In my research of infinite banking, I had questions, a lot of questions. Several of them couldn’t be answered by the same 'experts' who were selling policies by the dozens.
When I finally got answers, I was amazed—because of how important they are in making this strategy work—that the so called 'experts' don’t know these details.
In this post I will cover some nuance details that are tough to come by, even from the people who know the most about this strategy...
In our last post, we explored the lies many agents are telling their clients.
It was pretty alarming, right?!
All lies aside, there are some generally accepted principles in determining a carrier to work with and what to expect with infinite banking, but there are also some details that seem to not be understood by... well, every 'expert' that I have talked to about this strategy.
Let's get into the three of the most important factors about your infinite banking policy that are very poorly understood...
1. CONTRIBUTION FLEXIBILITY
Contribution flexibility is very carrier specific, which is why it is not only incredibly difficult to get information on, but why it’s dangerous.
Many agents or experts do not even know about this and if they do, they don’t realize that this is different from carrier to carrier and hence make blanket statements that end up being inaccurate.
The majority of policies that are over-funded (which if you have an IBC policy that is properly designed, it will be) will allow you to adjust down your premium from what it was applied for.
I am writing a post in a couple weeks on where to find the funds for infinite banking without changing your current cash flow. The easiest way to stay up to date on that is to subscribe to my YouTube channel and hit the notification bell so you are reminded when that comes out.
Ideally, this isn’t happening because of proper planning prior to committing to a policy of that amount, but life does happen and knowing the flexibility is important to plan for the unexpected life events that happen to us all.
For example, if someone was contributing $1,000 per month and had their hours cut at work and needed as much extra money as they could find, they may want to drop down the premium of their policy.
In this case, the insurance company will let this person drop down to just the cost of insurance, which should be around $100-$200 of their current set contributions (10-20%, assuming their policy has been properly set up).
Commonly, they may require the cost of insurance plus a minimum over-funded amount of somewhere around $50/m or $600/y.
Your agent may tell you that you could drop down to $0 if needed and they would be right, but when doing this, you will be using the cash value to make that minimum premium payment. Hence, this erodes your savings and is not what we recommend if it can be avoided.
Now, it’s important to note that by reducing the amount of over-funding you have reduced the effectiveness of your policy.
And, if you’re smart, you may be saying, "Well yeah, but I can just make that payment up later when I have more money." And, you’d also be right, but... you might not realize just how little time you have to make it up.
You have to be careful.
The vast majority of carriers will have guidelines in place that will only allow you to make up payments within a 12 or 24 month window.
On top of that, almost all carriers will take the average contribution that you have made over a certain period of time—maybe 5 years , 2 years, sometimes even 1—and make that the new maximum amount moving forward.
So now, not only were you not able to make up previous payments, but you are permanently restricted from making those full payments into your policy.
A Grim Hypothetical
- Setting up your policy with one of the best IBC providers...
- Contributing $1,000/month...
- Disciplined for a decade...
- Hard times hit…
- You’re smart and remember the flexibility you have...
- So, you drop your minimum payment down to the cost of insurance at $100/mo...
- You do that for 12 months so that you can use that other $900 to help pay bills and get by...
Now, you're back! Ready to contribute $1000/mo to this risk-averse, tax-favored plan.
But wait, sorry, Charlie, you missed an important detail. They're only going to let you contribute $100 from now on because that is the average of your last 12 months...
If you want to put those $900/m back to work for you, you’re going to have to start up a new policy! Gotta start over!
Knowing the terms to this restriction is important to making sure that you stay on track and get the most from your policy.
2. YOUR COST OF INSURANCE COULD BE LOWER
I touched on this point in my last post along with the several other things that experts are being dishonest about. I bring it up again here for a different reason.
Most experts don’t understand that every carrier has a different minimum requirement for the base face amount (death benefit). Some carriers will go as low as $25,000 while others may have a $100,000 minimum.
As a reminder, your cost of insurance comes primarily from the death benefit and is the portion of your infinite bank that you want to keep as low as possible if your goal is to maximize your cash value (savings).
For the agents who work with only one carrier or have a preferred carrier, they may not realize that the cost of insurance very well could be lower for their clients—for you—which would result in much quicker cash value growth.
Proceed with Caution
Keep in mind many "brokers" who do have several carriers to work with are often incentivized to use one carrier specifically because they can earn higher commissions, promotions, trips, etc.
Don’t be afraid to challenge the person you are working with to see if another carrier could offer you a better structured policy.
Most agents trained in infinite banking are taught to get your cash value in year 1 to be at least 60%, that’s their target for you. But...
Here’s The Truth: it’s not hard to get that figure all the way up to 80% and sometimes even 90% or more.
If you aren’t getting your cash value in year 1 to equal 80-90% of your total contribution, you may want to check with your agent to see what your base amount of insurance is. If it’s above $25,000, you may want to dig deeper.
Strictly from an infinite banking perspective, there is likely a better solution out there!
This early liquidity is incredibly valuable, especially for people who could use the cash value for investment opportunities or to pay off debts.
3. DIVIDEND RATE
The dividend rate is often talked about and I think most agents do a decent job of addressing the need to analyze the dividend rate as a factor in determining what carrier to work with. But...
What most of these popular voices on the topic do not realize is the way in which a dividend is credited to the cash value. Boasting about the dividend alone is an incomplete depiction of the returns received by policyholders.
Again, this is another carrier specific detail that is incredibly challenging to come by.
I'm very confident in people’s lack of a thorough understanding on this subject in part because of the days I've had to spend and dozens of people I've had to speak with on the phone for each individual carrier in order to properly analyze this.
If you hear that two companies both have the exact same 6.2% dividend rate, for example, what you will find is that they still perform differently because of how the dividend is credited to the policyholder in their cash value.
Although both are important to evaluate, the dividend history and illustration alone are not sufficient in determining which carrier provides better returns.
Some carriers will illustrate their projections very conservatively and others will illustrate based on their current dividend rate.
Some carriers may have a higher dividend rate, but credit less of their companies dividend to you, the policyholder.
I want to reiterate this point. If you compare two companies' illustrations, you may be missing something. Some carriers will illustrate projections lower than even their worst rate in the last 20 years and yet others will illustrate at the current dividend rate.
This can make it difficult to compare apples to apples, but is important to understand when striving to make the right decision.
To further this point, it can really depend on your goals and intended use of this strategy.
Direct vs Non-Direct Recognition
Though the majority of experts will tell you that a non-direct recognition policy is superior, they are making some general assumptions in regards to how you plan to utilize your policy.
If you see this as a way to generate long term wealth and think you will only take policy loans sparingly and possibly none for the first 10-20 years of your policy, then you may be better off getting a carrier that has a direct recognition policy loan.
Direct recognition will tend to credit a higher percentage of the dividend to your cash value savings each year when not borrowed against and will net you better returns if you plan to keep your cash value in your policy for use later in life, such as retirement.
Rule of Thumb
Those considerations aside, as a general rule of thumb, if the carrier dividend rate is unknown or less than 5.5% (as of 2020), it’s worth exploring better places for you to park your policy.
Ultimately, these details have an impact on the bottom line of your success. But, even with the data, it can be challenging for even the most researched agent to fully understand.
If you have any questions about this or a policy you're considering, I hope you won't hesitate to reach out.
BONUS: YOU CAN CUSTOMIZE YOUR POLICY
As a bonus, I want to add an extra one in here. To be fair, I do hope that this point is widely understood by all agents who sell these policies.
It’s the least sexy point I have to make, but I don’t hear anybody else talking about it, so I figured at a minimum I needed to briefly cover the ability to customize your policy to actually fill the role that insurance is intended to serve.
Life insurance companies find creative ways to add riders on their policies that offer additional protection. I, personally, find some of these riders compelling and think that you should at least know about them.
Most carriers will include terminal illness and chronic illness riders for free. This means under a qualifying illness you would be able to access a portion of your death benefit, which (especially in the early years) may mean considerably more than the amount that you would have in your cash value.
There is only one carrier (that I specifically know about as of now) that will also include a critical illness rider at no additional charge. This is the most common of the three and can include things like cancer, heart attack, strokes, and more.
Waiver of premium is a unique rider that will cover your base premiums for you for a period of time, again very carrier specific. And, other carriers may offer the ability to guarantee future additions to your life insurance.
It’s my goal to clear up the misconceptions and help you know what to watch for when pursuing this infinite banking strategy. Given that, it may come across as though I'm against the strategy altogether...
That couldn't be further from the truth. I know there can be a lot of value in this strategy when set up correctly, I just want to emphasize the things to be cautious of first.
If you are already working with an agent or have a desire to work with somebody to get started with infinite banking I want to empower you to do so.
I'll be releasing a video (and post) next week where I go over the questions you should ask your agent to help you navigate the lies and misunderstanding that unfortunately often come with this strategy.
I will include a PDF where I list those questions for you.
The best way to stay on top of everything that I am releasing each week is to subscribe to my YouTube channel and hit the notification bell.
Stephen Spicer and I work side-by-side to help people plan for their financial future. If you see value in some of the information I am providing you, I am confident that you will enjoy the analyses Stephen provides for market based investments on his channel.
Also, check out our online private community where we'll go more in-depth about infinite banking and other strategies!
Until next time,