A 35 year old male of average health with a traditional whole life insurance policy contributing $1,000/mo, after 2 full years of contributions (so, $24,000) would be projected to have just $3,947 accessible to him through his policy’s cash value.
If this same male, contributing the same $1000/mo, were to get a properly structured infinite banking policy, he would be guaranteed (not just projected) to have $20,327 in that same 2 year time frame.
In our last post, we explored the pros and cons of this infinite banking concept and I wanted to further explore how this differs from a traditional whole life inusrance policy.
Even though infinite banking is reliant upon traditional whole life insurance in order to provide the host of benefits that come with the strategy, it should not be confused with a traditionally-structured whole life insurance policy.
Understanding the Difference
For the sake of this post, I will refer to the infinite banking concept (and the unique way we structure and optimize those policies) as ‘infinite banking.’ When referring to the normal structure of a whole life policy (the way most life insurance salesmen sell it), I’ll call that ‘traditional whole life.’
Let's explore how much of a difference that this is subtle difference is making...
Simplistically, all whole life insurance policies come down to three main components- premium (what you pay in), death benefit (what the beneficiary receives upon the insured's passing), and cash value (what you can use along the way).
Originally when traditional whole life insurance came about, the focus was always on the death benefit. The basic question was how much premium was needed for the insurance company to guarantee the death benefit.
They realized that while they were pooling that money to be set aside in reserves, they could allow people to access some of that money in the form of cash value.
The government recognized the benefit of people having life insurance for their entire life. It meant less widows, orphans, and ultimately government assistance for the financial loss that is incurred when losing a loved one.
Because of this, not only did they allow death benefits to be tax-free, but they also allowed policy holders to access that cash value tax-free as part of an incentive for people to own more whole life insurance!
The cash value at this point began to gain traction as a valuable place to store money, but originally only as an auxiliary benefit that came with the cost of having life insurance.
However, as whole life insurance evolved, wealthy people who had a policy realized that they could put in more money (way above their required premium) to be placed inside the cash value of their policy so that they could get the...
- Safety
- Guaranteed growth
- and Tax-treatment
...that they couldn’t get anywhere else.
People then started to get policies for the least amount of death benefit that they could so that they could take advantage of the benefits of whole life insurance as a place to diversify their money!
This is where the infinite banking strategy became popular and why it is increasingly popular to this day. It is focused on designing policies for the cash value, with the death benefit being the auxiliary benefit.
However, it’s interesting to see that this way of structuring a policy, can actually end up providing a better death benefit long-term as well!
Let’s go ahead and take a peek under the hood and see what's making these two so vastly different when it comes to performance.
A couple things to note about the two illustrations before we dive in-
Both are using the same exact...
- Company
- Product
- 35 year old
- Male
- Non-tobacco
- Standard health rating
- Contributing $1,000/mo
I’ve just structure