Don’t get me wrong, I see value in infinite banking, but recently a lot of what I have heard and seen on the topic has been lacking some crucial detail, or has even been what I could only assume as, intentionally misleading.
There are 5 really important things that you need to know and be aware of before considering infinite banking for yourself...
In this post, I summarize 5 key misconceptions.
- Rate of Return - what you should actually expect and why it’s way different than what you may have heard from other experts
- Contribution Amount - why not all of your regular savings should go toward this strategy and why most infinite banking experts don’t discuss alternative solutions
- Policy Structure - even the experts will claim they are doing their best and nearly all are blatantly lying or uninformed about how they could provide a better policy for you
- This Isn’t for Everyone - you’ve heard this before I’m sure, but you may not know why and the dangers it can present for the wrong person
- You Pay Yourself Interest - Ha! This one is so far from the truth it hurts
As I go into this if you have any specific questions or want me to go more in depth, let me know in the comments below and I will do my best to provide that for you.
Alright, let’s get started by debunking one of the most universally common and most misleading selling points of the infinite banking concept...
1. Rate of Return
I'm here to tell you that you will actually experience negative returns on your investment.
You may be saying...
- ”What?! No, that’s not true! I was told I’d be getting much greater returns than I could in a savings account!”
- Or, maybe you heard the 4% guarantee plus dividends?!
- Or, maybe you’ve even heard an even more creative (yet still true) 100-400% greater return rate than a savings account.
Though all of these claims alone can be worded in a way that is not technically a lie, they are not the full story.
What’s scary about this claim is that it’s the same one that I, as well as pretty much every other insurance agent, was taught to tell my clients.
But, what I was and what the vast majority of others are still leaving out is that you will only have the potential to realize this type of return in the long run.
In fact, of the hundreds of policy illustrations and dozens of carriers that I have looked through, few policies will net a positive return within the first several years, some taking upwards of 10 years before having more money in your cash value than you’ve put in.
That's right: even with the absolute best policies from the absolute best companies, you'll still have less money available to you than you'll have put in for at least the first several years.
What's worse: if you actually study what the insurance companies are projecting...
A large number of policies won't ever reach the 4%...
Why is this the case?
The cost of insurance. It's unavoidable.
Even with the most strategic structuring of your policy any agent could ever possibly do, the fact that this vehicle is ultimately insurance comes at a cost.
That added cost is immediately subtracted from the funds that are going into that savings portion of your policy.
The savings portion—known as cash value—is what’s earning you the guaranteed 4% plus dividends. Which is why agents can get away with their boastful claims.
The thing is… a savings account does not come with this added cost and hence the way most people present this 4%—or 100% greater—claim is terribly misleading.
In the long run, yes I agree, these policies when structured properly will produce better returns and give you way more options and flexibility than any savings account that I know of today.
That is part of the reason I see a lot of value in them. Just be aware that this is a long term strategy.
2. Contribution Amount
The majority of experts are not talking about alternative places for you to put your money which gives little comparison to evaluate how good this strategy truly is.
When comparing this strategy to a savings account, it may hold up as a much better place for long term growth, but is a savings account really the metric to compare against for growth?
Many of the experts out here on this topic are not securities licensed and have no other investment recommendations and hence see life insurance as the only solution to your needs.
This causes people to take policies for as much premium as they can afford and utilize it as their only place for their savings.
I do believe that in many circumstances this is an incredible place to allocate a portion of your regular savings, even a significant portion; however, for greater upside potential you may want to consider investing some of your savings going into a market-based investment account (perferably one that also protects against downside risk...).
*For more information on how that's done, I'd recommend checking out Stephen Spicer's content on Youtube as well as within our online community where we talk about infinite banking as well as other investment strategies.
Regardless, the appropriate allocation of your savings and investments to this strategy is going to be circumstantial.
For certain people, the liquidity allows them to pursue more lucrative investment opportunities, in which case they may be better off with a higher portion of their money going here.
However, for others, this liquidity can get them into trouble, and if they're not careful, can allow further damaging spending habits that will erode their long term wealth.
Evaluating your financial goals is important in making a determination as to how much of your savings should go towards infinite banking.
I can confidently say that it rarely means all of your extra money should go here.
3. Policy Structure
This one is so interesting to me because very few people in the industry will talk about this transparently.
I understand why...
When structuring these policies, the goal for most of our clients using infinite banking is to get the minimum amount of death benefit so that they can have the most amount of money go toward their cash value.
However, I, along with hundreds of other agents in the country, had been trained to split the policy between death benefit and paid-up additions with 30% or even 40% going toward the cost of insurance.
In reality, it could be around 10% or even sometimes less allowing your cash value to grow even quicker.
So, why does the rest of the Infinite Banking industry do this?
Why do they structure your policy with only 60-70% of your premiums going straight into the cash value, when it easily could be 90% which would be better for you in every way?
The short answer?
They make more of it that way…
The insurance agency and agent are paid hefty commissions on that "cost of the insurance" portion.
And besides... the difference it makes for an unsuspecting client is pretty hard to notice.
To be fair, I doubt most insurance agents really understand this reality.
After all, once completed with my education, I had illustrations run for me... I didn’t even know I was writing policies in a way that was designed to pad my wallet at the expense of my clients.
When I found out this was the case... I honestly didn’t know what to do.
I could choose to keep making good money and it wouldn’t hurt the clients too bad, or I could reduce my pay—by about two-thirds!—and know I was doing the right thing.
I can tell you that very few people out there, no matter how positively you may view them, are stripping the policy down to your max benefit.
I have conferred and watched even the most popular voices out there talk about only being able to put 70% or so straight toward the savings portion and falsely claim that they can do no better because of the government’s so-called MEC limit.
Another factor to consider in this is something that actually may very well be out of the agents control...
That is: the company that they're working with. Most agents are working with 1—maybe 2—carriers. And, they may have a higher requirement for a minimum cost of insurance.
This is a really important factor when getting started with infinite banking. I am creating an entirely separate post on the nuance details that almost all experts are missing in their carrier evaluations for infinite banking.
4. This isn’t for everyone
Now, I'm sure you've heard that line before from many of the experts out there. But, the reason I included it on this list is because their actions speak louder than their words...
You see, I get the feeling that other experts say this because, though they know it to be true, it makes them look like they are looking out for you.
While at the same time, knowing deep down that it psychologically is creating a desire for people to qualify themselves as clients.
I rarely see these same experts turning down clients who are asking to proceed with a policy, yet in theory they should be making sure that it is a good fit before eagerly taking their money.
The reason I say this so seriously and mean it is because if you get started with a policy, you need to commit to it long term, and it needs to make sense for you short term.
Some people just aren’t quite in that position yet...
Cancelling your policy within the first years, will mean losing money and putting you in a worse financial position than before you even started.
This strategy takes discipline and works best for those who can be consistent and continue to properly fund their policy while managing the ups and downs of the game of life.
5. You Pay Yourself Interest
This is one I have never understood how any agent or marketer could even feel okay with saying...
Yet, almost all do!
And again, benefit of the doubt, maybe they just don’t fully understand exactly what they’re saying here and why they were told to say it...
Sure, it’s a great marketing pitch and works well for selling people on the idea, but are you actually paying interest back to yourself?
The way a policy loan works is that you are not actually pulling money from your cash value. You are simply using a collateralized loan against the value of that account.
This is what allows you (with certain carriers) to maintain your compounded interest earnings in your cash value, because you are never actually taking money out of your policy.
Now, there are several insurance companies that will give you great terms to this loan with exceptional flexibility.
But, it is still a loan…
And, you are paying the interest to the insurance carrier
... Not yourself!
Because of this flexibility, it can be difficult for a person who is using infinite banking to decipher that when they are paying back a policy loan a portion of the repayment is going to the insurance company as an interest charge.
The longer you have this "loan" outstanding, the more interest you will owe the insurance company.
Today, you'll find most of the best carriers around 5%—but that can change.
One thing needs to be clear: if and when you do decide to pay back your policy loan, in order to pay back that loan in its entirety, you will have to pay the outstanding loan amount plus any interest accumulated.
The vast majority of experts will elude to the fact that you are paying yourself back interest which would imply that this extra amount of interest would increase your cash value.
This is, in fact, NOT the case...
On the upside, you do maintain the growth in your cash value as if you never took out the funds (with certain carriers). Because you didn’t!
The policy loan is simply collateralized against that cash value.
Don’t get me wrong, when a policy is structured correctly, the terms of these loans are still incredibly appealing, and I think people should take advantage of policy loans when it makes sense for them and their unique situation.
I hope you gained insight from this post.
I do want to make it clear that infinite banking is something that I believe in—there are some very real benefits to this strategy.
I also believe in transparency and making sure that people truly understand what they are getting into.
I'm excited to continue to shed light on the misconceptions of this strategy as well as the many benefits and how to get the most from infinite banking. I believe it can play an important role in the vast majority of peoples’ financial plans.
But first, it's important that you are aware of the lies and know the truths about this strategy...
1. Negative Returns - in the early years you will have less money in your cash value than you had put into the policy.
2. Balance Your Contributions - determine how this fits in with other investments and your overarching Financial Plan.
3. Your Cost of Insurance Could be Lower - the vast majority of experts structure policies to be 'good enough' so that they can get paid higher commissions.
4. This (actually) is not for Everyone - some experts may even say this line, but most aren't honest about the dangers.
5. You Pay Interest to the Insurance Company - policy loans can be great, but the interest still goes to the insurance company, never you!
Keep an eye out for my next post where I dive deep into the 3 things that insurance agents don't know (or understand) about the insurance companies they're recommending.
I will include what to look for, what questions to ask, and how to make sure that you are getting the most out of your infinite banking experience.