every case. Want income? Borrow to acquire income producing assets and then use the income from those assets to pay your loan back so you can live on the income from those assets later. Want to go on a vacation with your cash value? Either setup a repayment or don’t use your life insurance for this.
I could keep going, but I’m going to stop here because I think you get the picture.
I love The Infinite Banking Concept and when done properly it is a powerful financial tool. But most agents (even the ones who advertise about it) have no actual idea what they’re talking about and have no real first-hand experience in practicing IBC themselves.
That’s why I call it The Sacred Account instead. I want to differentiate what I do for my clients, which actually works, from what the masses of motivated idiots with insurance licenses are marketing and selling. I don’t mean to sound rude or condescending, but it is these people who give the IBC concept a questionable reputation.
When you setup a Sacred Account with my firm we do the following for you:
- Design your illustration correctly with the correct carriers with our team of back office experts.
- Give you access to an online course with several hours worth of specific education on your Sacred Account and how to use it.
- Field and review your application for insurance to make sure it gets filled out correctly and submitted correctly so it’s optimal for underwriting (yes there’s an actual skill to doing this)
- Keep you motivated and going! When you go through financial and medical underwriting with the insurer, their #1 goal in that process is to identify why you’re too risky to cover so they can decline you. If they can’t find a reason, they’ll give you a policy. This process can be lengthy and tedious and it’s easy to get discouraged and distracted. We keep you focused throughout.
- We work with underwriting and negotiate with them to get you the best approval on your Sacred Account and if they give us a bad offer, we pivot with other strategies so you can get a better deal!
- We help you use your Sacred Account after its setup. We answer questions, educate you, help you with forms, loans, repayment plans, in-force illustrations, changes, etc. I own several of these and so do my staff. We have firsthand experience in using them and know what we’re talking about.
- Give you access to cheaper loans, cool strategies and investment opportunities for your cash value.
- If you are using your cash value to pay off debt, we give you a strategy to optimize this and we also have a team that helps reduce what you owe so you can repay it all faster!
My point in writing this article is to show you that anyone can buy and sell life insurance.
Anyone can talk about The Infinite Banking Concept.
But not everyone actually understands it, can do it correctly, has actually done it themselves nor and should be trying to help others do it.
If you’ d like to learn more about this concept, I want to invite you to register for my weekly Finance Friday course. This week I will be talking about this exact topic!
Click here to register!
Here is my course from last week if you want to check it out!
To Purpose, Wealth & Freedom,
Jerry Fetta is the CEO and Founder of Wealth DynamX. He is a nationally recognized financial expert featured in Forbes, Yahoo Finance, Fox, Chicago Weekly News, New York Finance, interviewed on over 45 podcasts with world renowned experts, earning endorsements and affiliations throughout his career with names like Kevin O’Leary, Grant Cardone, Dave Ramsey, and Pamela Yellen.
Jerry’s mission in life is to help create millions of financially educated and solvent families achieving greater financial freedom and sharing the truth about money with those around them.
Learn more at www.WealthDynamX.com
(DISCLAIMER: The information in this content should not be considered tax, financial, investment, or any kind of professional advice. Only a professional diagnosis of your specific situation can determine which strategies are appropriate for your needs. Wealth DynamX can and does not provide advice unless/until engaged by you.)