In the investment community, whole life insurance as an investment, sometimes called an Infinite Banking scam, gets thrown under the bus before it’s even understood.
The reason for this often comes from quotes and other misinformation spread by Dave Ramsey and other radio entertainers. And, as can be expected, many of these who preach “buy term and invest the difference” are sponsored by term insurance companies. Think they have some personal motivations for telling you to buy term life? I’ll let you decide that.
The reality is this, all investments have benefit otherwise they wouldn’t be around anymore. Some investments take more risk. Some grow faster, some slower. Understanding an investment, the pros and the cons, and weighing it out against all your other options is the only real way to get to the very bottom. Let’s look at the Infinite Banking scam and see if the underlying investment, whole life insurance, has any real merit.
Infinite Banking Concept Scam – The Underlying Investment
As previously mentioned, Infinite Banking utilizes whole life insurance as the underlying investment. Just like any investment, this product has some benefits as well as some downsides.
What one person may consider a benefit, another may consider a downside. It’s up to you to decide whether or not this strategy compares to your own personal goals and current strategies.
Whole Life Insurance as an Investment
As an investment, whole life insurance has some key attributes.
Safety – Whole life insurance is not tied to the market. This means that the underlying money contributed to a whole life insurance, as it moves into cash value, is safe from the market swings. It is not a market investment product and will not move down, or up, based on the market.
Growth – Typical growth inside of a whole life insurance policy, when structured as an investment like in Infinite Banking policies, has, in some examples, historically earned around 6% growth annually.
Tax-Free Growth – The growth inside of an Infinite Banking policy is tax-free, and can remain tax-free indefinitely if treated properly. Compare 6% growth tax-free with a taxable investment, like a 401k, and you could be looking at 7-9% pre-tax growth to get the equivalent growth found in whole life insurance.
Liquidity – Whole life insurance cash value is completely liquid, and can be taken out an used whenever the investor decides to.
The Downsides to Whole Life Insurance – Infinite Banking Concept Scam
Cash value whole life insurance, or these Infinite Banking policies, come with their own set of rules that can have a dramatic effect on the investor and their financial outcome.
MEC Rules – Because of certain rules, an investor who may try to build a whole life insurance policy on their own, without the help of a professional, may end up breaking MEC rules and making the life insurance policy taxable. This is difficult to do, in most cases it must be done on purpose and with written consent, but these laws must be understood which can make Infinite Banking policies seem confusing.
5-7 Years to Break Even – Infinite Banking policies through cash value whole life take time to break even. This means that the investor must wait a certain amount of time until all of the money they have contributed becomes available for use. This does not affect the overall growth and return rates of the whole life insurance policy, however, this does mean if the investor has an emergency, job loss, or cannot continue to make their life insurance investment, especially in the first few years, they could end up losing money on the investment.
Agent commissions – An agent who sets up an Infinite Banking policy often gets paid the majority of the commissions on this product up-front. One could make the argument that, overtime, the agent actually makes less than they would if they were taking fees annually, however, this doesn’t make the case any less pertinent. Fees can be heavy. An agent has control over how much he or she will make and, depending on the agent, they can gouge the investor for a significant portion if the investor is not wise.
None of these downsides make Infinite Banking a scam. But they do expose some of the truth behind whole life insurance as an investment and what to be aware of when considering this type of investment.
Comparing Investments – The Infinite Banking Scam
An investment is only as good as what it is being compared to. Let’s look at some of the other investment options that are available and how the so-called Infinite Banking scam, high cash value life insurance, compares.
Government Sponsored Programs – A government sponsored program will often defer tax instead of paying it up front. In some cases, deferring taxes can be a good idea, in others it can be a downside. It’s important to understand what you are getting into with deferred tax options before making the choice. If you are getting a match in a government sponsored plan then there is no comparison at all. However, if you continue to contribute money after the match, there may be an argument that an Infinite Banking policy is better. What it boils down to is this, is deferring taxes going to help you? And are you earning more than 9% annually on average inside your government sponsored plan with what you would consider is relatively low risk?
Market Investments – Market investments will have tax involved as well. However, this tax can be much smaller as a percentage. The real question when comparing market investments to Infinite Banking is earnings. Are you able to grow your money at around 8% or more with relatively low-risk? An investor who can create these kinds of returns probably wouldn’t need a safe investment alternative like Infinite Banking.
Alternative Safe Investments – This is where, I think, the argument for Infinite Banking can be made (not an Infinite Banking scam). If you are considering CDs, municipal bonds, or leaving your money in so called high interest bank savings accounts, Infinite Banking offers a much more efficient and competitive growth rate than these options. Infinite Banking is not a risk based investment. It acts more like a competitive growth savings account than an investment. However, the growth, and added benefits, of Infinite Banking are often much more enticing than these other safe investment strategies. This is the primary reason many of us who use Infinite Banking consider it a sound strategy, we aren’t basing it off of market investments–we look at Infinite Banking as a very effective saving strategy and nothing more.
The Right Investment for You
The Infinite Banking scam label has no merit. This Infinite Banking scam should be studied and understood. Just like investment, the best way to avoid being suckered into anything long-term is to be educated. Always consider the pros and cons of any investment before making a decision that will affect your retirement and the rest of your life. There is no “best investment” out there, which is why conversations like this one exist. It is up to you to educate yourself, from reasonable and dependable sources, before making any investment decisions. In the end, no one will ever be more affected by how you grow your money than you will.