One of the most important pieces to an Infinite Banking policy is the term rider. This small, very misunderstood, part of the policy can make a massive difference in the overall policy growth, as well as the agent commissions that come with buying any life insurance policy.
Let’s explore the term rider, what it is, how it works inside a policy, and how it affects agent commissions, to see just how this small insurance rider can make such a big difference in the outcome of an Infinite Banking, or cash value whole life insurance, policy.
The Term Rider – Infinite Banking
Infinite Banking, when done properly, utilizes a high cash value, whole life insurance policy in order to accomplish the goals that we want it to: safety, liquidity, and growth. But even though whole life insurance is the vehicle, it isn’t as simple as buying a whole life insurance policy and hoping for the best–this would be insanity and definitely wouldn’t work.
On the one side of the equation is whole life insurance–expensive and slow growing at first. The other side of the coin is the cash value–which is limited by the MEC (modified endowment contract). The MEC says that, for every dollar of cash value we have, we have to have a certain amount of insurance to keep the policy tax-free.
This is where the term rider comes into play.
The term rider is just that, it’s an add-on product that gives us term insurance on top of our whole life insurance.
In an Infinite Banking scenario, the term rider gives us more insurance, which in turn gives us more room. The term rider raises the ceiling on this MEC line, so that we can put more money into the cash value right away and buy less whole life insurance.
By doing this, our policy has more cash value in year one, money we can borrow and use right away. And we will find that it has a certain amount of added growth and benefit long-term. This is what makes the term rider so effective for an Infinite Banking policy, it literally buys us more cash value while keeping the policies tax advantages.
This is because term insurance is much cheaper than whole life insurance. And we don’t buy the term insurance forever, we just add the rider for a few years, usually around seven years, and after that, the growth of the whole life insurance gets to the point where the term insurance is no longer needed. This may sound a bit confusing, but the point is, term is cheaper than whole, and we want cash value growth first and foremost–not insurance. The term rider gives us the cash value availability and growth we want.
The Term Rider and Agent Commissions
Agents need to make money, and you need to grow your money. There is a delicate balance here that must be realized in order for each party to get what they want. In most cases, those who buy Infinite Banking policies are unaware of this fact–which some agents may take advantage of. Keep in mind, not all Infinite Banking policies use a term rider, so just because there is no term rider on your policy doesn’t mean the agent is trying to hurt you–more on this later.
An agent makes the bulk of their commission, in most companies and in most cases, off of the whole life insurance purchased within the policy.
The term rider pays pennies on the dollar to the agent, it offers them basically no monetary benefit.
When you purchase a whole life policy, the agent will make commission off of the “base” of that policy–or the whole life insurance in this case. For someone who spends 100,000 dollars on pure whole life insurance, the agent will make a commission off of that 100,000 dollars–a percentage anywhere from 40-100 percent depending on the agent’s contract with that life insurance company.
And this is in year one.
After year one, most agents make a very small percentages for a few more years.
This is how most whole life policies are structured for commission.
So the agent make the majority of their money in year one, and that’s it.
Some agents have higher contracts than others, which can make a difference in that agent’s earnings. Keep that in mind when talking to (or confronting) your agent, he or she may not be making the kind of money you think.
Now let’s add in the term rider. A term rider drives down the “base,” or the amount whole life insurance, that is being purchased. By purchasing cheap term insurance for a period of time, we are able to put more money into the cash value that would have normally gone into whole life insurance.
For the agent, the “base” whole life insurance will be much lower. The term insurance is replacing the expensive whole life insurance. This means they make a percentage off of a much smaller amount (the whole life insurance).
The agent is god over the policy in many ways, and they are often left to their own conscience, which can be manipulated by their own monetary struggles, to decide how much they make and how much cash value you get.
By understanding how a term rider works, often you can have a conversation with your agent that will create understanding and a fair outcome for both parties. Agents should be allowed to make money–remember, most agents make their money in the first year and that’s it.
The reduced fees and commissions come over the lifetime of an Infinite Banking policy, and an argument can be made that those fees and commissions are much lower over the lifetime of the policy than would be paid to a broker–say in a mutual fund–making a fee every year.
When a Term Rider Does NOT Apply
Although a term rider applies in most cases, there are some companies, or policy types, that do not require a term rider–or may call them by different names.
Certain companies have high cash value policies that are designed for upfront cash value availability–sometimes as high as 70-90 percent. They may not take term riders, they may call them a different name, or the term rider may be a very small option–not as much of an impact as in a regular whole life policy.
Ask your agent about the term rider, and the policy type, when considering an Infinite Banking policy.
Making the Decision
By educating yourself, and understanding what you are getting, you can help ensure you are getting the best Infinite Banking policy for you. The Infinite Banking Concept is an amazing source of security and strength long-term, however, policies setup sloppy or in err can make a major difference in the long-term outcome of that life insurance policy.
The term rider is just one piece of the puzzle, but it can make the biggest difference in the overall performance of your life insurance policy. Always read your policy before making any long-term decisions regarding whole life insurance as an investment.