A Twist On Whole Life Insurance

I recently wrote about how whole life insurance is a crappy way to get a permanent death benefit or decent investment returns.  In recent years, there has been a push to use a whole life insurance policy for a different reason- for “banking.”  It has been popularized as the “Infinite Banking Concept” or “Bank On Yourself.”  There is a great deal of marketing and hype involved, and even some scams, but the basic scheme itself is pretty interesting.

Bank On Yourself

Instead of borrowing money from a bank to buy your next car or other large expense, you borrow it from your life insurance policy.  You can pay it back whenever you like.  But you actually never have to pay it back if you don’t want to.  Even for those, like me, who say “I don’t borrow to buy cars, I just save up the money,” advocates like to point out that you may be able to save up the money more profitably inside the life insurance policy than inside the bank account (especially given current interest rates.)  They say it’s like getting interest free loans with an added death benefit.

Non-Direct Recognition

The key to making this all work is to get a “non-direct recognition” whole life policy.  With a “direct recognition” policy, when you borrow money from your policy the insurance company first subtracts the amount of the loan from the cash value, then calculates the dividend on the lesser amount.  With an “indirect-recognition” policy, the insurance company doesn’t.  Cool huh.  If you have $100K in there, they’ll let you borrow about $90K, but still pay you dividends as though there were $100K in the policy.

Paid Up Additions

The problem with most whole life insurance policies is that it takes forever to get any decent cash value in there.  For example, a policy provided to me by Larry Keller as the “best” $1 Million non-recognition policy he could find [MassMutual Whole Life Legacy 100] for a healthy 30 year old male in New York, demonstrates that the cash value doesn’t equal the premiums paid until year 12.  I’ll need another car before then!  That’s a pretty lousy way to “bank.”  So we have to figure out a way to get the cash into the policy sooner.  The way you do this is with Paid Up Additions, meaning you dump more than you have to into the policy, ostensibly because you want a higher death benefit, but in reality because you want more cash growing in the policy so you can “bank” with it.  The IRS limits how much more money you can put in.  Per the IRS, at a certain point it’s no longer a life insurance policy, but an investment called a Modified Endowment Contract (MEC), and it loses the tax benefits accorded to life insurance policies.  Ideally, you fund the policy right up to the MEC line to decrease the amount of time it takes until your policy has significant cash value.  Another benefit of maximizing Paid Up Additions instead of just getting a bigger policy, is that the agent commission on a PUA is lower than a larger policy, so more of your money goes to work for you, not to mention the required ongoing premiums are lower.

Borrowing Money

After 3 or 4 years of paying premiums and buying healthy paid up additions, you’ve got a tidy sum of money in the contract.  Now you can borrow it tax-free at a certain interest rate, say 5%.  Now that 5% doesn’t go toward your cash value, it goes to the insurance company, but since this is a non-direct recognition policy, the insurance company is still paying dividends, say 5%, on the money you borrowed, so it’s a wash to you.  You’ve got yourself an interest free loan.  Kind of cool huh.  Of course, borrowing money from your bank account is also an interest free loan, but proponents of Bank on Yourself like to point out your bank account isn’t paying 5% interest. If you kick the bucket during this process, your heirs still get the death benefit (minus the loan amount of course).  The insurance company doesn’t guarantee death benefit increases each year, but they generally do.

Tax and Asset Protection Benefits

Insurance policies have four main tax benefits.  First, you can borrow from the policy tax-free.  You have to pay interest on it, but you don’t have to pay taxes on it. That’s of course no different than “borrowing” from your bank account or from the bank itself, but it is different from cashing out of an investment with capital gains.  Second, money compounds in a tax-free manner within the policy; there’s no annual capital gains or dividend taxes on growth.  Third, the death benefit is income tax-free to your heirs.  Fourth, if you cash out, your basis is determined by the entire premiums paid, not just the portion that went to “the investment part.”

In many states ,cash value in your insurance policy is protected from creditors up to a certain amount.  Those of us constantly concerned about being sued see that as a benefit.  The money isn’t FDIC insured like a bank account, but states generally guarantee up to a certain amount from insurance company insolvency.

The Downsides

You can understand why at this point people are often pretty excited about this whole concept.  Higher banking returns and tax-free growth all combined with a “free” death benefit.  There’s got to be a catch, right?  Of course there is.  Let’s talk about catches.

The “Load”

When you put $10K into your bank account, the next morning there’s $10K there.  When you pay a premium into a life insurance policy or buy a PUA, the whole premium doesn’t go into the policy.  Like with a loaded mutual fund, a small percentage of that money goes toward the costs of the policy and toward the commission of the salesman.  If the policy is paying 5% a year, and the “load” is 10%, it’ll take 2 years just to break even.

Loan Rate vs Interest Rate

In my scenario above, I used 5% for both the loan rate and the interest rate.  It’s quite possible that the dividend rate can be higher than the loan rate or vice versa.  Obviously borrowing at 5% and earning 2% is a losing proposition.  In the policy discussed above the loan rate is variable, currently set at 4%.  The current dividend rate is 7%.  It’s easy to envision a scenario where those numbers reverse.

You Have To Pay The Premiums

Buying a life insurance policy is a long-term deal.  Those premiums come due every year, whether you like it or not and without concern for your current financial situation.  Lose your job?  Disabled?  Retired?  Wanted to cut back?  The policy doesn’t care.  With this particular policy you pay until you’re 100. I’m sure you can get one that is paid up sooner, but the shorter the payment term, the higher the premiums for the same death benefit.  If you stop paying the premiums, any loans you’ve taken out become fully taxable, at least the portion above and beyond the premiums paid.  This factor alone is the single biggest downside to this idea.  This would keep a wise doc from putting a whole lot of money into a policy.  But I worry more for the average earner that this idea is sold to.  The guy who’s putting $500 a month of his $4000 a month salary into whole life insurance.  One new expense and all of a sudden his whole financial system is collapsing around him.

MEC Calculations Are Complicated

The point at which the contract becomes an MEC is influenced by the amount borrowed and the current dividend rate.  With all these moving parts, it’s not that hard to accidentally make the proceeds of your policy taxable.  The insurance company and agent are supposed to ensure this doesn’t happen, but there may be times when you may be required to unexpectedly pay back a loan or contribute more money into the policy to prevent it.

Source of Funds

You have to take the money from somewhere in order to dump it into a life insurance policy.  Proponents often recommend pulling it out of your 401K, IRA, house (via refinancing or a home equity loan) etc.  When it’s pointed out that there are serious opportunity costs, interest costs, or tax costs to doing this, they finally settle down to “put your emergency fund and/or short term savings in it.” But for a doctor, how much money is that really?  $10-50K?  Maybe $100K if you’re doing really well?  Making an extra 4% on $20K is only $800 a year.   Not exactly the difference between poverty and financial bliss for a doctor.  It especially bothers me to see people recommending you stop contributing to a retirement account that provides tax protection, asset protection, and solid returns in order to buy more life insurance, that has nowhere near the same tax benefits, asset protection, or estate planning benefits.  Risking your house to invest in life insurance seems even more stupid.

Takes Time To Get Money

Loans from an insurance policy are a bit less liquid than what I think an emergency fund should be.  I’ve never borrowed from one, but I understand it’s a matter of days to weeks to get your money from the company.  That’s not the place for an emergency fund.  Perhaps if you know a big purchase is coming a few weeks early it could work.

Additional Complexity

Everywhere else in the financial world additional layers of complexity favor salesmen and the companies they represent.  Why would this be any different?  In fact, as you search the internet, you quickly realize that any discussion of these comments quickly breaks down into the proponents who suggest you need their expertise to understand it, and the detractors, who don’t seem to completely understand it.  I couldn’t find anything anywhere that seemed to be a straightforward, unbiased analysis. The sales methods and opaque nature all screams “SCAM” to me.  That doesn’t necessarily mean it is, but as a general rule good financial products are bought, not sold.  If an extensive sales process is required, or if I can’t explain it to my wife in less than 2 minutes, I try not to have anything to do with it.  There’s a lot of people in this world smarter than the average insurance agent and it doesn’t seem to me that very many of them are banking on themselves.  I can’t believe it’s simply a matter of bias or the word simply “not getting out.”  Good ideas don’t stay hidden long.


The books and websites that most push this concept like to talk about buying cars, as if saving up to buy a car vs taking out a car loan is the biggest financial concern in the world.  Most doctors can buy a decent used car out of last month’s paycheck. Maybe save up for 3 months if you want a new one.  You’ve got to think about what you’re actually going to borrow money for.  If you’re going to borrow it to pay off credit cards, don’t you think it might be smarter to pay off credit cards at a guaranteed “investment” rate of 15-30% than to buy a whole life policy?  When is the last time you went car shopping?  All the signs and ads I see are advertising 0% APR car loans.  Why bother dealing with an insurance policy when the car dealer will give you 0% right now?  A mortgage?  Why pay “myself” 5% when I can pay a bank a tax-deductible 2.75%?  It just doesn’t pass the sniff test.  I don’t really finance much  anyway, why do I need a “new, innovative” way to do so?

Ongoing Interest Payments

Let’s say you want to take some money out of the policy and NOT pay it back.  You still have to make the interest payments each year.  My goal is to minimize my fixed expenses, especially the closer I get to retirement.  If you don’t make enough payments, not only does the policy risk collapsing, but that death benefit starts decreasing too.


I’m obviously not running down to the local whole life salesman to start banking on myself.  I don’t think you’ll benefit much from it either.  In my opinion the downsides outweigh some significant positives.  You’re better off not mixing investing and insurance.  What do you think?  Do you have a whole life policy you use for “banking?”  Do you still feel like it’s a good idea?  Comment below.  Keep comments professional, avoid profanity, and avoid ad hominem attacks.

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A Twist On Whole Life Insurance — 218 Comments

  1. [Comment edited at the commenter’s request]

    If you structure a policy correctly it will break even in year 6-8 depending on age and health. A typical life insurance agent won’t know how to do this, but you are right you use the pua to make this happen. However, you say the IRS limits the amount of money you can put in and you talk about MEC (Modified Endowment Contract) like it’s this enigma that just might happen to you if you aren’t watching your policy everyday. Let me address this.

    1. The IRS does not limit the amount of money you can put into life insurance. The limit the amount of money you can put into a policy BASED ON THE DEATH BENEFIT. That’s the key here, if you want to put more money in then you increase the death benefit. You do this from the beginning so that number 2 doesn’t happen.

    2. The MEC is nothing to be afraid of, it just takes a little planning. Most people are going to fund a policy, or put money into the life insurance, at a steady rate. So if someone decides they want to put 10k into a life insurance policy then you set it up so that 10k is your limit. This means that you set the MEC from the beginning. So if my policy is for 10k then the MEC line is 10,001. All this does is make the policy at it’s maximum efficiency. You want to be as close to the MEC line as possible without crossing it because the IRS said so. It’s nothing to worry about, even if you tried to MEC the policy most companies will send you a letter say “Are you sure you want to MEC your policy?” It’s not something that will just happen and you’ll be stuck with the rest of your life.

    You say this as well…”In my scenario above, I used 5% for both the loan rate and the interest rate. It’s quite possible that the dividend rate can be higher than the loan rate or vice versa. Obviously borrowing at 5% and earning 2% is a losing proposition. In the policy discussed above the loan rate is variable, currently set at 4%. The current dividend rate is 7%.”

    Well ya it’s easy to envision a world where pigs fly and where Hitler was a great world hero, but we also have past facts we can base this off of, maybe that’s a good place to start.

    When it really boils down to it the numbers always move together. If the “loan rate” or rate you get when you borrow for the insurance company is 5, the dividend that you will get is going to be around 5. That’s the history of it, they always move together. There isn’t some magic place the money goes to, you are the owner of the insurance company and you get profits. If the company is profiting at 5 percent, then you will earn 5 percent, you are an owner. If the company is earning 8 percent, you are going to pay 8 percent on the loan and you will make 8 percent in your policy. This is how it has always been historically.

    Now with your next comment. What if you “Lose your job? Disabled? Retired? Wanted to cut back? The policy doesn’t care. With this particular policy you pay until you’re 100.” Well I understand what you are trying to say but clearly you don’t understand this very much. First of all, once you break even, you know that year 6-8 thing we were talking about, the policy is basically going to generate enough revenue to pay your premiums. But let’s say that it didn’t. If you don’t know about life insurance, then I understand your debacle here. However, there are so many options with life insurance this is not a problem.

    First – disability rider. Want money if you get disabled? Insurance company thought of that long before you did.

    Second – Reduced paid up. What this means is that at any time after year 7 you can drop the death benefit down and not have to pay premiums ever anymore. The catch is you can’t put new money in, but you can still borrow from it and pay the loans back. So if anytime you get disable, lose your job, etc. (after year 7) there are very easy ways to eliminate the premiums you owe. That being said, if you made it to year 3 you would have enough money in your policy to borrow it out for a few years and make the policy last. Now if you never made money again then yes eventually it would die. So you’re real risk is if something really bad happened in the first few years and you couldn’t make the premiums, it could last for a bit on its own, but eventually it would die.

    “With all these moving parts, it’s not that hard to accidentally make the proceeds of your policy taxable.” Actually it’s harder than hard, it’s impossible. With the majority of companies any of the bank on yourself of other type of agents use I will reiterate, there is 0 chance of you being able to MEC the policy without doing it on purpose. The insurance company is familiar with these regulations they do all this for you.

    I’m with you 100 percent on being careful with your contributions. You shouldn’t kill yourself to try to pay a premium, I (yes obviously I am an agent I’m not trying to hide this) always have my clients start small and work their way up. However, that being said…you continue

    “It especially bothers me to see people recommending you stop contributing to a retirement account that provides tax protection, asset protection, and solid returns in order to buy more life insurance.” Can I say lol?

    I mean guy. You think a 401k gives you tax protection? Really? Putting off taxes for the future is protecting money from taxes? Opposite. Putting taxes off for the future is saying “hmmm I really hope the government is going to lower taxes in the future?” You are rolling the dice. And what do you think your odds are the government will lower taxes? My guess is less than 0. It’s in the negative.

    And “solid returns.” Are you unaware of our current economic situation and thousands if not millions of people not being able to retire because they lost so much money in their 401k’s? Now they anticipate working till they are 70+ because they expected the 401k to help them, and it only shattered their lovely dreams.

    A side note, had they invested in life insurance they wouldn’t have lost a dime. They may not have got the huge growths in the 90’s, but they wouldn’t have had the huge losses that followed. They would have had something that was predictable and never lost principle. If anything you have to admit they would have had a much better road map that of certainty and they would still be on the path they planned out for retirement instead of being at the whims of the market.

    “That has nowhere near the same tax benefits, asset protection, or estate planning benefits.” I’m trying to be nice up until now. But you are making me bite my tongue very hard now that it’s bleeding. Tax benefits. We discussed this already but I’ll reiterate. If you could pay taxes now and never pay them again on growth, is that not the greatest tax benefit ever ever ever? No taxes? I don’t know what can compete with no taxes.

    You already said, “In many states ,cash value in your insurance policy is protected from creditors up to a certain amount.” I mean please don’t contradict yourself. I think having this pretty much sums up all I could say about asset protection.

    And estate planning? I mean really? You are going to say that a 401k or any other investment has better estate planning benefits? I would have to say having more money than you have contributed to your investment account (called the death benefit) transferring to your heirs with no taxes sounds like a pretty wise estate planning tool to me. But that’s just me maybe.

    “I understand it’s a matter of days to weeks to get your money from the company.” It takes as long as it takes a check to get mailed to you. And I assume that in the future things will be a little more electronic.

    “There’s a lot of people in this world smarter than the average insurance agent and it doesn’t seem to me that very many of them are banking on themselves. I can’t believe it’s simply a matter of bias or the word simply ‘not getting out.’ Good ideas don’t stay hidden long.” Yes there are smarter people. And they got the word out. Their called mutual fund companies, and they average less than 2 percent over the last few decades (you can search for dalbars study on mutual funds to find that). They take a profit from your money even if they are losing it, and they did a great job at getting the word out. Good ideas do stay hidden when mass marketing geniuses that are stealing your money continue to use your money to convince you to give it to them. It’s always going to be this way until people catch on. You want to talk about a scam? That’s a scam if I’ve ever heard of one.

    Don’t worry we’re almost done here.

    “All the signs and ads I see are advertising 0% APR car loans. Why bother dealing with an insurance policy when the car dealer will give you 0% right now?” Let me ask you this, would you rather have a 0 percent loan or a 5 percent loan? Umm… you really had to ask this question? Of course you take the 0 percent loan. If someone can convince you to take a 5 percent loan over a 0 percent loan then you may need to take some math, from a 1st grade teacher.

    “I don’t really finance much anyway, why do I need a “new, innovative” way to do so?” Ok, this might sting a little bit, but you might actually have to learn something about finances here. So I am assuming you mean that you pay cash? You really don’t see that as financing? That is the major problem here we are trying to solve. You think that because you pay cash you aren’t financing and that is why you have a poor man’s mentality.

    Coke did this exact same thing. They would take money from a bank and they would get charged interest, but then they would take money from themselves and not consider it a loan? Well they changed that pretty quickly and it made them extremely more efficient.

    You are the exact same way. Why is the bank’s money more important than your own? If you buy a car with cash you are losing out on ALL of the interest you could be earning on that money for the rest of your life. Not financing? Yes you are. You are stealing from your future.

    So, ok, bank on yourself or infinite banking isn’t a fix all. But it’s forcing you to see this obvious piece of the puzzle you are missing on. It’s forcing you to make your money compound and grow EVEN WHEN YOU USE IT. It’s not a magic pill, it’s showing you that your money has a cost. And if you can’t see that as a financial instructor then how can you expect to teach that to others online.

    People out there in the internet. Your money is valuable, extremely valuable. And when you spend it, you lose interest, a lifetime of interest. Everything you buy, whether credit, or with cash, is financed. With your money you are always either paying, losing, or earning interest. But interest is always there, there is no way to avoid it. It either works for you or against you.

    “Let’s say you want to take some money out of the policy and NOT pay it back. You still have to make the interest payments each year.” You can always liquidate money out of the policy, especially for retirement. You don’t have to pay money back that you liquidate. You can always take money out for retirement and up to a certain point not pay taxes.

    Now I’m not trying to be rude here I hope you don’t take this that way. And if you are truly trying to understand this concept then more power to you. You will find in the end that it’s not a magic pill, there is no free money, but the concepts here are extremely sound and in my opinion it rivals anything out there besides a 401k match. Up to the 401k match is hard to beat, but above and beyond that I don’t see any other investment that can take the risk of your death and put it on the shoulders of the life insurance company, grow with no taxes, transfer with no taxes, be accessed and still grow, guarantee you will never lose money, and offer you a way to plan your future without the ups and downs of the stock market.

    And last thing before I end this, and really the biggest thing here. Life insurance, it’s NOT your investment. It’s a savings vehicle. It’s meant for a place that is safe to save money. I pack as much money as I can into my own policies because of this one simple thing, and you are going to love this.

    You can ALWAYS make a better investment. What do I mean? Life insurance is only a hub for you to do everything that you do. But it makes you think about money in a much more intelligent way. With life insurance you can say…”Ok, my money is growing at 5 percent right now.” And this line of thought opens up a world of possibilities, here is why.

    If you have an opportunity to invest an investment earning 3 percent. Will you now take it? No, because you are earning 5.

    If you have an opportunity to invest in an investment earning 10 percent. Will you take it? Yes, because that is greater than 5. But you have ACCESSIBILITY in a life insurance policy to make any investment you want. But when you don’t have an investment, you know your money is growing.

    But if you have your money in a 401k and an investment comes along, you don’t even get to make that decision unless you have more capital. Mutual funds, stocks, bonds. All of these have to be liquidated in order to make this decision, or, you don’t even get to make that decision.

    And if you use your life insurance loan for an investment or business use, you get to write that loan off as a business expense, while your money, as we said before, is still growing inside your policy.

    So you have a policy growing at 5 percent. An investment growing at 10 percent, and you have a 5 percent loan you are paying on that is a write off as investment interest. Not a bad scenario.

    That’s why so many business owners and real estate investors use this.

    I’m not saying life insurance is a cure all or a magic pill once again. I’m just saying if you don’t see the benefits and don’t understand it properly you can’t make an educated decision. I will agree with you it is a bit complex, and because of its complexity it’s easy to make it look like a scam or like a magic pill.

    But in the end it just boils down to sensible, intelligent rules of money that, when put into your life properly, can really put your future into your own hands, and that is a huge piece of this that we really need in our country today.

  2. There is so much propaganda in that post im not sure i have the time to address it all but lets just knock out a little of it. First if you want to be mad about why whole life has a bad rap, be mad at your fellow agents and their insurance companies. They do not promote overfunding at all. They arent getting the word out like you pretend. Its probably less than 5% of policies that are overfunded and thats bc the industry time and time again has shown it cares more about itself then the clients. They just dont want to make less money and if most policies didnt fail then dividends would have to go further down since they use that money to prop dividends up. All independent stats from LIMRA and society of actuaries show that most policies lapse or fail. So your statements about people not losing a dime if invested in whole life instead of 401k is correct although its correct bc many (about 1/3) would have lost every dime if invested in whole life. Your statements on taxes and 401ks implies you dont understand taxes and the rates people pay from withdrawl of their 401ks. Almost all people have paid a lot less by using a 401k and in the end will have more money to spend. If you want to use a scare tactic about the future then why not look at the articles where it says the administration is considering taxing death benefits of insurance? I prefer neither scare tactic myself since i feel neither is likely to occur. These policies routinely break even longer than what you quoted. You need to be in excellent health and hope dividends dont go further down (which isnt likely). Its more like 8-10 years if being remotely realistic. Loans are not a guaranteed wash at all. Many policies crash bc of loans. In fact they make up a reasonable percent of the dividend other policy owners receive especially at this point with low interest rates making the return on these products lower and lower. The disability riders on these policies are horrible. They are total disability policies and almost never pay off which is also why they arent that expensive.

    All of these banking ideas have one thing in common, reduce the amount of the horrible basic whole life part to as much as possible. If you make the horrible part as little as possible then maybe it wont be so bad.

    There is only two reasons to get involved with with this junk. One is because you need a permanent death benefit and the other is because you want one and are willing to take the likey lower gain in order to have it and the security it provides you. If you dont have either need or desire then the rest is just a gimic. Since few people fall into the need category, the question is does one fall into the desire category. If so then definitely make sure its overfunded right up to the MEC limit. Make it a small policy that you easily pay yearly (to avoid the 7% fee that most people who put money into their 401k monthly would be forced into paying and thus probably never beat inflation in the long run), take your loans out late in life to reduce the risks of low dividends and questionable loan rates on the policy and leave the difference to your heirs. Keep in mind that at the moment policies are likely to under perform current illustrations and definitely under perform any historic numbers the agent gives you. A good guess is about 5% tax free return on the death benefit with the current direction of dividends but noboby will actually know unless you can predict interest rates over the next 40-50 years. The cash value will be substantially less of a return which is why you need to be sure you never have to surrender te darn thing and then to boot it would be taxed as income and not the better long term capital gains rate.

  3. Surprised it took 6 days for the first Bank on yourself salesman to show up! There’ll be plenty more as the weeks and months go by, and that’s fine.

    Regarding the MEC comments, there certainly are a few people who have been surprised to see their policies become MECs. I agree it should never happen, but sometimes (admittedly probably rarely) it does. A quick internet search reveals a handful of people.

    Disability riders cost money, whether it is itemized out or not. If you have one, you earn less than you otherwise would. Plus it brings up all the issues with disability insurance- will the company agree with you and your doctor that you are disabled? I am glad to see you admit that the policy CAN FAIL if you are unable (or don’t want to) to continue to pay premiums. It’s a real risk that real people run into.

    It’s clear to me you do not understand the difference between marginal tax rates and effective tax rates. I save money in my 401K at 38% and anticipate pulling it out in the 10-15% range. I’ve explained this elsewhere, but it’s surprisingly poorly understood. So LOL all you like about it, but do try to understand it. This link may help:


    What’s better than tax-free growth on money that’s already been taxed? How about tax-free growth on money that is taxed at less than it otherwise would be?

    That is the reason you don’t want to do BOY instead of a 401K, despite all the hype.

    The reason people are unable to retire is because they pay too much in investment expenses, buy high and sell low, and undersave. It has nothing to do with stock and bond returns. Sure, we had a couple of bear markets there, but you have to plan on those happening from time to time during your investment career. People who undersaved because they expected 1990s like returns to continue reap what they sow. The solution isn’t to buy whole life insurance instead.

    You have money in a 401K and an “investment” comes along? You can invest in most investments through a 401K- stocks, bonds, CDs, gold, commodities, even real estate. That’s a silly argument. Yes, if you’re making a guaranteed 5% you don’t want to switch investments into a guaranteed 3%. It doesn’t take a life insurance policy to know that’s not a good move.

    There’s a minimum on investment interest you can write off. I believe it’s 2% of income. That’s a lot of investment interest and most people don’t get to it, so they can’t write that off. Interest for your business is an expense, and can be deducted whether you borrow from your life insurance policy or from the bank. Still not a good reason to buy one of these policies.

    You have a very creative definition of “finance.” I understand opportunity cost, but it still doesn’t make paying cash “financing.”

    I realize it’s hard to understand something when your livelihood depends on you not understanding it, but if you look closely, you’ll see that most people won’t benefit from BOY.

    • I’ve read several comments thus far on this thread and there are valuable points mentioned on both sides.

      The part that always bothers me is this idea that when I retire and start to draw funds from my RRSP(As i’m Canadian) similar to the 401K the only way a person pays 10-15% tax from my understanding is if they only withdrawal a some amount annually. I know for me personally my intention isn’t to live my whole life earning multipe six figures to retire one day and live off of 30K/yr so that my marginal tax bracket doesn’t get bumped up. I believe in diversification so I invest in long term buy and hold blue chip dividend paying stocks, I own several rental properties, I have a BOY system set up that I overfund that IMO is Bad ass because the cash available to me exceeded my premiums between year two and three and i’m using it move my mortgages over into my own banking system. For me its about creating generational wealth and ensuring my family is financially educated so they don’t have to live paycheck to paycheck like my parents/grandparent/extended family and friends. I agree that your BOY has to be funded correctly and I have a large policy so I’m able to leverage the overfunding PUA’s. I appreciate all the comments and at the end of the day its just knowledge sharing. Onwards & Upwards

      • Supersavers could run into issues where they actually have such huge tax-deferred accounts that they may be withdrawing a significant sum of money at higher rates than they saved when contributing it, but that will be a fairly unusual situation. I’m not as familiar with Canadian brackets, but for a US person I’m talking multiple millions in IRAs, not a few hundred thousand.

        I agree that a break-even of 2-3 years is pretty darn good for a whole life policy. Glad you’re happy with yours.

  4. I don’t work for or have any affiliation with Bank on Yourself.

    I’ve done interviews with numerous accountants and though your tax strategy ideology works good in theory a majority of people retire in higher tax brackets than they are in when they are younger and working. Good luck with that though. But for a majority of American’s you would do better to pay taxes now and not later, even if taxes stay the same. You are most likely not going to have many of the deductions you have now, and how many people make less money as they get older? Most people are making more money and have less deductions in their older ages.

    The reason people can’t or aren’t able to retire currently is because they lost money in the market and because they trusted their 401k to provide them with a retirement, that’s a huge portion of our society right now. They had the money saved. They had 100’s of thousands of dollars with only a few years to go and then all the sudden they get slapped in the face with huge losses that reduced their 401k’s by some even more than half of what they had.

    Things were much more stable in the past because employees were getting pensions from their companies which were normally funded in an annuity. Surprise surprise, a life insurance company product.

    It’s unfortunate that it takes major collapses and people losing massive amounts of money in the market in order to see the benefits of cash value life insurance. I’m not saying this is a cure all once again, but if you understand this concept you will see that it has some very good advantages.

    If you are paying 5 percent on a loan, and you are making 5 percent on those same dollars, and you can only write off 1 percent, that’s still a benefit. So what if there is a limit up to a certain amount most people won’t max out this write off. And if there is no write off, then still who cares?

    As far as Rex’s comments. Alot of whole life policies fail. This stems from talking heads telling everyone to get out of whole life (Dave Ramsey and others). People have been convinced that whole life is bad, and that will hurt them in the end.

    And you are right, the 401k saved alot of people alot of tax burden. People from the late 70’s and 80’s when the 401k came into play, they are benefiting huge off this because taxes were so high and now they are much lower. But good luck with that argument in the future. Once again, I don’t think taxes will go down anytime in the near future and I don’t think many people would argue with me. If anything, most people are assuming taxes will go up.

    Most people would find great benefits from using this system.

  5. Dave Ramsey has nothing to do with it. Whole life has been around for what 200 years. The stats remain the same before Dave Ramsey and will remain the same after he leaves this Earth. In fact, even though whole life has been around forever, not one single independent study shows it to be a good investment. If you can point to one then please do. I guess Dave Ramsey pays off those academic folks not to publish any, yet there is evidence for some insurance products such as SPIAs. Additionally, if most policies didnt fail, in the current interest rate environment not only would dividends probably disappear but companies probably couldnt even make good on their guarantees given the comissions they pay off early on and their other associated costs (and those guarantees returns are darn weak returns which likely dont beat inflation). The best analogy for doctors when it comes to whole life is that if i were a drug rep who said i have this great drug that has been around forever but still the only evidence that its worth a darn is evidence back on file at the drug company or the word of the drug rep then all doctors would know what to think of it. Think the same with whole life. If you have a need for a permanent death benefit then it does that although no lapse gUL is typically going to be cheaper for the same death benefit. Whole life gives you the ability to take out loans which is typically not an option with no lapse gUL since it is typically designed to have little CSV. If you want a death benefit, just realize that this costs money and if you live a normal lifespan compared to how you were rated then likely you would have done better elsewhere. There just arent any magical investments in this world. Not for me and not for he insurance company. With whole life they invest in bonds/treasuries over a very long time period but take out large fees on your return. The good news is the investment is pretty safe but the bad news is that as an investment inflation you will make it such that you have a lot less money to spend.

  6. “I don’t work for or have any affiliation with Bank on Yourself.”

    Your name links to a webpage where the infinite banking concept is marketed. Do you really believe there is a significant difference between the two marketing strategies? If so, please illuminate us.

    “I’ve done interviews with numerous accountants and though your tax strategy ideology works good in theory a majority of people retire in higher tax brackets than they are in when they are younger and working. Good luck with that though. But for a majority of American’s you would do better to pay taxes now and not later, even if taxes stay the same. You are most likely not going to have many of the deductions you have now, and how many people make less money as they get older? Most people are making more money and have less deductions in their older ages.”

    You’re wrong on this point. Most people have income in retirement FAR less than their working income. I’ve calculated I need ~ 30% of my current income to retire quite comfortably. Even standard “financial planner theory” is that you need 60-70% of your current income to have the same lifestyle in retirement. Yes, you lose a few deductions (although there are a few you pick up), but that doesn’t make up for the significant decrease in income. The vast majority of Americans will do better getting a tax deduction during peak earnings years, then withdrawing that money during years in which they earn less NO MATTER WHAT HAPPENS TO TAX BRACKETS. Very few people will put money into 401Ks at 35% and then take a significant amount out at 39.6% (to use figures currently in Congressional discussion). But even if that was your concern, the investor can often use a Roth IRA or Roth 401K/403B. No taxes ever again and you don’t have to “borrow” from the policy to get your money.

    “The reason people can’t or aren’t able to retire currently is because they lost money in the market and because they trusted their 401k to provide them with a retirement, that’s a huge portion of our society right now. They had the money saved. They had 100′s of thousands of dollars with only a few years to go and then all the sudden they get slapped in the face with huge losses that reduced their 401k’s by some even more than half of what they had.”

    B.S. I lost 31% in 2008 and gained 33% in 2009. What did I have to do to achieve that 33%? Nothing. Just not sell out at the bottom. All those thousands of dollars I lost came right back. That was a fairly aggressive 75/25 portfolio. My parents 50/50 portfolio lost 18% then gained back 22%. To lose more than half your money in 2008 required an exceedingly risky portfolio. It’s not exactly intelligent to hold an exceedingly risky portfolio just a few years before retirement. If that’s your argument then I’ll concede that yes, financial idiots might do better in a whole life policy with 2-5% returns than they will buying high and selling low in the stock market.

    “Things were much more stable in the past because employees were getting pensions from their companies which were normally funded in an annuity. Surprise surprise, a life insurance company product.”

    Let’s not get too off-topic here. Pension funds are usually invested in stocks and bonds, although often times people get the choice to take a lump sum or annuitize it at retirement. I’m not saying there are no decent insurance products. SPIAs can be very helpful for many people. I plan to buy some myself at an appropriate time. It has little to do with our current discussion of whole life insurance/infinite banking.

    “It’s unfortunate that it takes major collapses and people losing massive amounts of money in the market in order to see the benefits of cash value life insurance. I’m not saying this is a cure all once again, but if you understand this concept you will see that it has some very good advantages.”

    Yes, it has good advantages. Unfortunately it also has significant disadvantages, which, most of the time, for the majority of people, outweigh the advantages.

    “If you are paying 5 percent on a loan, and you are making 5 percent on those same dollars, and you can only write off 1 percent, that’s still a benefit. So what if there is a limit up to a certain amount most people won’t max out this write off. And if there is no write off, then still who cares?”

    I’m not sure you understand how this works, which concerns me since you sell this stuff for a living. Let me walk you through it, because there are lots of others who don’t get it either. Go to Schedule A. Line 23 is where you deduct investment expenses like margin interest. On lines 26-28, you multiply your adjustable gross income by 2%. Any amount less than this is non-deductible. So for a doctor making $200K, you have to spend $4K on interest before you can deduct ANY of it. And even then, you can only deduct hte amount over $4K. So you can have a pretty big loan (at 5% that would be something like $80K borrowed for a year) before any of it becomes deductible. And if you’re taking the standard deduction, none of it will ever be deductible.

    “As far as Rex’s comments. Alot of whole life policies fail. This stems from talking heads telling everyone to get out of whole life (Dave Ramsey and others). People have been convinced that whole life is bad, and that will hurt them in the end.”

    Not necessarily. Some of them get out when they see their statements every year and realize that they still have less than they put into the policy after 5 or 10 years. That’s pretty depressing news as an investor who had a whole life policy marketed to them as some great investment. There are a lot of reasons for this, but I’m convinced that’s a big reason why people bail. The other big reason is they realize they have better opportunities for investments, and choose those instead with their limited investment funds.

    “And you are right, the 401k saved alot of people alot of tax burden. People from the late 70′s and 80′s when the 401k came into play, they are benefiting huge off this because taxes were so high and now they are much lower. But good luck with that argument in the future. Once again, I don’t think taxes will go down anytime in the near future and I don’t think many people would argue with me. If anything, most people are assuming taxes will go up.”

    Again, marginal vs effective tax rates is the key concept you’re missing. Yes, it’s nice to see lower marginal rates, but that isn’t the reason why putting money into tax-deferred retirement accounts during your peak earning years is such a good reason. It’s that you save money at 38%+ and then spend it at 0-25%. It’s the tax arbitrage that helps (plus the lack of tax drag on growth over the years.)

    “Most people would find great benefits from using this system.”

    I would say a few people would find marginal benefits from using this system. I doubt I’ll convince you, so we’ll have to agree to disagree/disagree without being disagreeable, but I think the discussion is beneficial to people who will read this later while trying to decide whether to do their own banking through a whole life policy.

  7. I’d like to stick my toe in here for a second. I do so with significant hesitation, however, because I have followed this blog and enjoy the insightful content and I don’t want to demean the work Jim is doing here, I simply want to share the knowledge that I have on the subject.

    Let me tell you about my experience with cash value life insurance. First of all I set out to determine whether or not life insurance could be an advantageous place to store extra money as opposed to a savings account, checking account, or other incredibly low yield vehicle. And quite frankly the stock market – no matter how you invest in it – is a huge gamble, one that I don’t have the stomach for so I wanted safe, risk free, moderate growth.

    Now I did this for a reason, I didnt’ want to learn if it was good to use as a “banking” vehicle I just wanted to know at its core if it was a solid place to park money.

    After hours and hours of my own research and then hours and hours on the phone with and in front of some very veteran and skilled insurance professionals I was introduced to something I never knew existed.

    I was told for as long as I can remember that whole life was terrible and that anyone who sells it is an idiot and they’re trying to steal your money. As mentioned above I like to find out for myself, hence the time spent researching.

    So what did I discover? Well, most of what I found has already been pointed out: it offers some incredibly favorable tax advantages, I can borrow against my cash value whenever I want and pay it back on my terms. (side note – I discovered that a policy loan is received in a matter of days, 2-3 to be exact. it’s a simple process of faxing the ins. company a form and them mailing the check). most everything else I discovered has been pointed out here.

    some things I found out that aren’t very clear based on this thread: (keep in mind i’ve spent some serious time on the phone with ins. companies because I wanted to get it from the horse’s mouth).
    1. a policy becoming a mec is much more difficult than stated….as soon as the ins. company receives money that will turn a policy into a mec they communicate that with the insured, and in many cases make them sign a form, stating that they still want to submit that money.
    2. everyone keeps talking about this “break even” point – I’ve had illustrations drawn up for me that show my cash value equaling my out of pocket cost in 4-5 years. Not to mention that in year 1 I have about 90% of the premium I’ve put in available in cash value…guaranteed. When I saw that my jaw dropped.

    One thing that I can’t understand is that many people compare a WL policy to a savings account….that savings account has no death benefit attached to it. So this whole ‘break even’ comparison is irrelevant to me….If I can have 90% of my cash value (again this was a guaranteed amount) available in year 1 AND I have X amount of dollars in death benefit – I’m okay with that.

    3. I think it was mentioned previously but there is something called a reduced paid up policy. This method debunks the myth that premiums must be paid until age 100. From what I understand, and i could be wrong here, you can reduce pay up a policy anytime after year 7. That means that at anytime after year 7 I can eliminate my out of pocket premium expense and my cash value remains and continues to earn the same dividends it would have anyway. I can still borrow against my cash and I can also withdraw it at my will.

    Anyway, this is getting long but I was just like most people who thought thought that any form of permanent ins. was expensive and not worth my time. Now after having spent a lot of time (probably way too much) researching I have come to understand it and see it as a viable option. Not to mention that the more I dove into it and spoke with others I found that the wealthier the person the more cash value life insurance plays a role in the their overall financial plan.

    a quick note on the whole “banking” idea – this is how I simplify it: I have access to money at 5%, if I can find cheaper money elsewhere (which right now isn’t that tough) then I use the cheaper source. Back in the late 70s ans 80s it was cheaper to borrow from a policy than get a loan from a bank so it made sense to borrow from the policy.

    I agree with the fact that you should be able to explain something in a couple minutes – so let me make an attempt in only a few sentences: Life insurance is the only place to offer all the advantages it does (taxes, creditor proof, easy transfer at death, no risk, control, etc.). If I used it, I would use it as a ‘storehouse’ for my money until I a)needed it for large purchase and couldn’t get cheaper money elsewhere or b) had an investment opportunity that I wanted to get involved in.

    Again, i spent a lot of time looking into this and these are a few of the things I found out (i feel like I could talk for hours) but who knows maybe someone out there knows more than me.

  8. woah! had comment come in while I was writing mine…good points by the author, but one thing to point out and many people make this same mistake…

    “I lost 31% in 2008 and gained 33% in 2009. What did I have to do to achieve that 33%? Nothing”

    let’s look: if I have 100k in an account and I lose 31% I’ve lost 31,000 dollars….so my account balance is $69,000. the next year you earned 33% but you only earned it on 69k so your balance at the end of year 2 is $91,770.

    Granted that’s not losing half of your account but all the ups and downs of the market can have real effect on outcomes. thats why i learned to never rely on the percentages thrown at me in an annual statement. You have to look at what really happens….

    just a thought…hope my math is right :)

  9. Liz

    Always glad when someone is happy with their purchase. Also typically a policy owned for as long as you have had yours is almost always better to keep then to surrender. You need to realize the returns on whole life were a lot different back then. Dividends have been decreasing since then. Like with all products there can be a good time to buy them if comparing to todays investments but none of us have a time machine. I would love to have purchased Apple when it was 20 bucks and then sold it when it was 700. Unfortunately that isnt a strategy. Hopefully you also understand that if one choses to convert a policy to paid up and takes out loans that the policy can still crash from the weight of those loans. While i didnt check your math, you are right that relying on percentages can be deceiving and it is why one needs to be careful about averages given by stock pickers or anyone else. As an easier example. I could invest 100k and have it lose half its value to 50k (50% loss) and then have the money double back to 100k (100% gain). If i average those numbers then i could pretend the 25% average gain was something more than breaking even. Thats not even factoring inflation into the equation. The only reason why wealthier could equate to more use of whole life is bc it isnt about investing or growing your money at that point. Its about just preserving what you got. There is risk in these products, it just isnt market risk. A guarantee is only as good as the company’s ability to make good on it. Fortunately the low risk investing of bonds/treasuries combined with huge lapse rates make it very safe. If it wasnt for the lapse rates, there would be a problem just like there now is with long term care insurance. If you have followed the other posts on whole life, you know i feel the creditor protection is very weak but state dependent. Again im glad you are happy with your purchase.

  10. Your math is absolutely right Liz- a 33% gain does not completely wipe out a 31% loss.

    I dislike the argument that “it’s a savings account with a death benefit” because you only get one or the other, not both, as I wrote about a week or so ago. And you’re probably paying too much for the death benefit. Mixing a need for permanent insurance (which you can get with a guaranteed universal life) with a saving/investing account almost guarantees you won’t get the best of both worlds.

    The only way to get anywhere near 90% of your cash value after a year is to buy paid up additions right up front. A typical whole life policy (I have an illustration in front of me for a 30 year old male Metlife Promise Whole Life 120) isn’t anywhere near that. This one shows that you would pay $8230 per year and after one year would have $1000 in cash value. After 10 years ($82,300 in premiums) you have $69K in cash value. The only way to get that % up higher is to put more cash in. A smaller percentage of the paid up additions goes toward the policy costs, so it goes toward your cash value. As Rex mentioned above, this is how you minimize the bad parts of a whole life policy.

    The reason the “very wealthy” are more likely to have these policies is three-fold: First, they can’t save as much as they’d like to save in tax-advantaged vehicles like Roth IRAs and 401Ks. Second they actually have enough that the estate tax becomes an issue ($10 Million for a couple under current law.) Third, they have less need to take risk than most Americans. They simply do not need a high return on their money because they already have “enough.” None of these apply to the vast majority of Americans, including physicians. Emulating the “very wealthy” in this regard is not particularly intelligent.

    Just for the record, I’m not 100% against having a whole life policy. But you should have a realistic view of what it’s going to do for you (2-5% nominal returns over the very long term) and it should be a fairly small part of your portfolio. And you certainly shouldn’t be taking out a home equity loan or skipping 401K contributions to fund it.

  11. gentlemen, thank you for your responses. Rex, just to be clear I am still on the fence and haven’t decided one way or the other. When you say there is risk involved, how do you figure? I know there is such thing as a guaranty association that is something of a safety net if an insurance company ever goes under….but with the companies we’re talking about that seems highly unlikely – all of which have been around for over 150 years.

    white coat, I get where you’re coming from but I can’t determine whether or not your for or against UL – anyway, to me that seems like exactly what you’re saying not to do – it’s a savings/investment account mixed with life insurance. I spent a little time looking at UL and holy smokes! talk about confusing…..that is the most complex product I have every seen – not to mention that I haven’t seen too many illustrations that don’t show the guaranteed column lapsing at some point.

    About the 90% cash in the first year – i’m looking at mass mutual HECV (high, early cash value) policy right now that shows me a little over 90% of the premium outlay available in the first year. Mass mutual is one of the oldest and most recognized companies I know of. I thought for sure it would be a MEC but it isn’t

    last thing, I’m okay with your first two reasons that the wealthy have more whole life but the third reason pinpoints what I think is a fundamental flaw in America’s financial education. That flaw is that the average person needs to take risk in order to achieve their goals.

    we are told by the media and talking heads that the only way to get wealthy is to invest in the mythical 12% mutual fund. Now, I haven’t run any numbers on this (may be worth your time for a post) but I would venture to guess that if you took two 25 year olds and sent them down two different paths – 1 did it the “traditional way” and threw money at the market via IRA/401k/etc. and the other put it in something that grew 5% year in and year out without losses the one who rode the roller coaster would come out the same or worse as the person who grew steadily without any losses. It goes back to my previous comment about the losses have much more of an affect on returns than anything else.

    I’m a firm believer that by avoiding losses I will do much better than the person who ebbs and flows up and down. With that belief in mind, let me ask you both, where can I get what I’m looking for?

    thanks again for a quality conversation

  12. A few comments liz-

    First, the truth is that most people need to take significant risk to reach their goals. 0-2% real returns simply aren’t going to be adequate (and that’s what you get long term with a typical whole life policy). Assume you want to live on 60% of your salary in retirement. Assume you make 1% real. Assume a 30 year career. What percentage of your salary do you have to save each year? 43%. That’s far more than most people are able/willing to save. Actually, if you continue to only get 1% real in retirement, you probably need more as you’re not going to be able to maintain a 4% adjusted to inflation safe withdrawal rate. Now if you can get 5% real during your career and 4% real in retirement, then you only need to save 21.5% of your salary each year. While still high, at least it’s doable. Returns matter and most people are going to have to take risk to meet their goals. It might be stock market risk, or real estate risk, or some other type of similar risk. But just stuffing 100% of your retirement money into CDs, bonds, or whole life insurance isn’t going to get you where you want to be unless you’re saving A LOT of money. Low returns can only be made up for in three ways- work longer, spend less in retirement, or save more.

    Second, remember that 2-5% nominal returns on whole life are only over the long term. You don’t get those returns early on. You cannot compare exactly the dividend rate on an insurance policy to the return on an investment because not all the money you put in the policy goes to the cash value, especially if you’re paying monthly like most do.

    Third, I’m not necessarily for or against UL or WL. If you want a guaranteed permanent death benefit and don’t care about cash value, guaranteed universal life (not complicated at all- you pay one price every year (just like level term) until you die (not like term.)) It costs more than term but less than whole life. Whole life is okay for a small portion of your portfolio if you’re okay holding it for a long, long time and are okay with nominal returns of 2-5%. What I am against is the marketing that causes people to buy them inappropriately or to buy an inappropriate amount of them. As Rex notes, only something like 8% of these things are held for the long-term. That’s totally unacceptable. If salesmen/advisers were doing their job appropriately that number ought to be above 75%.

    Fourth, remember that a “high early cash value” policy doesn’t necessarily have the best long term returns. As I understand it (and I’m sure someone will correct me if I’m wrong) this is not the same as getting a more standard policy and buying the maximal paid up additions.

    Last, and this bothers me a great deal, is that I continually have people show up here not understanding exactly what they bought with these policies. You’re far more educated about it than most, and you’re still learning about them. That level of complexity is NEVER good for the consumer. Much like a loaded mutual fund or a military “scholarship” for medical school, once people really understand the product, it turns out few of them actually want it. I don’t have to be anti-loads, anti-military, or anti-whole life…..I can be totally neutral and explain how they work, what can go wrong etc and most people choose not to “buy” them. That’s just the way it is. Most people who understand these things don’t perceive them to be a good deal.

  13. Let me review the state guaranty assoc for you. These products are NOT backed by either the state or federal government. The state guaranty assoc is an organization that all insurance companies have to belong to if they want to sell in a particular state. Its is unfunded. Its an agreement that other insurance companies will do their best to make good on the guaranties of a policy if another company goes under up to the limits of 100k of cash value and 300k of death benefit (actual limits vary slightly state by state) but everything above this is not “protected”. The funny thing is that it actually helps people who pick small weak companies that offer better rates. In isolated small failures it seems to have worked well. For a failure of a really big company, it wouldnt work as well and for any systemic problems it probably wouldnt do much good at all since then nobody has the ability to bail you out. Agents are typically forbidden to talk about it since the weak companies could just say come get our better rates for a small policy and dont worry bc if we fail since then a bigger company will take over and they still have to meet our guaranties. Obviously the bigger and more powerful companies dont want that happening which is why agents arent allowed to talk much about it. Lets also review why the model so far has such a long track record. Insurance companies buy treasuires and bonds. So far those products have been pretty darn stable over a long time period and have had decent returns. Add in that most policies lapse or fail (i believe its more like 18% kept until death) and it would be practically criminal for them not to make tons of money and still make good on the guaranties. Fast forward to today with a low interest rate environment that appears will last at least a few years where they cant replenish their bonds/treasuries with new ones of the same yield and you can see why dividends continue to falll year after year. If the lapse rates also decrease (meaning that more people keep these policies in force) then this could be a real problem for these companies. Its the main reasons why long term care insurance is taking a huge hit with multiple companies leaving the business and most requiring huge increases on their clients. Now i dont personally think these companies will go under especially the strong ones. What could easily happen is that dividends continue to fall and this has a big impact on your return. At the moment i wouldnt even be surprised if lapse rates are improving but this actually is going to further hurt dividends. With time the issue will correct itself since people will see their policies perform worse than expected and they will get out at some point. A guaranty is only as good as the company’s word that they can make good on the promise. Nothing more. Early high cash value policies are definitely better than standard vanilla whole life. Most agents dont present them just like most dont present overfunded policies. High cash value policies typically perform similar to standard policies over the long run similar to what WCI has demonstrated.

  14. WCI, I’m guaranteed to get 3% with life insurance and that’s just the guarantee – if the company performs like it has for the past 100+ years I’ll get between 5-7%. If I expected to get 0-2% this would not even be a conversation however performance has historically been better than that.

    Now the argument can be made that past performance is no indicator of future results but I would make the same argument for mutual funds – and from what I understand bonds have outrun stocks over the last 30 years.

    I couldn’t agree more than the bank on yourself folks are completely over the top when it comes to marketing – at least the gentleman earlier peeled back the layers and removed some fluff.

    regarding the HECV policy to standard with paid up additions – I have had multiple companies send me their “best policies” and the HECV from mass mutual typically beats everything both short term and long term.

    Rex, I knew the majority of what you said about the guaranty association, however I’m not ready and willing to put my full faith and trust with the FDIC – a quick bank run and I’m toast, right? I learned (and perhaps this is not true) that many of the banks were bailed out by insurance companies during the great depression – that speaks volumes to their safety and stability.

    I appreciate you guys trying to talk me out of this :) but I guess we’re back to the same question – I’m a firm believer that by avoiding losses I will do much better than the person who ebbs and flows up and down. With that belief in mind, let me ask you both, where can I get what I’m looking for?

    I’ve never met or talked to someone that got rich from investing in mutual funds, the same holds true for life insurance. But I’ve talked to plenty of people that have lost hundreds of thousands of dollars in mutual funds – the same is not true for life insurance.

    One last thing – only 1% of term insurance actually pays out a death claim. Talk about a cash cow for the insurance companies! I have a feeling that if more ins. agents were versed in whole life the lapse rate would decrease by a ton – the reduced paid up option completely eliminate premiums – it’s the perfect solution for job loss, retirement, financial hardship but I’m afraid many agents and their clients are unaware of the option.

  15. You must not have talked to many people about permanent life insurance then. Almost 1/3 lose practically every dime. The stats pretty much show that people have lost more as a percent on permanent policies then any decent mutual fund plan. A low cost index approach has way better evidence for the long run period. Only people who lose a ton are ones who do things which arent wise like sell low or are excessively aggressive. Sadly they are the same folks who will make the mistake of buying whole life now only to surrender in a few years. Bottom line is a straw man argument isnt going to cut it.

    You cant ask for magic. There is no magic in this world. If you want returns then you need the ebb and flow as you put it. You dont understand all the ramifications of paid up status. It is based on the current cash surrender value. Since few policies are setup with either high cash flow or PUAs, it wont work until much much later. Also if the lapse rates were zero then the company will go under. The model doesnt work without lapse rates being what they are and many policies having little CSV for them to give back. You wouldnt be able to even get the guarante which is 3% death benefit. When you factor inflation, that isnt much money for most people. For the people who just want to conserve what they got then its fine. You seem to forget what the insurance company needs to do with the money you give it. Its funny that you have little faith in FDIC since that is backed by the US govt. If the US govt cant back that then the treasuries arent worth much and in turn life insurance companies arent worth anything. You should have tons of faith in the US govt and bonds if you like life insurance.

    By the way, SBLI has a policy with guaranteed csv greater than premiums paid after 1 year if you are in excellent health and it is NOT a MEC. No overfunding or PUAs are allowed. If current illustrations are near correct then over the long haul it doesnt perform any better than any other good policy in fact slightly worse.

  16. I hear you rex, and trust I’m not here to get in a shouting match. It seems to me over the course of this conversation that the opposition has gone from “Run away as fast as you can!” to “if you want to protect what you have it’s a good option.”

    I think I made that fairly clear – I want to protect what I have and what I will have. It sounds to me like the numbers you are telling me are based on traditional whole life insurance….which I don’t care about – I’m looking at a policy that is structured for cash value not for death benefit.

    I understand your argument about reduced paid up status but you need to understand that I don’t care that “few policies are setup with either high cash flow or PUAs” because if I purchased a policy it would be set up with very high cash value. What that means to me is that I’m “breaking even” in year 5 or 6 which means that I can reduce pay up and let the thing sit and steadily grow for me without ever having another dime required from me for premium. 7 years is not a long time….for me at least…it may be for some but from an investment standpoint 7 years doens’t qualify as “much later.”

    This is great! don’t get me wrong I’m really enjoying this because you both seem extremely knowledgeable and we’re getting way down to the nitty gritty.

    so what’s left? the whole FDIC vs safety nets of life insurance policies is not the issue for me – I’m just as comfortable putting money with a life insurance company as I am with any bank if not more so. I can structure a policy “correctly” (in my eyes) and be breaking even very early and have the ability to reduce pay up anytime I want after year 7.

    I’m not sure I agree 100% with your statement: “If you want returns then you need the ebb and flow.” I can get returns without that ebb and flow but they will be moderate – perhaps i’m fine with that because I loathe the thought of losing money and we’ve already looked at numbers showing how detrimental losses can be.

    Maybe I’m the only person in existence that is looking for a better place to store my money…regardless the question remains, where can I get what I’m looking for?

  17. No that isnt correct. The reason there is confusion is bc you keep changing between what you should do and what most should do. You seem to think that most people would do well with early high cash value whole life and everyone could get up to 7% return or could easily change to paid up and there would be little consequences. As i mentioned earlier i like it when someone is happy with their purchase. That doesnt mean most people should purchase any form of whole life. Most people should run away. They will either lose money flat out or lose purchasing power. The only good reason to purchase whole life in any form is if you need a permanent death benefit. An OK reason is if you want one but are willing to take the lower returns. Your return is the same as typical whole life over the long haul. It just changes how the commission is paid. Everyone wants a good place to store their money. I dont believe i can give you a realistic answer. You dont even have faith in FDIC but somehow have faith in insurance companies. Maybe you should look at equity indexed annuities. It might fit your desires but again not something id recommend to most.

  18. woah there!! I already said I’m not trying to pick a fight here – just looking for some quality info. Let me ask you this – has you or anyone you know ever been burned by whole life? I’m assuming the answer is yes and I would like to hear a few details.

    Here is my thought process – If i can do just as good as the average guy that throws money at mutual funds and I don’t have to worry about laying awake during down markets wondering if I’ll ever recover – I’m all for it.

    I get the impression that that is an impossible task…..am I right?

    I’m not trying to say that life insurance is the magic bullet for everyone, but for disciplined, conservative people like myself that don’t by into the mantra of “you’re young enough to take the risk” (my phrase goes like this – “i’m young enough to not have to take the risk”) I am still leaning toward the option.

    What I can’t figure out is why, rex, you are so opposed to this logic – and that is the reason for my question at the begin of this post.

    keepin it friendly :) -Liz

  19. Liz-

    You’ve never met someone who’s gotten rich off mutual funds? Seriously? Trot on over to the Bogleheads forum. Per the anonymous polls, about half of them are millionaires and most of them invest in nothing but index mutual funds. It certainly does work and should be the default investing selection for most people.

    Remember that dividends are not returns. Dividends apply only to the cash value already in the policy, not the new money you put in each year. So you can’t compare a 7% return on a mutual fund to a insurance policy paying 7% dividends. They’re not the same. The illustration I did a week or two ago shows that if you live to your life expectancy, you can expect returns of 2% guaranteed and 5% illustrated (that’s nominal-before inflation returns) out of a typical policy. Assuming 3% inflation over the long run and let’s give the company the benefit of the doubt and say you get 4% returns, that’s only 1% real. That means your money doubles once every 72 years. It takes a long time to get rich that way. I like the idea of “slow and steady” returns, but when your returns drop to a certain level, slow and steady just doesn’t cut it.

    Also, where have you gotten the idea that bonds have outperformed stocks over the last 30 years? The S&P 500 Index Fund at Vanguard has a return since inception (36 years) of 10.51% per year. The Total Bond Index has returns since inception (24 years) of 6.76%. Even if you just look at the last 10 years (this famous lost decade for US large cap stocks), it’s 6.24% vs 5.31%. 30 years at 10.51% gives you 19X your original investment. 30 years at 6.76% gives you only 7X your investment.

    I don’t see why you think term insurance is some cash cow. Yes, only 1% (or whatever it is) pay out. But when it pays out, it pays out big. Yes, they make profit, but it isn’t some ridiculous amount like 99%. Think about it. You don’t buy term insurance for a guaranteed payout anyway. You buy it for a just-in-case payout. If you’re that rare case, it pays out big. If you’re not, well, you had the peace of mind that if something bad had happened to you, your family would be taken care of. It certainly is no argument to buy a permanent policy.

    Gotta run to work, I’ll address more later.

  20. You must not be a physician. If you were, then you would have several if not tons of friends who are unhappy bc they were placed into a permanent policy. My details arent important to this post but one just needs to realize insurance agents dont have a fiducairy duty and the worst way to purchase permanent insurance is within a qualified plan regardless of what a financial advisor might say. I can list only 2 friends (out of many) who arent unhappy bc of permanent insurance. One has a need for a permanent death benefit so that was a good sale and that person isnt really in love with the product but still its a good sale. The other doesnt have any idea what they are doing and thats actually fine too.

    Ill put it to you this way, why isnt there any academic evidence for whole life as an investment even though its been around for 200 years? That should answer your question about the logic behind your statements. There are also like 200 years of data on what happens to people who purchase whole life and it isnt pretty. There is also the fact that there are no magical investments in this world for either insurance companies or individuals. On the other hand there is good evidence for index funds and using a SPIA later in life.

  21. I don’t disagree about the qualified plan portion – I never had any intention of purchasing whole life within a qualified plan. My details aren’t necessarily important either, just know that I have enough to worry money to want to do the best thing with it.

    I may have mentioned this before – the thread is getting way too long :) but I was shocked at a suze orman interview i read – she was asked what she does with her money and her reply was something like this “I have 1M in the stock market because if I lose it I don’t personally care the rest is in highly rated bonds”

    this bothers me because she does exactly the opposite of what she tells her listeners to do. Now you’ll argue that she is rich so doesn’t need to be fully investing in the stock market – my argument is this: Her advice is sound for everyone – put at risk what you can afford to lose, that is age old advice. If I can’t afford to lose my retirement portfolio why is it invested in mutual funds?

    anyway, somewhat of a tangent there, but back to your thoughts – I’ve talked with multiple people who bought whole life policies from an uncle, cousin, brother, etc. just because they felt bad and wanted to give them some business – 20,25,30 years later it turned out to be their best performing asset and these were regular plain vanilla policies. Very few people pay as much attention to their portfolios as they should and as a result end up suffering damaging losses that take years to make up for.

    white collar, i’m assuming you’re just agreeing with rex here, hence the silence?

    I think we’ve almost beaten this thing to death but I like to be thorough.

  22. No i wont argue that. Her advice isnt for everyone. Its for people who are in debt. Same is true of dave ramsey. Thats what she is good at and same with him. The rest of their advice is not so good although her and dave ramsey are both correct when they say avoid permanent insurance. They may not even understand it based on their comments ive seen but their conclusions are correct. Im sure you and your family has a very close association with the insurance industry. No doubt in my mind. It takes 16-17 years to make up for the mistake of just purchasing a vanilla whole life (more if you count inflation) much more than the damages from index funds.

  23. Thanks to everyone so far for a very cordial discussion. Unlike most threads on whole life I haven’t yet had to edit a single comment.

    Liz- Don’t worry, I haven’t gone away, but all these pesky people keep coming in with appendicitis and want me to do something about it….. :) There are some things more important than arguing about life insurance of course.

    Remember that Suze Orman has little need to take risk. She can live the rest of her life off much less than she already has. Unlike Suze, I have significant need to take risk, as do most Americans, including docs. If you can reach your goals with 1% real returns, more power to you. But I think putting a large portion of your portfolio into permanent life insurance is probably a mistake, as that is what you are likely to get.

  24. I guess we’ll all have to agree to disagree about the performance of cash value life insurance. I know for a fact that I will do better than 1% inside a life insurance policy. 4-6% return with a guaranteed death benefit as the cherry on top.

    It’s back to what i think is fundamentally wrong with America – we think that we can save a few dollars here and few dollars there and grow it to make us rich. With savings rates as bad as they are (about 5%) it’s no surprise you’re out looking for risky ways to turn a few thousand dollars a year into a million. I would rather discipline myself to save more and earn a moderate 4-6% in place of barely saving anything and trying to make it grow abnormally fast, which ultimately sends my risk through the roof.

    thanks again all!

  25. I hope that works out for you Liz. But make sure you actually run the return on your policy. For example, the guaranteed return in the illustration on the whole life policy I have in front of me from age 30 until retirement time (let’s say age 60), is not as good as you are imagining, and that’s on a 30 year investment!

    You pay $8230 per year and at age 60 you’re guaranteed to have $345K in cash value. What’s the return? 2.08%. That’s 1% less than historical inflation. If you only get the guaranteed return, you’re not actually making any money. You’re not even preserving what you have. You’re losing money! In fact, at age 50, when you’re guaranteed to have $190K, your guaranteed return is 1.35%. Even if you believe the insurance company’s illustrations (and in my experience returns nearly always lag the illustrations by a significant amount), you’re looking at 4.59% for 30 years and 3.55% for 20 years. Yes, 4-6% doesn’t sound too bad, and if you truly save enough, you can make up for it, but the fact remains that you are actually unlikely to have your money growing at that rate. If you expect 5% and save accordingly, you’re going to come up short. Take a look at your guarantees and the illustrations in your policy and you’ll find a similar result. If inflation is 3% a year, and your money grows at somewhere between 1.35% and 4.59%, in real (after-inflation) terms you’re going to have to save more than you ever spend in your entire life. Your portfolio will do none of the heavy lifting.

    The dividend rate IS NOT the same as your long-term return. It is absolutely crucial to understand this.

    • “For example, the guaranteed return in the illustration on the whole life policy I have in front of me from age 30 until retirement time (let’s say age 60), is not as good as you are imagining, and that’s on a 30 year investment!”

      Two things, based on the 100+ historical return many Life Insurance companies have paid a dividend every single year including 2 World Wars and the Great Depression and the Great Recession.

      Secondly after the capitalization period using your policy as a bank account and paying yourself the “going rate” back you would increase your ROR by a wide margin.

      Putting your policy to work can yield tremendous results, not only for purchases but for other investments that come along, like real estate, business ventures and even the stock market or precious metals.

      • The issue isn’t whether or not they pay a dividend. It’s the overall return on the policy. If you’re willing to accept a relatively low return on a long-term investment, then whole life may be for you. I’m not, so it’s not for me.

        The issue isn’t after the “capitalization period.” The issue IS the capitalization period.

        I don’t doubt that “putting your policy to work” is a good idea once you have the policy. I’m just very skeptical that buying the policy in the first place is a good idea. I’ve got a different way to buy investments that come along and don’t need an insurance policy to do that.

  26. My thoughts are you are an insurance agent.

    There is nothing independent nor appropriate in that propaganda. It’s filled with misdirection and you know it.

    Why not stop the act?

  27. Liz-

    Are you trolling us here? Fess up. What do you do for a living? I’ll give you the benefit of the doubt for now.

    At any rate, let’s look at this “actual study” of how some guy’s whole life policy performed from 1963 to 2012. He put in $527.22 every year for 49 years and ended up with cash value of $132,098. What’s the return? 5.57% Pretty much what I’ve been saying, no? Perhaps a little on the high side thanks to some pretty high interest rates and bond returns over that period. I certainly wouldn’t expect that return going forward. Probably more along the lines of 3-4%. And what was inflation in that time period? A little over 4.1% per year. So his real return was ~1.47%. In 5 decades he barely doubled his money on an after-inflation basis. That’s like a compound interest disaster.

    Now, let’s say this guy instead invested that $527.22 into the stock market. How would his returns look then? Let’s just use something simple, like the S&P 500 which is easily invested in with a simple index fund, at least since the mid 70s. From 1963 to 2012 the S&P 500 earned about 9.5% per year. Investing $527.22 at 9.5% per year for 49 years gives you a “cash value” of $512, 692, or about 4 times as much as the guy who “invested” in the whole life policy.

    The cited paper is not a particularly unbiased comparison. In order to make those whole life returns look good he has to compare them to a nearly risk-free investment like CDs AND subtract out 30% of the CD return (for taxes….you know) even though an intelligent investor would put CDs into a tax-protected account if at all possible, especially if he was in the 30% bracket. But what CDs does he pick? 6 month CDs? WTH? He’s comparing an investment that must be held your whole life to one that must be held for only 6 months? He could have at least used 30 year treasuries. (Vanguard’s long-term treasury fund has returned 8.6% over the last 26 years.) I also love how he assumes the guy who buys term and invests the rest keeps buying term into his retirement years. If you need life insurance after you’re retired, you probably shouldn’t buy term.

    • I’m slowly making my way through all of the entries, and trying to make sense of WL insurance. My initial thoughts after seeing the title of that “study” referenced by Liz were exactly in line with what Rex and WCI thought–WTF? All content aside, the layout of the paper looks exactly like every other “Buy Gold now before the world ends” papers I’ve come across. ;-) I’d imagine that anyone who has ever read real scientific papers at any point in their life would have expressed similar thoughts.

      Great thread.

  28. Liz-

    MassMutual’s High Early Cash Value Whole Life policy is often used in business situations in order for the premium paid to the insurance company (and normal lack of cash value) not to be a burden on the balance sheet of the business (employer) purchasing the policy.

    As a result, as WCI has stated, due to this structure, generally it will not provide a long-term return that is better compared to a normal Whole Life policy.

    For example, I ran a MassMutual Whole Life Legacy HECV policy in the best underwriting class for a male, age 30, in New York for $1,000,000. The annual premium, including a waiver of premium rider, is $10,180 ($9,910 for the death benefit and $270 for the WP rider.

    The guaranteed cash value in year 1 is $8,870. The IRR on Cash Value Report shows -12.87% in year 1. -0.96% in year 5, +0.73% in year 10, +2.14% in year 15 and +4.70% at age 65. The IRR remains under 5% until policy year 81 (the insured’s age of 111).

    So, Liz, while you state, “I’m guaranteed to get 3% with life insurance and that’s just the guarantee – if the company performs like it has for the past 100+ years I’ll get between 5-7%”, using the values from my illustration above, you would not get more than 5%.

    For that reason, if you do want to purchase whole life for a long term investment, the HECV policy may not be the one for you.

  29. what do you mean am I trolling you? You were the last one that I would have expected to throw out some derogatory term on this thread – after all it is your blog, and if you treat your readers like that for too long you won’t have any more.

    best of luck.

  30. I guess trolling wouldn’t be the right term, sock puppet would be. That’s when someone on the internet pretends to be something they’re not. For example an insurance agent who pretends to be an honest buyer of an insurance policy seeking more information on it. Agents tend to do this all the time on the Bogleheads forum, so I wouldn’t be surprised to see it happen here. Thus the reason I asked you about it. If you are as you project yourself then no reason to take any offense. As I mentioned above, I’ll give you the benefit of the doubt for now, but based on your response (feigning offense rather than simply saying “No I’m not an agent, I’m a dentist” or whatever) I’m starting to suspect Rex may be right.

    • [Ad hominem attack deleted. One more and you’ll be blocked. I’m losing patience for these over the years. Stick to discussing ideas rather than attacking individuals.]

  31. I think he will get more readers bc he clearly knows what he is talking about. He just smoked your propaganda and frankly was as kind as possible to you.

    He didn’t even mention of course that less than 20% get the death benefit and thus 80% get worse results with most losing tons of money.

    I wonder why there isn’t any independent evidence for whole life as an investment after what 200 years of the product being available? Actually I don’t wonder. I’m not going to pretend.

  32. wow, I have to be honest gentlemen this turned bad real fast. I asked what trolling was because I’ve never heard the term…..ever. Aside from a troll being one of those little dolls with crazy hair. Now you can understand why I was offended by being called one of those.

    I am in the medical arena, just not a doctor …..is that okay with you? Or am I not worthy to even set foot on your site? I’m an orthodontic assistant.

    Honestly I don’t know what you have to gain by calling my comments “propaganda” and wasting your time trying to talk me out of a vehicle that has been around for 200 years and into a vehicle that is less than 50 years old.

    You had my professional respect up until now. It’s starting to fade.

  33. I personally dont mind if you invest in whole life at all. You can do whatever you feel is appropriate and we have been very clear with good evidence why its a very poor investment. Now if you want to pretend its a good investment and that its good advice to others to purchase as an investment, then no im going to continue to point out all the actual facts. What you linked is propaganda and we didnt even touch on all the aspects of it out of kindness. Have you ever wondered why only such articles are written by people in the insurance business?

    You are correct a vehicle that has been around for 200 years but ZERO independent evidence that its a good investment.

  34. let me quote from my previous comments:
    “First of all I set out to determine whether or not life insurance could be an advantageous place to store extra money. ”

    “If I used it, I would use it as a ‘storehouse’ for my money until I a)needed it for large purchase and couldn’t get cheaper money elsewhere or b) had an investment opportunity that I wanted to get involved in.”

    this is my intention and always has been – find a storehouse for money.

  35. Its not advantageous for even that. If its a small amount of money then who cares but for big amounts its a horrible idea. You lose money on insurance costs in the short run (no matter how you structure it) and in the long run you lose money bc of inflation. Once purchased, it must be kept in force until death or any advantageous go away (thus you need to lose money based on inflation alone) and in fact you get hit with the higher income taxes (as opposed to capital gains) on any gains if you do surrender. In the end, you just lose money no matter how you slice it as any sort of investment. Its good for a permanent death benefit although no lapse gUL is cheaper for the same amount of death benefit . Few to none need this permanent death benefit and many once they actually understand the costs dont want it. You cant invest through an insurance company and do better than you would without insurance since that costs money. So store it there if you want but i wouldnt recommend putting any significant amounts there.

  36. Very well Liz. I’m pleased to see you’re not trolling or sock puppeting.

    This idea of a “storehouse” is just marketing. A mutual fund in a retirement account could also be called a storehouse, as could an Ibond, or a savings account. Investment, storehouse, it’s all the same. Some are riskier than others.

    Rex- You should qualify your comments that investing through the insurance company can’t do better than investing on your own. It’s possible to have a lower return and do better on an after-tax basis due to the tax advantages. It’s also possible you could benefit from other people surrendering their policies. The insurance company could pay you market returns plus a little bit of money from the people who surrendered and still make a decent profit. It isn’t that your main points aren’t correct, just that I think it’s less black and white than you make it sound.

    I just think it is kind of silly to tie your money up for decades for what is likely to be at best 1-2% real (and that’s assuming you’re one of the 8% or so that actually holds the policy long-term). Today 1-2% real sounds pretty good, but it wasn’t that long ago that I was making 5%+ nominal in a simple money market fund.

    But as Rex mentioned, if you understand what you’re getting into, and that’s what you want, more power to you. I have to admit though, most people who understand how these policies work and what your long-term returns are likely to be don’t invest in them. There’s a reason for that.

    • It went from 20% to 12% to 8% of people that keep their policies — why has it changed through-out the duration of this comment section. Again, where are your references?

      • It depends on the time period. In the first 10 years, about 2/3 of people who buy a whole life policy have surrendered it. As that stretches out to 20-30 years, the number gets larger. Eventually, it ends up around 8%. The “evidence” is the surrender rate as published by the Society of Actuaries. It’s well-known data to anyone knowledgeable about cash value life insurance, but if you need a reference, you can use this one:


        The chart you’ll be interested in is at the top of page 14. Or you can just read this post which includes a similar chart:


        • This chart just proves what us advisors who practice Infinite Banking explain in early interviews with clients. Traditional life insurance has been sold for a death benefit and is not a good place to save money. If you are going to practice Infinite Banking you need to maximize the amount of cash you can put into a policy by utilizing a Paid up Rider up to the limit of the Modified Endowment Contract. http://blog.fireyourbankertoday.com/the-modified-endowment-contract-mec-explained

          During my 10 years as a Financial Planner I have seen a lot of policies that have been sold by traditional life insurance agents that don’t include these riders and are definitely not being used as a financing source like what is taught by Becoming Your Own Banker.

          I encourage all agents who are practicing IBC to share your persistency rate (% of policies lapsed vs policies sold)on this thread.
          Mine for the last 5 years is 99.8%.

          This thread is about using the Infinite Banking Concept and not Whole Life insurance. I design policies for dental and medical professionals to be a funding source for their practices which means you must minimize the death benefit and maximize the cash. People enjoy keeping access to their money and using it. This is why we have such a low lapse rate vs typical policies sold where money sits and is never advised to be used.

          Buyers remorse is not exclusive to whole life insurance.

          • I agree with both your points. If you’re going to be your own banker/do infinite banking etc, you should use a policy designed to do that. That’s assumed that you actually did that when I discuss it. Also, pulling money out of 401(k)s during mid-career is dumb, although the article states that’s not necessarily because they regret the investment, but rather that they’d like to spend the cash or don’t want to or don’t know how to roll it over.

            However, self-reporting of persistency rates isn’t exactly reliable information. Every agent who has ever told me his seems to have one very close to 100%, yet the overall rates are remarkably low. What are the odds that I only run into the “good agents?” Forgive me for being skeptical.

  37. Given how their model pays so much out in commission early on let alone their ongoing costs in addition to the actual insurance component as well as the products they must invest in to make good on their gurantees, while possible its not likely probable. Also we have 200 years of evidence of them producing pretty poor returns. While they could change their model to pay the client better, that might lead to a lower lapse rate and eventually it would be self defeating. While the tax advantages help, its pretty hard to get over that hurdle.

  38. Agreed. It’s a tall hurdle. That’s why it takes decades to even get a reasonable return (and by reasonable, I mean keeping up with inflation, not besting it.)

  39. last thing, I promise :) …The DOW has increased by a measly 1% per year for the last 13 years …..looks like inflation left me in the dust. The S&P 500 is below where it was at the end of 1999 – inflation wins again.

    If I had been invested in the market for the last decade and had basically gained no ground financially how long do you think it would take me to catch up? My whole point is it’s never better to risk in hopes of returns. It’s far better to grow steadily and avoid losses which is exactly what happens inside of a life insurance policy (granted losses occur in the first 1-2 year, but I’ll give those up over the long run).

    And keep in mind my money is not “tied up for decades” I can at any time borrow against or withdraw my cash value. If I borrow against it my money continues to compound at the full amount – if I withdraw I give up the future compounding of the dollars that I’ve taken out.

    government sponsored plans are 100X more restrictive than an insurance policy – why should I be told when I how I can access my own savings….never has made sense to me.

    anyway, I appreciate the conversation and wish you both the best. (maybe we should reconvene in a decade or so and see where we’re all at)

  40. You forgot dividends and you cherry picked on purpose specific dates. This is actually a common insurance agent trick by the way. Not that your an agent or anything. Since you must keep a policy in force until death, you need to use much longer horizons.

    You also down played the costs of a loan. So many policies crash bc of loans.

    We don’t really need to get together in the distant future since we have 200 years of whole life evidence. I don’t need to cherry pick short periods of time.

  41. Liz, come on. Why pick the last 13 years? Why not use March 2000 to March 2009? That would serve your purposes so much better. I suppose I could respond by using data from 1995-2000. Or perhaps 2003-2007? Or perhaps 2009-2012? In fact, I could pretty much cherry-pick the first 10 or 20 years of any whole life policy and show pretty cruddy returns. Or alternatively, we could use the most complete data sets we can find for any given question instead of using ridiculously cherry-picked time periods.

    As long as you’re cherry-picking time periods, might as well cherry-pick an asset class. Why not use small value stocks instead of large growth ones? Or perhaps emerging market stocks? Nope, wouldn’t want to do that. It wouldn’t prove your point.

    And leaving out dividends? Really? What would happen if you left out the dividends for an insurance policy? That’s not going to turn out very well.

    100X more restrictive? Exaggerate much? What’s the restriction exactly? Well, if you withdraw the money before age 59 1/2 except for a handful of reasons (which are exactly the reasons you might need that money before age 59 1/2 incidentally), you pay a 10% penalty. That’s 100X more restrictive?

    I hope your strategy enables you to reach your financial goals. If you save enough money and live frugally enough, it just might. As Taylor Larimore likes to say, there are many roads to Dublin.

  42. Hi Rex – how are you? I see your opinions (nor the WCI’s opinions) have not changed regarding whole life with this post.

    >>>> “I wonder why there isn’t any independent evidence for whole life as an investment after what 200 years of the product being available? Actually I don’t wonder. I’m not going to pretend.”

    Here’s an interesting link for you:

    Yes, the study in the article about life insurance as an asset class where the portfolio with permanent life insurance outperformed the portfolio without life insurance and was less risky was commissioned by Guardian Life – one of those “evil” ogres promoting whole life. However, you’ll also notice there was research performed by Roger Ibbotson (from Yale – expert on asset allocation) where he found that life insurance as an asset class can act as an attractive hedge against the loss of “human capital”—or wages over a lifetime. “To hedge against such a loss due to mortality, people should have cash value life insurance, suggests a 2005 Yale International Center for Finance working paper, by Roger Ibbotson and others.”

    Unfortunately this doesn’t fit your paradigm, so I look forward to your disparaging comments.

    FYI – while I am licensed to sell life insurance, I’m not affiliated with Guardian Life.

  43. That’s an interesting use of the word hedge. Most would use the phrase “life insurance.” Hedge against mortality? Good grief. Once you retire, the human capital is gone, and the hedge against its loss is no longer needed.

    Let’s talk about the link.

    “Life insurance cash values don’t move in the same direction (as stocks or bonds) during a crisis.”

    Okay, that’s true. Stocks go down. High quality bonds go up. Life insurance does the same old same old 2-5% returns over the very long term (negative early on.)

    “Weber coauthored a white paper, commissioned by Guardian Life Insurance of America, New York, on considering life insurance as an asset class.”

    As you mentioned, this hardly counts as “independent evidence.” That’s like a study showing Viagra cures cancer commissioned by Pfizer.

    “The researchers looked at a 45 year-old male in good health with $500,000 invested in municipal bonds, and assumed the municipal bonds grew at a 4 percent annual rate. The investment was worth $2.9 million by the time the male was age 89.”

    Sounds like a strawman coming. As I mentioned previously, you can expect 2-5% (often 5% in the past) over the long term, like the 44 years mentioned, from a whole life insurance policy. If the bonds grew at 4%, then sure, a life insurance policy performing at 5% is going to beat them in the end. But what about after ten years. Oh wait…life insurance not looking so good. We also need to consider that 4% is pretty low historically for munis. Vanguard’s intermediate tax-exempt fund has returned 5.85% a year for the last 35 years. Why not use that number? Or perhaps the 7.01% returned by the high-yield tax-exempt fund. Hmmmmm…might not reach the same conclusion.

    “By splitting up the life insurance policies among whole life, universal life insurance and variable universal life insurance together, Weber adds, other research indicates a policyholder’s cash value and death benefits will keep pace with inflation.”

    Seriously? Variable life insurance? You mean by trying to invest some of your money in stocks you can keep pace with inflation? There’s a surprise. Why not cut out the 2%+ the insurance policy will eat out of that stock return. It’ll be a whole lot easier to keep up with inflation.

    “Previous research indicates that life insurance as an asset class can act as an attractive hedge against the loss of “human capital”—or wages over a lifetime. To hedge against such a loss due to mortality, people should have cash value life insurance, suggests a 2005 Yale International Center for Finance working paper, by Roger Ibbotson and others. “Human capital—even though it is not traded and highly illiquid—should be treated as part of the endowed wealth that must be protected, diversified and hedged,” Ibbotson says.”

    I can’t seem to find where Ibbotson says buy cash value life insurance. I see that he wrote a working paper, and that he suggests insurance should be purchased to protect the value of human capital. I can’t find a link to this working paper, and it seems the writer of this article may be implying something that isn’t there. Can you produce a link to Ibbotson’s actual paper?

    ““No broker-dealer would permit a registered representative to perform a sophisticated analysis because FINRA rules do not permit the projection of life insurance future returns,” said Richard Weber, principal with The Ethical Edge, Inc., and Pleasantville, CA.”

    Wow! I’m glad I’m not a broker-dealer so I can do it.

    “Miccolis, whose company has $700 million in assets under management, does not look at life insurance as an asset class, but as part of a long-term financial plan. It is used to provide for the family when the loved one is no longer around or to pay estimated estate taxes, he believes. “I’m not sure it makes sense to consider it an asset class,” he says. “An investment portfolio is there to work for you during your life time and to meet your financial needs and goals.””

    I have no idea how this Miccolis guy got into this article. It’s like this paragraph came from somewhere else. But he seems to know what he’s talking about unlike this Weber guy on the Guardian payroll.

    “Counters Weber: “Life insurance may deliver greater legacy and living values in conjunction with the investment portfolio—for a given risk tolerance and reward goal—than a portfolio without life insurance. Large amounts of life insurance should be purchased on the basis of risk and reward considerations.””

    That “may” in the first line is where the emphasis should be as should the “given (i.e. low) risk tolerance and reward (i.e. again, low) goal”. Then somehow in the last line of the article he makes a huge jump to “large amounts of life insurance should be purchased”? WTH? This article hardly makes a case for that bizarre conclusion.

    Come on Shrek, surely there’s something out there better than this. You could at least link to an actual study rather than some bizarre article about it. The link in the article goes to the Guardian website (there’s a surprise.) I hunted around a bit on it and found a link to the actual 109 page white paper (which incidentally doesn’t have Ibbotson’s name on the front of it- you did read the actual paper, right?):


    Since when is 109 pages a “paper” and not a “book” by the way?

    The methods section of this scientific paper was pretty hard to find. There is an awful lot of simple explanation of life insurance policies and very little “study” here as near as I can tell. The endnotes were pretty interesting, and the closest thing to a methods section I could find. They included a reference to Rich Dad, Poor Dad by Robert Kiyosaki (hard to take any paper seriously with that in it.) They also included a reference to Ibbotson’s asset allocation book (only because they wanted to quote the returns of the S&P 500 out of it.)

    Here’s my favorite part of the paper:

    “BTID strategies may make sense under the following conditions:
    • There is a quantifiable period of time for which life insurance is needed or desired, with a near-certainty that life insurance will not be required beyond that period … even if for just a few years beyond;
    • The “period of time” is 30 or fewer years;
    • The insurance buyer is age 45 or younger, allowing sufficient years to achieve an aggressive investment potential before a more conservative asset allocation
    is adopted and in an age range in which term insurance is relatively inexpensive;
    • The “difference” will, in fact, be invested with a reasonable amount of discipline both as to making the investment, as well as managing the allocation through the early “risk taking” years as well as the later “risk averse” years;
    • There is a budgetable difference. Term insurance fulfills an important role in providing needed or desired death benefit at low initial cost. If there are insufficient resources to provide lifetime insurance coverage with the appropriate lifetime (i.e., “permanent”) insurance product, then maintaining a suitable level of term insurance is the appropriate strategy (and presumably without a “difference” to invest).”

    Okay, I agree with that. Buy term and invest the difference seems to be the message of at least this section of the paper.

    Now, all that criticism aside, if someone wants to put 5% of their asset allocation into permanent life insurance and are already maxing out your 401K, backdoor Roth IRAs and other tax-protected investment accounts? Fine, knock yourself out. There are lots of dumber things you could do with your money. But these aren’t the folks who are emailing me every week as they realize they were duped by an unscrupulous agent who sold them a permanent life insurance policy inappropriately. I’ve gotten exactly one email from someone who is doing exactly this, studied it for a long time, and is reasonably happy with it. But he’s maxing out everything else and it’s a small chunk of his portfolio and he’s done all the other things right to maximize his return (pay annually, paid up additions etc, prepared to stick with it for decades). That’s not the case for most of the people I talk to about their whole life policy. They’re mostly like the 30 year old who recently posted in the other thread. $100K in income, no assets, can’t max out 401Ks or Roth IRAs, needs a ton of term to protect his family and “hedge against the loss of human capital”, and is being sold a relatively small short-term, convertible term policy combined with a whole life policy by a NorthWestern Mutual agent “friend”. Totally inappropriate.

    Now fess up Shrek, did you really read all 109 pages of this paper you couldn’t even post a link to? I doubt it. I think you just read this “summary” article about the paper by Mr. Lavine which presents what appear to me to be unfounded conclusions. If there’s something in the white paper you want to discuss, let’s do so, but cite the actual pages of the actual paper you want to discuss, and we can all read those.

  44. Oh im fine thank you. There is no reason for either of us to change our views on whole life since the evidence against it as an investment is overwhelming (against it i might add).

    WCI, yes that is the best he could come up with. After 200 years, this is as good as evidence as whole life has going for it. Is there a single medication that we would prescribe with such weak evidence….Nope…Of course since most policies lapse, few would even get this benefit. Even a seasoned agent cant come up with any reasonable independent evidence for it as an investment.

    One could say that this says volumes but more simply put it says stay away from whole life as an investment. If you have a need for a permanent death benefit then either whole life or no lapse gUL is fine. If you live a normal life span, you lost money compared to reasonable alternatives but you received insurance in case you didnt live so long. If one wants to use a very very small amount for overfunded whole life then no big deal. Its not a great decision but there are worse things one could do. Putting a lot of money into whole life without a need for a permanent death benefit is rarely going to be a good move.

  45. Sorry, WCI – you’re right. I didn’t have a lot of time with the holidays and some other priorities, but I knew about the paper (regards to Ibbotson, specifically). I wasn’t impressed with the article either (for the same points you mentioned), but I do have a ton of respect for Ibbotson and the economic research he’s performed over the years (Nobel-prize winning!).

    Let me see what I can dig up, so we can have a more thoughtful discussion moving forward.

  46. This is my first time responding to a Blog. I hope my terminology is correct. A friend of mine asked me to review this site. He wanted my input. I find it very interesting. I have found this site very informative. I wish it was in existence when i came out of residence.

    I do not pretend to be as knowledgeable as the people on this site. I just have 18+ years of being in the game. I do not have all the right answers and in the end (my end, not this conversation) i may be wrong. But i do not think so.

    I am a practicing podiatrist and have been so now for almost 19 years. I make a good living, in the range you stated as average for a Doc. (other site). I came out of school and residence almost 190K in debt and had a 140K practice buy-in along with a new wife, new house and three children all in a 6-7 year period.

    I am vested in my companies 401K (no longer max funding, but did so for about ten years), I have rental properties (not the best investment return at this time), undeveloped land investments, some stocks (still down despite the recent jump) and i have multiple participating, non-direct recognition, whole life insurance policies with mutual companies. And i have convertible term policies. It took me almost 2 years of reading, talking to people “in the know” and praying before i bought my first policy. I am glad that i did. In the beginning i had the standard whole life policy and growth was slow and payments sometimes painful but i stuck with it. And again, i am glad i did.

    I started the “self banking” concept about 4 years ago and i am very happy with it. To date, i do not believe most people understand the concept. Especially agents and the multiple websites promoting the idea. Or maybe i am the idiot. Buyer be wear! My new policies are designed with max front funding and i have converted the old policies into better policies. Yes, you can do that, and yes it costs. For me, it was worth the cost. I have borrowed money out of my policies and have paid of my student loans, practice buy in loan, two car loans and some other “bad” debt. I am redirecting the principle plus interest i was paying to the finance companies back to my policy loans. The great thing is that i am paying back my policy loans and the interest in a total of three years. The other loans would have still been in repayment at the end of three years and some ended with a ballon payment. All this with the same money flow. No extra $ out of my pocket per month.

    For me, the use of whole life insurance as a financing vehicle and savings account is working. (my definition of or use of whole life insurance changed about five years ago.) Now, someone may be able to show how poorly i used my money and how i might have done better else where but peace of mind is peace of mind. As listed above, many of my investment choices could have turned out better. But that is life and that is the risk with Investments. I ran an In-force (sp?) ledger on both my life ins. policies and on my 401k over the life of my accounts. The insurance has done better. Not by much, but better. But in my opinion it is comparing apples to oranges. There may be those who want to see my numbers. Believe me or not. I have no skin in the financial part of this game.

    I am a “White Coat” and i am more than happy with my choices. There is no free lunch out there and everyone is trying to make a buck of physicians. Doctors need to be in control of their money.

    I think Will Rodgers said, (paraphrasing) “It is not the return on your money that counts, it is that your money gets returned”

    I have truly enjoyed this site and plan on visiting it again. I am not interesting arguing all the points above. I do not have the time nor the desire. As responsible adults and physicians we have to live with our decisions. And if something does go wrong, and it will, look in-ward before you look out-ward!!

  47. Thanks for your comment. I’m glad to hear you carefully investigated the benefits of a whole life policy before purchasing, are doing what you can to maximize it’s return and value to you, that you actually track your return, and are happy with your decision.

    I’m sad to hear you have any stocks that are underwater after our recent 4 year bull market and that your 401K has underperformed your whole life insurance. Over the long run, a reasonably invested 401K should outperform whole life insurance. But poor investment choices, high fees, unfortunate timing, and especially investor behavior, can lower those returns substantially.

    Your level of educational debt ($190K 20 years ago) is now, unfortunately, becoming standard so financial education for doctors is getting more and more important all the time.

    Good luck investing.

  48. It’s baffling to me that after all the market crisis, QE, printing money, market manipulation, etc. that half-way intelligent people are still recommending “buy term and invest the difference.” It’s time to do real objective research (without bias). Banks commonly keep more money in life insurance than any other Tier One asset. Almost every major executive and politician keeps massive amounts of money in overfunded life insurance – because it’s off the radar. Arguing about this is a waste of time because people will usually see what they expect and want to see.

    “There is a principle which is a bar against all information, which is proof against all arguments and which cannot fail to keep a man in everlasting ignorance – that principle is contempt prior to investigation” – Herbert Spencer

    • Are you suggesting that a typical professional should model his investment portfolio after that of a bank, a CEO, or a politician? While it is possible that would be a wise move, I think assuming it is a true is folly. I don’t need my money off the radar. I need it to grow at a reasonable rate to reach my retirement goals.

      Despite the market crisis, QE, printing money, and market manipulation, the stock and bond markest is still growing money at a reasonable rate (higher than that of cash value insurance policies), especially when you minimize fees and taxes.

      The US Stock Market via VTSMX has an 8.69% annualized return over the last 10 years. The US Bond Market via VBMFX has a 5% annualized return over the last 10 years. The non-US Stock Market via VGTSX has a 10.19% annualized return over the last 10 years. Despite the crisis, QE, printing money, and market manipulation. Someone who invested 10 years ago in a whole life policy 10 years ago is now just breaking even. Those investing in a whole life policy now should expect returns over the very long term (3+ decades) on the order of 2-5%. That might be an adequate rate of growth for a bank, an executive, or a politician, but not for most professionals who want to retire in the next 20-30 years.

      That’s why buy term and invest the difference is still recommended after real objective research (without bias). I do, however, agree with you that arguing about this may be a waste of time. Best to collect all the data you can and make your own decision.

      • White Coat Investor – I certainly appreciate your attempt to provide alternative investment and financial advice. It really is a breath of fresh air. I don’t have the time to write a full article on the site… although I’d like to find the time to give you all of the research I’ve done at some point.

        I’m in my late 50’s. I have a very good friend who has just turned 70. We’re both orthodontists. A couple of years ago we got together and began talking about our financial endeavors over the years. We’ve invested in most of what you can think of – stocks, bonds, mutual funds, real estate, businesses, and so on.

        In the early 80’s we both bought whole life policies with major mutual companies. And they weren’t the overfunded kind. They were the typical high-commission kind. There were many times throughout the 80’s and 90’s that I thought about cashing it in. It seemed illogical to watch my cash-value grow so slowly, only to watch my mutual funds increase substantially.

        Every time I decided to cancel my agent would talk me out of it… and for some reason I kept the policy. I’m glad I did.

        These policies have grown at just under a 5% compound annual growth rate. What’s crazy to me is that my IRA statement says that my ROR has been 7 and a quarter over the same time period – but the whole life cash-value has grown proportionately better. I certainly wish I had put all of my investment dollars in this kind of life insurance. Turns out my friend’s policies had grown the same way.

        After talking with an economist early last year he explained to me that the market was not an efficient place to put money because of taxes, fees (yes, even ‘low’ fees), and market corrections. This is not to say that you can’t make money there – you can. It’s just a matter of not putting all or most of one’s money there.

        My question is this: why would I want to take substantial risk to typically barely even keep up with inflation when I could put the money in life insurance and keep up with or beat the market over 30 years? After doing much more reading and research with my good friend a few years ago we actually decided to redirect more money to the overfunded type of life insurance. Within the year we began using our cash-value policy loans to make money within our expertise: the dental and orthodontic market.

        To date we’ve made more money through our ‘banking system’ then we could have ever made in the stock market over the last 5 or 6 years.

        White coat – it really seems you’re trying to give good advice. It just seems to me that you may be unknowingly leading people astray.

        • I don’t doubt there are many people who do better with whole life insurance than they did in more market-based investments due to behavior, timing, high fees or whatever. I’m not sure I understand how your IRA grew at 7.25% and your whole life insurance grew at 5% (which doesn’t surprise me by the way, just about any policy bought in the 80s and held until now should have a return in that neighborhood), yet the “investment” growing at 5% ended up growing faster. How do you explain that? Was the 7.25% before fees or something? I’m not sure you’re calculating your returns right.

          I don’t doubt you’re able to make more money in the dental and orthodontic market than in the stock market, no matter what you used to fund the endeavors. I’m glad it’s working out well for you. There is more than one road to Dublin. As far as leading others astray, are you suggesting perhaps that I should be telling physicians and dentists to buy whole life insurance instead of investing in the stock and bond markets? In my opinion that’s not what the evidence suggests is most likely to be beneficial. But that’s the fun thing about the internet and life in general. You’re allowed to have a difference of opinion with others.

          • WCI – I agree with you final statements. Thanks for the opinions. It’s always worthwhile to think about things from all perspectives.

            The 7.25% was an average annualized return.
            The 5% was a compound annual growth rate (CAGR).

            I am calculating my returns right. There is a major difference between how “rates of return” are calculated. Most index funds, mutual funds, and variable annuities do not calculate the CAGR, just the average.

          • White coat — used the word evidence but did not follow it with any reference? You are giving people advice but we should be able to look at your evidence and make our own assumptions. You should know that if you are in the health-care field. That’s what evidence based medicine is. So, please ‘either you or Rex’ give me your articles, publications, etc that show whole-life policies ‘lose me money’ and ‘I shouldn’t investment or put any more into these policies’.

  49. Liz – Just curious if you moved forward with the mutual dividend paying WLP? I have been on the fence on starting a policy like this for the past month after reading Nelson’s book and Pamela’s book. I even spoke with three different agents from Tom McFie, Chase Chandler, and Scott Plamondon. I still can’t decide on which direction to go. The more I read on forums, the more negative comments I read on these types of policies.

  50. WCI and Rex:

    I found this thread because a mother of a physician mentioned your website. I really enjoyed the conversation you have had. I have included a link to my 5 part article on the topic and as I was prepared for most people to bash it, yet some did find it enlightening. If you want to skip to Part 5 to see my final thoughts you can, but for me it boiled down to savings vs investing, as Liz was trying to get at before. Being a dentist, I would not recommend ANY of my assistants do this because there are other more cost effective avenues they need to pursue first. Once you get to a point in your income where you just don’t want to skew everything to the stock market, I believe WL insurance can become a valuable tool. And that is all it is, a tool with a few interesting advantages, but not a tool for the masses once you get past the marketing shenanigans this is wrapped around.

    First, it is life insurance, or mortality insurance or whatever semantics you want to use. Getting past that, if you going to look around the curtain and see what rate of return I get (which is what everyone begins to look at), 4-4.5% per year is not bad for a fixed income that has the leverage of a death benefit, something that the traditional bond fund does not have or savings bonds do not have.

    You mention insurance companies invest in the same space we do. That is similar to saying Warren Buffett invests like we do. He doesn’t. He has clout and with clout gets juicier returns and greater access to investments that the average person cannot access. But staying on track, if the insurance companies had to invest like us, their investment returns would be low now and then begin to increase again as nominal rates increase again. The returns would lag by, my wild guess, 2-4 years.

    WCI, if you think you are going to live on 30% of what you currently make, kudos to you. I don’t think most people would choose that austere of a lifestyle change. And people always say you don’t know what new expenses or the cost of expenses will come up, particularly healthcare, college (and the questionable investment that has become), and the squeeze from having to take care of the aging and the young at the same time. It will be nice, for me and me alone, to have that side fund that I can access with just a signature and pay back at my discretion.

    I look forward to your comments about my articles and for continuity’s sake, please comment here to keep the dialogue going.

    Doctor Dividend

    P.S. Rex, What is your occupation as you seem to be the 2nd most contributor to the message boards? I could not find that answer in my perusal.

    • 1) I didn’t see the link. Did you forget it?

      2) I agree that WL is a tool. It may make sense for a few people. But it marketed to far more people than it makes sense for, thus the marketing shenanigans you describe.

      3) 4-4.5% may look good now that we’re in a historically low interest rate environment. If interest rates stay like this going forward, the whole life policy will probably perform much closer to the guaranteed scales, which for a policy bought now are ~ 2% (nominal, not real.) Anyone who thinks that is “not a bad return” for any long-term investment is nuts. It’s likely to underperform inflation long-term if that’s all you get out of it. You also cannot necessarily directly compare investing in a whole life policy (which requires you to hold it for 30-50 years to get that return) with a bond or bond fund where you can get your 4-5% for 5 years or 10 years and then move on to something else if you wish. An investment requiring you to stick with it for your entire lifetime to get a decent return ought to return far more than a 5 or 10 year bond IMHO.

      4) Do insurance companies have access to investments that individual investors do not? Yes. But so do lots of pension funds, mutual funds, and endowment funds, and their returns, on average, can be pretty disappointing, often times underperforming simple index funds available to all of us through Fidelity, Vanguard, Schwab etc. The vast majority of investments held in the accounts of insurance companies are no different from what can be purchased for less than 10 basis points a year at a low cost mutual fund provider. Take a look if you don’t believe me: http://media.nmfn.com/pdf/2012_midyear_update.pdf

      82% bonds, 7% high-yield bonds, 4% private equities (the kind not usually available to the mom and pop investor), 3% public stocks, 4% REITs. 96% of that you can buy at Vanguard for less than 10 basis points a year. I find it interesting that all they report is the asset allocation, and don’t mention the returns. But it isn’t that hard to figure out about what the returns should be once you know the asset allocation.

      5) The reason I can live on 30% in retirement of what I make now is because my expenses will go down dramatically, not because I plan on living an austere lifestyle. Take away most of the taxes, some of the charitable contributions, the mortgage interest, the college cost, the costs of raising kids, the commuting expenses, etc etc etc and you may discover the reason why many people retire quite comfortably on an income much less than their peak salary.

      6) Yes, it’s always nice to have a “side-fund” you can access at your will and pay back at your discretion. The question isn’t whether it’s nice to have a side-fund, it’s whether it’s better to have a large side fund not in a life insurance policy or a somewhat smaller side fund that is in a life insurance policy.

      7) As I recall Rex is a dermatologist.

      Thanks for your comments.

  51. WCI:

    If you scroll over my name on the first text, it links to the first article I wrote. One other thing, which I am inferring from your posts, but don’t know if it has been explicitly stated. Looking strictly at non-direct recognition policies, as one overfunds the WL policy, minimizing the death benefit, it will actually increase the death benefit over time. When the person who is insured dies, then any loans will directly decrease the death benefit, but the increasing cash value will continue to support sn ever rising death benefit. And in this day and age, we just don’t know why we might need a permanent death benefit. It’s hard to know in my mid 30s what the next 50 years will bring that it may be wise or may not, but I am comfortable with decision and most importantly. know I can fund it without changing my lifestyle.

    Hope to just continue the conversation.

    • I absolutely agree that if you’re going to have a WL policy you should overfund it.

      I skimmed through most of your articles. I’ve written other posts on infinite banking; I don’t know if you saw them or not. It seems like we have similar views about the concept. For some reason you’ve concluded it is a good idea for you, which is fine. I don’t think it’s the worst thing someone can do financially. I disagree with you when you say “you just don’t know why we might need a permanent death benefit.” The premiums of a whole life policy are awfully high for something that it seems to me I have a very low probability of needing. If someone wants to do this with a portion of their fixed income portfolio, they can knock themselves out. But putting 50% or more of your portfolio into whole life insurance is a mistake IMHO. My main issue isn’t people like you who seem to get the concept who decide to go ahead and buy a policy. My problem is with these policies being sold to residents and other poor people who can’t even max out their available retirement accounts. I also object when the policies are sold as some kind of financial panacea or alternative financial system. You’re investing $100K a year toward retirement and your policy costs $10-15K a year for 7 years? Fine. I don’t see a problem. You’re investing $6K a year toward retirement and your policy costs $5K a year? I think that’s a problem.

  52. WCI:

    I agree with everything you said. I chuckled at the low probability of needing the permanent death benefit. Well, of course, YOU won’t need it – you will be dead!!

    I think we are both on the same road in terms of do everything else first that is within the tax system, and then ONLY look at this, as part of the overall asset plan if it even fits for the individual. For me, I think there is a benefit. For you, there is not and I respect both sides of the argument.

    But I will get off on a little tangent on why I am using this in my overall plan. I looked at your basic portfolio. It is the Suze Orman stuff. Diversify with broad based categories and ride it out. But when I have dinnner with my grandmother every Monday night, she never mentions how much she has in assets. She always mentions CASH FLOW. How much are expenses and how much do I have coming via SS and dividends and interest? And that is when it hit me. I have been investing all wrong for nearly 20 years.

    So I switched to investing in things that have an income stream. Mainly stocks that have dividends and have grown their dividends over time (DGI). Companies we have all heard of: 3M, Coke, Proctor and Gamble, Johnson and Johnson, etc. The dividends can get reinvested in more shares to get more dividends and, if it all works, out, never having to touch the principal even if the market swans dive again, and it will at some point.

    Which gets me back to this. Overfunded WL can be another income stream to tap, if and when I need it. If I don’t then my heirs get a nice estate tax-free bonus, if and when I give them ownership over my policy. If I do need it, it is there as a back up. And when i have access to other investment opportunities, I don’t have to go crawling to a bank, waiting for the bean counters to say yes (eventually), when I can get a check in 7-10 days from the cash value built up and pay back the loan on my own time.

    It’s just a different philosophy, and if you would want me to write some articles about DGI, I would be happy to. Thanks for the dialogue.

    • I think a lot of investors, particularly those in retirement living on their cash flow make this mistake. The truth is you shouldn’t be a “capital gains” investor or a “dividend” investor. You should be a total return investor. Consider one of my partners who is always really excited to tell me about the 10% yield on one of his investments. I point out to him that yes, he got 10% in dividends this year, but the value of his investment declined by 8%. So his return is 2%. If he continues to spend 10% a year of an investment that only has a return of 2%, it isn’t going to last very long.

      The truth is that dividends and capital gains are completely exchangeable. Want more yield? Sell a few shares. Want a higher net worth? Reinvest the dividends. It’s all fungible.

      Yes, overfunded WL can be another income stream to tap. But you can tap it in multiple different ways. You can take the dividend and spend it. You can take the dividend and reinvest it. You can take some loans out on it. You can also surrender it. You can let the dividend pay the premiums. There are lots of options. I’m not sure why you seem to think you have this overwhelming need to crawl to a bank. I’ve “crawled to a bank” 3 times in my life- each time to buy a house. After this one is paid off, I don’t anticipate ever crawling to a bank again. If I need money, I’ll take it from my savings and investments. I prefer to earn interest rather than pay it, whether to a life insurance policy or a bank.

      Feel free to submit a guest post about dividend investing if you like. Directions can be found here: http://whitecoatinvestor.com/contact/guest-post-policy/

  53. WCI:

    This is starting to go way off topic from the initial post, but I don’t know where else to post and I love the discussion, but it goes back to what is your focus for investing? For me, and only me, it is to provide an income stream that grows each passing year faster than inflation in companies that have sustainable advantages or those promising companies that I think will build their “moat.” If you find the strong companies, the total return, the capital gain is secondary to what I invest for now.

    Using KO as an example, it’s historical dividend range is between 1 and 3% for the last 50 years. And every year for the last 50 years they have increased the dividend but the yield never seems to get outside of this range. Why? Because if KO was suddenly yielding 4-5%, everyone would buy it boosting the share price back to its historical range. The dividend becomes the tangible proof that the model works and the increased dividend lets the investor know we, the board of directors, are confident about the model for the next 12 months.

    When you say you can sell a few shares, once you sell it, it is gone and can never work in your investing army again. And if you sell at the wrong time, you just put more strain on the rest of the dollars. With dividends, they are not part of the irrational world of Mr. Market. They are not subject to the whims of what Stock X is priced at this second but to the fundamentals of the company irregardless of stock price. On seeking alpha, there is an author by the name of David Van Knapp. He is a big proponent of DGI investing, as am I. Between July and August 2011, he wrote a series of 4 articles stress testing the 4% Retirement Rule (which is in the 4 titles). I would recommend reading those and seeing your comments. Besides, newer research is saying you should only withdraw 2.5 – 2.8% if you want a better chance of having at least $1 to your name when you die. Even 4% is starting to bend the limits.

    Thanks for the intellectual debate. It’s getting harder these days to have these.


    • A 2.5% withdrawal rate doesn’t pass the sniff test. Remember the Trinity Study said that a 50/50 portfolio with a 4% withdrawal rate has a 100% chance of lasting 30 years and an 85% chance of lasting 40 years. All of a sudden now you think you should cut that by 38% “just to be sure?” Are you so sure that the next 50-80 years will be so much different than the past? Bernstein makes a pretty good argument that there is only an 80% chance that the United States won’t implode during your lifetime or some other catastrophic scenario (nuclear war etc) so trying to get any higher than that is silly anyway. If I were retiring today in my 60s I sure wouldn’t be only withdrawing 2.5%. 3.5%? Okay, I’ll buy it. 3%….sounding paranoid. 2.5%..silly IMHO. If the SWR over the next 50 years is 2.5% we’re all screwed anyway.

      • But that is my point. You can have big stable companies that have paid dividends for years, that have raised their dividends for years at a rate equal to or faster than inflation, that has an overall portfolio yield between 3.5-4.5%, and never touch the principal.

        Back on point. Let’s make the numbers easy and say you had the ability to get a highly overfunded WL policy at $10,000 per year, after Year 1, what is the guaranteed minimum you would want as cash value to say this may be an “OK investment”? A dollar amount if fine.

        Lastly, the one big advantage of the BOY, and this is the “process” that people keep referring to, is that it acts similar to fractional reserve banking. $1 has the ability to do 3 things. Provide a death benefit, compound cash, and borrow against the cash as if you did not (for non-direct recognition policies only). Granted, you pay for this ability but I don’t know of another tool (and again, it is just a tool) that lets you do multiple functions with $1.


        • Yes, that’s the benefit and 100% of the attraction to the “product”. Nobody is denying that. You have to weigh it against the downsides, of course.

          You’re asking me what I would like out of a BOY policy? I’d like it to return 20% a year, be completely guaranteed to never lose principal, to be completely tax-free and completely liquid. We don’t need to discuss what we’d like, we just need to discuss what’s possible and decide if it is something we want. Buying a whole life policy, whether you buy it for the benefit or to Bank On Yourself, is a lifelong commitment. Add on the expenses that drag on returns and that’s your downside.

  54. I love it!!!! I was referred to look at this thread by a dental student who is looking into Infinite Banking. Great comments on both sides. Good investements are definitely something that need to be sought after and people need to be educated. Unfortuntely very few people understand where their money is and what it is doing for them. Infinite Banking is a process and everyone needs to understand its message. It has nothing to do with WL insurance, WL insurance is just a byproduct. One last comment, but its not short. If life insurance was such a terrible place to put money, explain why every major bank keeps about 25% of its most liquid reserves in it? For example Wells Fargo has about 18 Billion dollars in life insurance. Don’t take my word for it go to FDIC.gov, search Bank Data & Statistics, Institution Directory, and enter the bank you want to see under Find Institution. You can generate a report for their Assets & Liabilities and see it for yourself. Keep up the good work, the more you talk about it the more it educates people!

    • I see this argument in the books and pro-IB sites. I don’t buy it. Just because a bank does something doesn’t mean I should or can. I also disagree that it has “nothing to do with whole life insurance.” That’s just marketing, and dishonest marketing at that. Let the idea stand and fall on its own merits. You don’t need to dress it up.

      • I’m sorry you have had such an awful experience in the financial industry. Being a doctor you might agree that prescribing solutions before analyzing the problem isn’t a good idea. This is true in finance so I’d refrain from making broad statements. You cannot treat every patient the same way and expect to get the same results. Infinite Banking is about understanding how money works and who controls the banking function in your life. I say again, WL is a byproduct of this process. If Luke Donald hits a bad golf shot I don’t expect him to say it was Taylor Made’s fault. The process that he uses is what makes him a World class golfer not the club. I’m sure when you read through BYOB you saw this clearly, right? Remind us again, how many times you studied this book and attended workshops to learn the process so you can accurately state what is fact and not fact? By the way how much money is spent everyday in marketing MF’s? Try watching John Hancock’s latest series of commercials. Now that’s SPIN.

        By the way I’m a CFP, which means I have a code of ethics that I adhere too.

        Don’t be afraid to learn new ideas, I did. ‘The dumbest people I know are those who Know It All’ Malcolm Forbes

        • I’m glad you adhere to a code of ethics. “The Banking Function” in my life consists mostly of depositing checks and transferring money to investing accounts. There are some automatic bill pays too.

          If you’re referring to loans, I have two, both of which are at rates lower than those available from whole life insurance policies. I don’t plan on taking any others out.

          Which banking function do you think I should use whole life insurance for? It doesn’t seem possible to use it for the first, and it isn’t as good as what I’m doing for the second. That leaves the only thing worth considering it for is investing. In my opinion, it’s an inferior investment. If you want to use it as one of your investments, knock yourself out. It truly doesn’t bother me at all.

          As long as we’re ending with quotes designed to be a vague insult, I’ll leave you with this one:

          “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” –Upton Sinclair

          • As I said I don’t advise prescribing solutions without understanding all the problems. It’s easy to give broad brush examples without ever having to sit in front of someone and answer to the results. I also apologize for my quotes being interpreted as insulting. My passion for truth got the better of me. Thanks for your quote. Having a role model like Upton Sinclair shines light (or dark) on perhaps the basis of why this blog was started.

            Matthew 7

  55. As a dentist now, I think he would be an idiot to look at this as a student. This is not the first, second, or third option to use for retirement. He needs to get out of the nearly I am guessing $200K in debt and that’s just for dental school. There is a basic game plan and this is way down the list.

    WCI and Rex, maybe you can comment on this because I don’t have a good rational answer on why it is ok for banks to have so much life insurance and be considered Tier 1? My guess is they like it just as I am fond of it – a mini version of fractional banking.

      • Controlling money shouldn’t be any concern to you…..Really? Read ‘The Creature from Jekyll Island’ and you will understand why it might be in your interest to “impersonate” a bank.
        ‘If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.’ – Thomas Jefferson

        • Thanks for stopping by. The Creature from Jekyll Island sounds interesting. Seems like reading it and similar books would lead me to buy gold, not whole life insurance though.

          Seriously though, I can’t yet figure out a reason I would want to buy a whole life insurance policy in order to bank on myself. The only banking functions it is good for is saving/investing and borrowing. I suppose if I could borrow at a low rate and then invest in some fairly guaranteed way at a higher rate, that would be a good deal. But the loan interest rates are 2-3% higher than the going rates on guaranteed investments. The loan interest rates are also higher than the rates at which I can borrow elsewhere. Could that relationship change in the future? I suppose it’s possible, but it seems unlikely.

          Now, for someone who borrows money all the time, might it be better for that person to borrow from a whole life insurance policy than from a bank? I suppose it’s possible. But those aren’t usually the type of people who can afford a whole life insurance policy above and beyond wiser investments, much less overfund it as is necessary for this to work out.

          I think it would be helpful to hear from advocates of BOY/IB/LEAP to hear what they actually do with their policy- I.E. I borrowed $50K out of it to buy a rental property that returns 8% when I’m paying 5% for the loan, or I borrowed $20K to buy a car because the best loan I could get was 8% or whatever. Or I put $10K a year in for 7 years. I broke even in year 5. The cash value now grows at 4.5% a year and I can borrow from it if I like at 6%.

          Then the reader can judge for himself if it would be a good idea for him to bank on himself. There’s just so much marketing and spin and hype involved it’s hard to see how someone in decent financial shape would actually benefit from it. Vague ideas like “banks buy life insurance” and “don’t you think controlling money would be important to you” aren’t helpful.

  56. An adage from early modern economic thought regarding borrowing:
    ‘The man who borrows in order to spend will soon be ruined; if he borrows and uses it as capital to employ productive labor he will be rewarded’.

    So if you can borrow cheaply from life insurance policies to fund a business venture or positive NPV project, it might be cheaper funding than other sources for an individual.

  57. I recently sat through the Infinite Banking sales pitch. I was hoping that it would be a great financing vehicle for certain loans that I’d like to pay down. Most of the pitch consisted of an effort to prove that WL is a better investment that traditional 401k, even without the paid up addition. The salesman made a number of assumptions that “proved” that I would need to get my 401k to return 12% in order to truly match the 4% returns provided by the WL policy. Needless to say, I disagreed with the assumptions and concluded that I just need to be more prudent and pay down my debt. Much of the sales pitch involves rhetoric similar to what Russ is peddling, but a WL policy cannot replace the world monetary and banking system.

  58. When examining evidence relevant to a given belief, people are inclined to see what they expect to see, and conclude what they expect to conclude. Information that is consistent with our pre-existing beliefs is often accepted at face value, whereas evidence that contradicts them is critically scrutinized and discounted. Our beliefs may thus be less responsive than they should to the implications of new information.”
    R. Nelson Nash

    • In a transaction there is a certain set of assumptions that are used to explain possible future results. All deals have these assumptions and they are an essential aspect of financial planning and analysis. The thing is, those assumptions make critical changes to the information. If the parties involved in a deal disagree on those assumptions then the deal is dead because they are effectively saying that they cannot agree on the information that a model produces.

  59. I agree that if the parties involved disagree nothing happens. Don’t mistaken me by thinking that you or anyone else should do IBC, I just believe that you should understand it. To do that, you must 1. Read Becoming Your Own Banker 2. Attend one of his workshops. After that you can be as critical as you want to, until then you are making assumptions.

  60. No it’s not that complicated at all. It’s the detoxicing from all the garabage we have been taught that takes so long. IBC is a concept that has to be caught, it cannot be taught. How long does it take to learn? I hope a lifetime for me….no response needed.

  61. Do any of you have cash and bonds in your investment portfolio?

    Ok. Replace a portion of that with WL. Guaranteed, safe returns plus a death benefit. The death benefit will allow you to spend down your nest egg whereas without this, you should not be depleting your nest egg, you should be living off its returns.

    Only do this if you are maxing out all other tax deferment options (401k, mortgage int, etc).

  62. Wow Awesome awesome discussions on this post. I learned so much from reading the back and forth between the folks on both sides of the party line. This was so valuable for me to spend my time reading. And thank you for that White Coat Investor. (and if you are wondering, I am leaning towards the in favor of using Whole Life camp as a solid foundational investment platform)

    • “I’m making the article autobiographical because part of the story involves the newly launched IBC Practitioner’s Program, and I can’t fully explain the rationale of the program without describing the situation that I (and the other founders)”

      Minor conflict of interest there. :)

      He says this:

      “Part of the problem was that I knew absolutely nothing about whole life insurance; I thought all life insurance was term insurance”

      This guy is an expert in Austrian economics? And he hadn’t even heard of cash value life insurance?

      Not a lot of new information there. He’s just explaining how the concept works as I did above. I always find it interesting that they compare buy whole life and bank with it to banking with bank. They never seem to compare it to not “banking” i.e. taking out loans at all. I know, at least virtually, lots of millionaires. I don’t know any who became that way by “banking on themselves.” They did it by generating a high income, saving a good chunk of it, and investing wisely in standard investments like stocks, bonds, mutual funds, and real estate.

      • You are right you probably know more about economics than he does (http://consultingbyrpm.com/resumecv) b/c you took a class in undergrad and eventually became a doctor who writes a blog.

        Thought a unbiased third party who only became involved after spending 2 years of research would give others insight to this concept.

        By the way there is NO such thing as ‘not “banking”‘. Your money has to reside somewhere. Every time you make a purchase it is financed through cash you stored or money someone else did. Try not accounting for it and you will end up borrowing from someone in the future.

        Imagine a ballon that is being inflated one breath at a time. Eventually what will happen to that ballon? Do you ever get the gut feeling that there is just something not right in our financial world today? QE, QE 1, QE 2, etc, etc. For those not as wise as WhiteCoatInvestor the Federal Reserve is pumping money into the economy at record rates (ballon example). People are investing in “standard investments like stocks, bonds, mutual funds, and real estate” with fake money that doesn’t exist from banks who have used fractional reserve banking (see ponzi scheme) to produce it. What do you think is going to happen? It doesn’t take a rocket scientist, or a MD to figure it out.

        • I think this discussion was had somewhere above in the comments section. Yea, I use a bank for a checking account. Guess what? You can’t do that with an insurance policy. Bank on yourself types like to get out into the weeds on the Federal Reserve etc, and I agree there are concerns there (just as there were concerns when we were on the gold standard), but that’s hardly a good reason to trying to turn a whole life policy into a savings account.

          I’m not saying I know more about economics. I’m surprised that such as brilliant economist somehow never came into contact with whole life insurance. I’ve got people knocking down my door trying to sell it to me. It’s hardly a “secret product.”

  63. I’m new to the forum but good info from all sides about WLI. Thanks White Coat for hosting.
    Question: Is there a way to see the actual records of someone who successfully stayed with a WLI for lets say 20 years? I want to see his/her statements over a prolonged time horizon to verify dividends, cash value, etc. I have Nash’s books and he gives illustrations from his own portfolio, but I want to see a real person’s WLI statement (s) . This should be that hard should it? For example, is there a Insurance rep who is willing to share their own life insurnace statements. I’m interested in buy WLI but exercising due diligence.

    p.s. I’m a sleep physician and do not have any ties to any financial sector.

  64. I happened upon this blog as I was researching WL policies. I have a friend whose husband passed and left $400K in WL insurance. The salesman who sold her husband (income <40K/year) the policy has advised her to purchase a single premium WL policy with a death benefit of $1,000,000 (her income is $70K/year and, again, replacing an income of less than 40). I am a nurse with little if any financial expertise (but enough to know Liz is an insurance agent). I owned a $150K UL insurance policy for 25 years. Doing the math: I paid 102.00 per month for a total premium payment of about $30,000. Nothing lost, nothing gained and if I had died my kids would have $150,000. I have about $30,000 in actual cash value so I feel like I got free permanent insurance which was important for me to leave my kids. HOWEVER, this is clearly, to someone with NO financial knowledge – NOT an investment. It has a guaranteed 5% return – again, do the math. All of this having been said, two take away points for everyone:
    – a real life illustration of what actually occurred with a permanent policy as requested earlier which showed nothing lost (except the $3000 I would likely have made in an index fund)but certainly NOTHING gained.
    – what is happening in the insurance industry selling these products – $400,000 for a guy making less than $40K???? A widow being "advised" to dump the entire amount into a WL policy by the same insurance agent???

    Although I appreciate the expertise and research provided – real life speaks louder to those of us just trying to make prudent decisions.

    • Thanks for sharing your experience. Regarding your own policy, it might feel like nothing lost, but when you consider the time value of money and inflation, and the cost of an equivalent term policy, that certainly was pretty expensive insurance. I don’t know how you can possibly believe it has a guaranteed 5% return. Perhaps going forward it does, but perhaps its only a 5% guaranteed dividend, which is very different. If you’d been getting a 5% return, then your cash value would now be $61K.

      Regarding the $400K WL policy for the guy with a $40K income, I agree that it was probably an inappropriate sale. That said, it sure worked out well didn’t it? Anytime someone dies early, life insurance, whether term or permanent, is a great investment!

      • There are many ways of calculating insurance needs. Income replacement, needs analysis, and human life value are common methods. Let’s say someone earns $40K a year and is 42 years of age and was killed on a fair ground ride due to a defective design. How much would the courts award as compensation? Probably human life value, calculated by assuming increasing income over the remaining working years, so 65 minus 42 is 23 times $40K equals $920K without taking into account rising income. Yes, you can argue the net income would be less but, my point, $400,000 was hardly over insured. And I wouldn’t call the life insurance an investment when, in this case, it worked properly as protection (although, certainly, the death benefit has an IRR). Missing in many of these postings in the fact that, yes, people do die early.

        Guardian used to have a single premium policy but has dropped it due to popularity. Yep, people realized they could drop money in and realize a 3% annual gain in cash value and a leveraged death benefit. A single premium policy automatically becomes a MEC unless it was a 1035 exchange, but a MEC is not necessarily a bad thing. All the growth in a MEC contract is tax-deferred until distributions are taken and if not distributions are taken, the death benefit is still tax-free.

        I don’t know that I would have suggested dumping the entire proceeds of her husband’s death benefit into a single pay, but if she wishes to provide for her heirs (children), then using some of the proceeds to purchase permanent life insurance is a good idea

  65. I recently was introduced to the Infinite Banking/BOY concept by my insurance agent when I went to purchase some term life for myself and my wife and an individual disability policy for myself. (I’m 32 years old, second year attending). He briefly brought up WL policies, only to promote this IB/BOY concept. He wasn’t pushy at all, but said he felt “honor bound” to make me aware of this possibility. He loaned me a copy of Nelson Nash’s “Becoming Your Own Banker,” asked me to read it and let him know if I was interested, before moving on to sell me the exact term policies I had asked about at the exact same rates seen on term4sale.com.

    The Nash book is disappointing frankly, and there is so much fluff: meaningless analogies, Bible verses, and other nonsense in this already very short, large print book, that it is hard for me to believe on the face of it that there is anything of real value here. Nevertheless, the underlying concept was intriguing enough that I am interested in trying to understand it better, and judge it on its own merits, not the superficial qualities of the book. I have since done some additional reading on the internet (here and elsewhere) and basically come to the conclusion that it is probably a poor choice for long term investments such as retirement, for which there are numerous other good options which I have available to me. I have yet to see anyone present a direct comparison of BOY method vs a buy term and invest in a Boglehead-style portfolio of low-cost index funds, appropriate asset allocation over time, healthy combination of Roth and non-Roth, in tax-sheltered accounts. Some would argue that such a comparison is apples to oranges because of the different risk profiles of the 2 investments, but if you’re considering the long-term nature of retirement savings, there is an enormous amount of historical data to suggest that the market is predictably cyclic and over the time spans of 20+ years, you can reasonably reliably count on pretty excellent returns. I don’t consider it particularly risky, at least at this stage in my life.

    However, I remain somewhat allured by the prospect of using such a vehicle for shorter term savings that I might otherwise just have to use a savings account. First of all, I want to challenge you on what seems to be a common misconception in arguments against IB/BOY which your provide above (if this was addressed in the comments above and I missed it, I apologize):

    “After 3 or 4 years of paying premiums and buying healthy paid up additions, you’ve got a tidy sum of money in the contract. Now you can borrow it tax-free at a certain interest rate, say 5%. Now that 5% doesn’t go toward your cash value, it goes to the insurance company, but since this is a non-direct recognition policy, the insurance company is still paying dividends, say 5%, on the money you borrowed, so it’s a wash to you.”

    This is simply not true, it is not a wash. Please run the amortization calculations and compound interest calculations for yourself. If I take a $5,000/60month loan at 5% interest, the total interest I would pay is $661.60. However, 5% rate of return on $5000 of cash-value compounding annually would earn me $1381.41; a net gain of $719.81. This is obviously because the principal in the loan goes down each year (and thus the amount of interest paid), but the principal in the account goes up (with more earnings each year).

    Now as you point out, it’s conceivable that the rates may not be equal to each other, and might even be upside down at times (though how the insurance company could justify paying me a dividend that is less than the prevailing base interest rate is a bit mysterious to me), the point is that even if they are numerically equal interest rates, you still come out ahead. In fact, the interest rate can even be higher than the return rate, and you could conceivably come out ahead or break even.

    Lastly, while I do fundamentally agree with you that paying cash and financing almost nothing is the way to go in life, I think you are underplaying the opportunity costs of saving for items that generally cannot be purchased out of just 1 or 2 months’ paychecks (at least not by me, if you’re trying to save for retirement, pay back student loans, save for kids’ college, etc). There are a few relatively large, recurring or perpetual expenses that recur every few years and no matter how frugally you live, you will certainly have to face. These include automobile purchases, major home repairs or renovations, or things that you want including perhaps a very long vacation. If I want to do a home remodel, there seems to be a real opportunity cost to gradually over a few years accumulating $20,000 in my savings account earning 1% if I could have that money in a (nearly) 100% liquid account earning 4-5%, and would continue to earn that even after I spent the money on what I was saving for. Where am I going wrong here?

    • I don’t think you’re going wrong. I don’t see this as some scam or stupid thing to do with your money, it just isn’t anywhere near as good as it’s promoters and marketers would like you to believe. Yes, it’s better to earn 5% than 1%, but you’ve still got to buy an insurance contract and hold it your whole life. That puts a certain amount of drag on returns.

  66. Matt:

    I will suggest going to my 5 part series on seeking alpha.


    It is unbiased and gives the downsides in Part 5. I am in healthcare – I don’t sell insurance and yes, it is a sell job. But it can be useful. If you have other commitments that stresses you financially, BOY is not for you. Period. If you have excess cash, then it may be for you. It works for my needs and my goals of what I am looking for in my excess cash.

    Best of luck.

  67. I just decided to purchase a WL policy. I’ve maxed out my 401K so with the residucal income I’m going to see where this WL leads me.
    Will keep everyone updated if WL turns out to be a scam. I’m hoping it doesn’t.

  68. The best investment advice is to pick wisely when getting married and stay married. The next best thing is investing in yourself and the businesses you own and control. In my 10 years in the financial world I have yet to meet someone who has made a fortune investing in the market. The Infinite Banking Concept is not an investment it’s a personal monetary process. Those I have met and seen personally make fortunes have done so by taking advantage of opportunities. Opportunities can only be taken advantage of when one possesses money and the access to it. This is the true benefit for those looking to invest money. That is they create a Warehouse for their capital prior to deploying it into a worthwhile venture. Those investing in the market will recieve whatever profits are left but will have to pass on all other opportunities due to their lack of access to real capital. Any arguments to the contrary are bogus. I have seen the markets go up and go down and people do not sell on either side and cannot sell if their money is locked up in Qualified Plans. I have 9 WL policies and I’m perfectly ok earning the 3-4% return within them which by the way is is net of taxes, fees, is creditor proof, liquid, and they will through a death benefit in down the road when I die so my heirs want have to reinvent the wheel. Which by the way we all will die and 99% of us long after we have let our Cheap term policies go. There is a Seen to everything we do financially but the Unseen is often much greater! To see what I’m talking about go to http://www.fireyourbankertoday.com

    • You NEVER met someone who has made “a fortune” investing in the market? I know hundreds. Although perhaps you have a different version of “fortune” than I do. I certainly know plenty of millionaires who never invested in anything but boring old stocks and bonds.

      Thanks for the details about that 100% mortality rate on life. Wasn’t sure about that. :)

      I disagree that money is “locked up” in qualified plans. Most worthwhile investments can be invested in with qualified money and it certainly isn’t difficult to liquidate a typical mutual fund portfolio in order to “take advantage of an opportunity.” I’m surprised that 10 years in the financial world didn’t teach you how to do that.

      I’m glad you’re happy with your nine whole life policies. I sincerely hope your financial/investing strategy works out great for you.

  69. WCI, I am a physician, 52 with stock, bonds, mutual funds investing and derivative trading experience of 30 years. I had taken a small WL with NWM 20 years ago when I was a resident 250K with a separate term 1:2 ratio and dropped term as my assets built up. I kept the WL as the dividend were able to reduce premium without increasing death benefit. I could have kept the level term instead but being fully invested in equity, and not having to pay further WL premiums in future and fully optimized for tax deferred accounts, decided to continue WL. After a long 15 years, finally WL is paying the premium from dividend and extra amounts are funding paid up additions.

    I agree with the fact that WL is not optimal for investment, IBD/BOY for short term or for long term due to limited returns as you have beautifully outlined and cash value build up in form of saving vehicle could be better done short term in other forms of saving with pretty much similar risk and less cost/better return and safety of principle. In fact, as NWM (my WL company) outlines, Dividends on WL is basically, % return currently 5%, on (cash value-administrative cost including commissions-mortality expense-cash value increase for the year+premium paid), basically accounted as return of excess premium paid over the similar cost of term and administrative expenses+cash value and due to slow build of cash value from initial years, overall reduces the returns. However, if you want to carry the death benefit even later in the years, when term becomes prohibitively costly or unable to be underwritten/uninsurable risk due to medical condition, is a welcome choice and based on the value of diversification is a choice that I am making for my college bound children also starting this year. Asset diversification even with a small percentage of your assets in fixed income category (WL is basically that with component of death benefit), reduces volatility and returns both. I basically used it to compensate for higher risk portion of portfolio (derivative trading). In this regards, term would have been appropriate in my case with hind sight but no one knows future and there are enough features that help make WL useful in specific situation and for limited circumstances. Overall, I respect excellent blog and discussion by White Coat and his in depth honest opinion.

  70. Thank you for your posts. I believe I have saved quite a bit of money by not buying whole life insurance which was brought to my attention by my ‘financial advisor’.
    BTW I like the way Liz presented her argument. She is a very diplomatic financial advisor aka insurance salesperson.

  71. Fascinating summary and comments back and forth. I am an attorney and I have been researching this Bank on Yourself comment for the last several weeks. I’m leaning toward using the concept (either with Whole Life or Indexes Universal Life). Let me first start by saying I think both sides of this debate are somewhat clouded by their inclinations for or against this.

    First, the for crowd hurts their credibility by overselling it. One of the worst is the Bank on Yourself author. That book is horrible. A better book in my opinion is The Retirement Miracle by Kelly, although I hate that title.

    Second, the against crowd hurts their credibility by holding the LI product to a standard they don’t hold the alternatives. Quoting the historical average return of the S&P 500 is irrelevant for comparing for a few reasons: (a) you don’t get the average return if you start investing in 1963 and withdraw your money in 2012. You get the actual return. Here is a helpful website to get the actual return: http://www.moneychimp.com/features/market_cagr.htm. So, while the average (non-inflation adjusted) return may be 9.5% for that period, the actual (inflation adjusted) return is 5.46%; (b) using the Self Banking concept, unlike leaving that money in an S&P index, you actually have access to your money during those 40+ years via the loan option; (c) if you take the money out as a loan or if it goes to your beneficiaries, it is tax free — not so if you sell your S&P index; and (d) if you access money from your cash value, you still earn return on that money (We all know that if you access 20% of the balance in that S&P investment fund to buy something, you are now only earning that 5.46 inflation-adjusted actual return on the 80% left in the account).

    In conclusion, I think the problem most have in considering this concept is they look at it as an investment and then try to test it as an investment. As for me, I am in my early 40s and very healthy. I have $6 million in term insurance. I don’t trust the stock market and I don’t trust the federal government. I believe taxes will be higher when I’m 20, 30, or 40 years older. My Capital Gains tax rate just got changed to 23.8%. That 5.46% historical actual return on the S&P just got smaller. I suspect that will go up and I wouldn’t be surprised if the death tax goes up (or the exclusion goes down). My wife and I are looking to buy our next primary residence in the next 3 months. I’ve already contacted a friend in the insurance industry about sitting down after that happens. I’ll strongly consider Indexed Universal Life or Participating Dividend Whole Life because it allows:

    1. getting a higher rate of return on savings
    2. creating a tax-deferred (potentially forever) vehicle for saving money and accessing money.
    3. creating a nest egg for retirement that does not ever get taxed if structured correctly and that does not have withdrawal requirements or penalties on accessing the money (if I do it through a loan).
    4. creating a huge part of my estate that I can pass to my children tax free
    5. creating a place to put my money that will not be subject to the wild swings of the market.
    6. creating a potential financing source that will be much more lucrative when interest rates go up (and with the way the fed has been printing money, it is only a matter of time before they are going to go up)

    That’s my current thought process.

    • 1) There is a better way to get a higher rate of return on your savings- stocks and real estate. If you don’t trust them, that’s fine, but you’ll unfortunately have to accept the lower returns you will inevitably get because of that.
      2) It isn’t tax-deferred. Dollars used to pay life insurance premiums are fully-taxed. Very different from a 401(k). If you’ve already maxed out your 401K, DBP, Backdoor Roths, HSA, 529s etc, that’s one thing. If you’re buying life insurance instead of maxing out retirement accounts, I think that’s a mistake.
      3) Yes, tax-free (but not interest free loans) are one of the major benefits of investing in life insurance.
      4) Income tax, but not necessarily estate tax free. You do realize that any investment you leave to your children passes income tax free, right? That includes stocks, mutual funds, income producing property etc. It’s called a step-up in basis.
      5) The reason you get higher returns in the market is because of the wild swings. If there were an investment with much less volatility and less risk but the same returns, why wouldn’t everyone pull their money out of the market and buy it? It’s because it doesn’t exist. If you want to eliminate risk, you must accept lower returns.
      6) As a general rule, the borrowing costs go up with interest rates. I also would not make the assumption that interest rates are definitely going to go up any time soon. Look at Japan for the last 20 or 25 years. Sometimes interest rates don’t go up.

      I wrote a post on the myths of whole life insurance. I suggest reading it (and everything else you can find on the subject) before committing to a policy you will need to hold for the rest of your life. You may still want it, and that’s fine, but it’s important that you understand the downsides to it.

      • 1. I wasn’t aware returns in the market or real estate were guaranteed
        2. Understood. The tax deferral is like a Roth. Taxed funds are used and then no taxes are ever paid on any gains as long as you keep it for life and access funds through loan.
        3. The interest is paid back to the LI company, which is paying interest on the policy funds. As someone else demonstrated above, that is effectively interest free.
        4. I’m not expert on taxation, so I googled life insurance and estate tax. Apparently, you can put the policy in a trust to avoid the estate tax issue. But, even if that were not possible, it is a wash as to alternatives when it comes to estate tax.
        5. That is why I am considering (a) the additional “return” as not just the dividends or interest, but the interest saved by using the loan possibility and the death benefit itself as a return (just not to me); and (b) indexed universal, which provides a higher return that dividend paying whole life.
        6. The borrowing cost going up are at worst a wash if you are paying yourself interest as opposed to a third party and, at best, makes the Self Banking concept even better. I understand the Japan expirement, but would suggest that the worldwide money printing spree is pushing things to a breaking point.

        Agreed. That is why I have read three books (the Nash book and the Banking on Yourself book were painful to get through) and am going to be sitting down with my insurance consultant and going to very carefully and in detail go through the numbers. The point of my original post is that it isn’t just about return on investment because of the loan ability, the tax benefit on the loan, and the death benefit, none of which alone make this compelling to even consider. But, put together in one vehicle, it intrigues me a great deal.

        • There’s no doubt you can do a lot with a permanent life insurance policy. However, I view it as inferior for any possible financial need I have compared to the alternative. If you’re willing to use something less than the best for everything in order to have the flexibility to use it in a lot of different ways, then you’ll probably be happy with your purchase.

          I’m surprised to see how much many people value the ability to borrow from the policy to buy stuff. I really don’t find myself needing to borrow at all any more.

          • If I can get an 8% return on an Indexed UL policy from a A or A- Company when the S&P is 10% or higher in a year and 2% interest and no loss when the S&P is zero or less in a year, plus loan myself money out of an account where the return on my money will still occur as if all my money is still in the account and instead of paying a loan interest rate to a bank, I pay it to my own LI policy, and I have no cap on my annual contributions (like I have now with an IRA or 401(k)) and my kids will not have to pay income tax on the proeeds when I die, that sounds pretty good. Now I just have to sit down with my guy and make sure it is not too good to be true. I already talked to him on the phone and he prefers the whole life approach with a paid up rider (less risky than indexed UL to him), but we’ll get together after my home purchase and I’ll try to find you guys to give you an update on my thinking at that point.

            • I think you’re missing the point here. I know it SOUNDS good. Most of the upside with none of the downside and all these fun things on the side like asset protection, tax benefits, estate planning benefits etc. However, the devil is in the details. The cap, the participation rate etc. Post a link to the prospectus of your favorite policy and we can talk about the details. The problem is that you give up too much of the return in order to get all the extras like the guarantee, the tax benefits etc.

      • Wanted to follow-up on this — I started reading Kelly, The Retirement Miracle again. He does a really good job of laying down the thought-process that leads to valuing the LI concept. Anyway, he has an interesting illustration that reminded me of your comment “Look at Japan for the last 20 or 25 years. Sometimes interest rates don’t go up.” First, he presents the position that taxes are definitely going up in the future considering how out of control our national debt is and that increase has been on steroids under our current President. Second, after noting that many are saying we are going down the Japan road, he takes the Japan market in part of that 25 year period you mention. He looks at the hypothetical $1,000 invested on December 31, 1989. Using a buy and hold strategy, in 2010 that investment would be worth $240.16. Granted, he picks his starting point as the very top of the Nikkei. But I still wonder how much and how long you would have had to invest to reach $1,000 on 12/31/89. He then uses that same time period and those same returns of the Nikkei to show what an Indexed Universal LI policy would have done. Again, it is simplistic because he doesn’t include fees and as you mentioned, the devil is in the details, but it really shows why this is an alternative that many folks are considering — they think their taxes are going to skyrocket in the future and they think the stock market is on the verge of a Japan-like correction that will either languish under the low interest rate environment like the Nikkei has done or it will be even worse if the Fed has to raise rates. I personally think the federal government will eventually take private retirement plans of “the rich” to try to forestall the impending collapse of Social Security (I was going to say bankruptcy, but it is already bankrupt). I was also trying to find a Time article on the dilemma many are facing today who bought whole life in the 80s because of the decline in the interest rate since they purchased the policy, but my google turned this up: http://www.foxbusiness.com/personal-finance/2012/02/22/legally-cutting-out-tax-man-in-retirement/
        I couldn’t find the time article, but here is a WSJ piece that talks about the same issue with whole life (which I believe is less of a concern for purchasers now because of the historically low interest rate environment: http://online.wsj.com/news/articles/SB10001424127887324595904578121484233279270

  72. [Ad hominem attack removed.]

    The first few comments on here hit it right on the head. If you can’t get it from that then there is no hope.

    Companies like Dalbar have already done enough studies to prove that people don’t get very good returns in the market. Whether it’s mutual funds, stocks, or 401k’s and IRA’s it’s all the same. It’s a failing system that very few do well in.

    It’s not being scared of the risk, it’s the fact that the risk is met with little to no reward.

    • The solution to poor investor returns in an environment of good investment returns isn’t to avoid the stock market. It is simply to get the market returns by not shooting yourself in the foot. I don’t find it particularly difficult to follow a reasonable investing plan. Those who do are likely the same people who bail out of their cash value life insurance plans after 5 or 10 years to buy something else. They’re not going to do any better in whole life (or IUL) than they did in the stock market. It’s sad, but there are some people who would do better just putting their money in a savings account at 1%. Would those folks do better in whole life if they stuck with it? Sure. Are those people the target audience of this website? Not even close.

  73. I guess don’t put any comments with facts or they get deleted…

    Only last thing I’m going to say is that if you can do better than 8% in the market with no risk then be my guest. But, I don’t think most people, even the best investors, can consistently do that.

    • Who invests in the market without risk? I have no idea what you’re referring to.

      Ad hominem attacks in comments are routinely edited on this website. I find it interesting that they only ever show up on posts about permanent life insurance.

  74. Here is perhaps the most balanced analysis I have seen on this (by three professors at Lamar University)

    EQUITY INDEX UNIVERSAL LIFE INSURANCE: REVEALING ITS HIDDEN ADVANTAGES IN VOLATILE MARKETS https://www.cis.wtamu.edu/home/index.php/swer/article/view/12/5

    They conclude that the return by investing in an S&P index directly and also by purchasing term insurance and investing the difference in an S&P index would return more money than the Indexed Universal Life policy. But I find a few things interesting in their study. First, I’m not sure why they bother to look at average returns as opposed to actual with the S&P. They almost reluctantly admit that the real returns were lower. Second, they don’t consider the capital gains tax hit of 23.8% (probably higher in the future) that would eat at the S&P index investment. That makes the performance difference about 2% over that 30 year period. Third, I don’t believe they take into account the death benefit as a return. That to me is the potential game changer, especially when they compare term insurance. If it is a 30 year term policy and you die in year 31, it reverses the results completely, going from a death benefit of $199,000 for the term and $100,000 for the IUL policy, to zero for the term and $100,000 for the IUL policy. Finally, even though they cite sources from 2009, they only include market returns in their analysis through 2007. Doesn’t that load the deck in favor of the other two options? Their numbers are from September 1, 1977 to September 4, 2007. I don’t have access to the numbers if you adjusted that by 1 year (from September 1978 to September 2008), but I can compare (using the moneychimp.com link I provided above) 01/01/78 to 12/31/07 with 01/01/79 to 12/31/08. By just changing that 12 months, the S&P index return goes from 13.01% actual return and $1 growing to $39.19 to an 11.01% actual return and $1 growing to $23.12. By excluding the most recent major market correction, their analysis (with the tax hit) has the S&P investment winning by about 2% (which is remarkable since it doesn’t consider the loan and tax-free benefits discussed above). If you include market performance from 2008, I suspect their conclusions would have been that the IUL option wins.

    • The devil is in the details. If you have a contract/policy you wish to discuss, link to the prospectus. If not, then it’s all hypothetical.

      Some ways the return is reduced include:

      1) Not counting dividends. This is actually pretty routine. It’s only changes to the “index” that matter.

      2) Sometimes the “participation rate” is less than 100%. So if the index goes up 10%, you might only get 6 or 8%.

      3) There is often a cap. So if the stock market goes up 32% (like last year), you only get 10%.

      At the end of the day, even with relatively routine stock market returns, your returns resemble those available with whole life insurance. It probably won’t be zero over the very long term, but it will be very different from that available for taking the risk of investing directly.

      Also keep in mind it is possible to invest very tax-efficiently in a taxable account. You can tax loss harvest, donate appreciated shares to charity or leave them to heirs, etc.

  75. I just wanted to make 1 quick comment about this “salesman” issue.

    I hear it all around and even on these comments that you can’t trust an insurance salesman.

    Aren’t they the professionals here? Aren’t they the ones who actually study this stuff?

    And if you say they are going to sell you something, so they have something to gain from you believing what they say, then the same thing has to go for any salesman, right? Or anyone that is gaining any type of monetary reward for their opinion?

    Am I wrong on this?

    • If the salesman was paid a flat fee for advice (say $100 an hour) that would be one thing. But if they are successful in selling you a policy with an annual premium of $50K, they’re paid $50K. That’s the issue. You’re only paid if someone buys, and you’re paid a heckuva lot only when someone buys. It just introduces this massive conflict of interest.

      • Wow, I didn’t know how poorly I was being compensated by the insurance companies. 100%!!!! That would be awesome in comparison to Reality. [Personal insults to the WCI deleted.]

        • Perhaps you are being compensated poorly. This insurance agent, who writes a blog for his fellow agents, writes this:

          Whole Life Insurance

          For starters, let’s look at the base premium on whole life insurance. Most base commissions for most life insurance products sit at 50-55% of the premium. Then there is an expense allowance that is paid which brings the total to 70-110%, depending on the product.

          Now this is what’s paid to the agent typically.


          Other agents have used the same figures. Perhaps you’d like to take up your argument with them.

          • The next paragraph from the blog you posted says that an agent gets paid 2.5-3% for the portion that goes to Paid Up Additions. Now if a policy is designed like we do 60-70% will go towards paid up additions. This is dramatically different than 100% paid out in commisions.

            Now for an economics lesson and a rant. The so what of this topic is irrelevant. If I bring in a $1, like most businesses in America 60% will go to Overhead and 40% will be income. Focusing on the gross revenue of any business means nothing. Furthermore markets will determine the value of any product and service. So if I bring no value or I steer people the wrong way the market will compensate for that and reduce the commisions that are paid out. That’s the way free market/enterprise works. You might not believe that since unfortunately your profession has decided to hand over the reigns to a Socialized Government which now compensates you as a physician on a rating system. This before long will move you out a job and replace you with a nurse practitioner who can read a chart and follow guidelines sent down from the board writing this all up at a much lower cost. Because isn’t everything based on cost?!!!! However I pray you and your collegues put your foot in the ground and say NO to all this but you better start now. Maybe you could focus your blog towards that, and I would be more an advocate for you in that pursuit.

            It’s great that you have an opinion and I have a very large opinion too. However make sure not to confuse opinion with FACT. The next time you sit down and diagnose a persons financial position and get paid to do it let me know. Until then I will keep doing my job as a Certified Financial Planner Professional and you can continue as a Medical Doctor.

            • So, are you suggesting that commissions of 50-110% (or heck, let’s humor you and call them 20%) don’t create a massive financial conflict of interest from the salesman?

              What if you went to a doctor, and instead of paying the $100 office visit fee, the doctor was paid 50% of the cost of any tests he ordered? Would you be concerned that maybe, just maybe, he might be ordering more tests than you actually need? This is such a bad idea it’s actually illegal in medicine. But it isn’t in financial advising.

              If the vast majority of financial professionals would do their job (give great advice at a fair price) there would be no need for a blog like this one. Instead, firms advertise for “financial advisors” much like yours does (and I reference the page on your site describing the “typical candidate profile” for your job):

              In career transition
              Sales representatives
              Marketing professionals
              Recent College Grads

              Your firm wants people that are “coachable, competitive, and achievement oriented.” There’s nothing listed about, you know, financial expertise, desire to help others etc. It’s about sales. To make matters worse, your firm’s fees aren’t listed on the website. In my experience, that’s because they’re too high. Feel free to post the link to your firm’s fees if I’m wrong.

              • Thanks for researching our firm we are very proud of our 40 year history. By the way Integrity was at the top of the list for traits of an ideal candidate, you accidentally left that one off. We didn’t accidentally leave off financial expertise, it was on purpose. Unlearning is much harder than learning. This is obvious through the number of times you have gone back to the well of traditional investing that doesn’t work. If it did why are some many people having to leave “Retirement” and go back to work.
                We are in a sales profession. Do you want me to say that again, we are in a Sales Profession. Why do you assume that is a bad thing? This is what makes are country great, if there wasn’t a need for things, there would be no need to sell them. This is why every Socialized country has failed. When you don’t know what people want through free market purchasing you don’t know what to produce more or less of. Try reading Biblical Economics by R.C. Sproul JR. it tackles this perfectly.

                In response to how much someone is paid let me go back to my previous post. Free market/enterprise will determine the value of everything. The market will compensate for bad practitioners by eliminating them and the good practitioners will be rewarded. Consierge medicine is on the rise, why? It’s definitely not cheap. Why else would patients pay for this? People want to seek people who are highly qualified and they will pay to receive high quality. How much can they charge for this conseirge service?……As much as the market will pay!!! Is this bad? NO. If you think you are not being paid what you worth, then you are incorrect. The market says you are being paid what you are worth.
                So if an insurance agent makes 500% than that is what the market says it is worth to do that job. You can argue against this as much as you want too but it will not change the fact that it is true.

                  • You are missing a key point.

                    Let’s say someone puts in 10k every year into a life insurance policy.

                    And the commission is 60%. That doesn’t mean that you get paid 60% of 10k, it means you get paid 60% of the base insurance.

                    A whole life policy built for cash value has a base and a term rider. This is adjustable by the agent but if you want a good policy you are looking at, most likely 50-60%, of the policy being base.

                    That’s what it means to get 60% commission. It’s not 60% of total money it’s 60% of base insurance. That means on a 10k policy the agent gets paid $3,600 one time.

                    You will continue to put in 10k every year of which the agent will get a small residual but it’s nowhere near the first year payout. The first year is where the agent makes his money.

                    It may seem like a hefty chunk the first year but if you look at it overtime it isn’t that much. You are putting in 10k every year.

                    If you did that with a planner charging 1.5% a year you would be paying that 1.5% every year as your balance gets higher and higher (you put in 10k every year).

                    A fee based planner will charge you, let’s say, $150 an hour? So you get a few years of planning in until you hit the $3,600 dollar mark? Eventually, in both cases, you are going to be much much more than $3,600 for their services.

                    But the real point is that your fee is actually going to buy life insurance. In all other cases you are just paying some guy to watch your money. With whole life you get insurance and growth, your fee is actually going towards something that has value on top of your policy growth.

                    • Are you suggesting that the money the insurance company uses to pay your commission is actually being invested for my benefit? I disagree. Look at the cash value after 1 year. It’s pretty much the amount you invested minus the cost of the insurance minus the cost of the commission. There’s no magic in there.

                      Your argument fails because you’re assuming there is no value in the advice given by the fee-based planner. “A few years of planning” is a valuable service to many people.

                      At any rate, the only guys I know who think the commission-based model is a good one to use for financial planning and investment management are those who make money on commissions. That’s a salesman model and, in my view, the worst possible model for getting your financial advice.

              • In fairness, there are doctors who recommend procedures for patients that have only marginal benefits or not needed, which allows them to collect money from insurance. Your argument is that the difference is that this is considered fraud in the medical world, and while I agree, I simply want to point out that there are unscrupulous medical practitioners out there so it’s important to get a second opinion and manage your own healthcare in the same way you would manage your money.
                In the financial world, it’s best to have a CPA, a registered investment advisor, and an attorney assisting you. This gives you a number of different opinions.

  76. Agree with White coat investor. Unfortunately, most industries are based on commissions so its hard to distinguish the good professional for the one who is doing it mainly for th money. To White Coat Investor: to they really get that much of a sales commission–1 years worth on the policy? Wow!

  77. I read the blog link published by White Coat. It seems that if an agent designed a whole life policy that supports a “life benefit” and in turn generates a higher internal rate of return, as compared to favoring a death benefit, the agent would get a much lower commission. I think this is true because I asked an agent from Paradigm Life how much he was getting from my whole life and he said it was closer to 15-20%. I have no proof if that’s correct but that’s what he told me.
    Hopefully my insurance guy will structure my policy in my best interest.

  78. Any examples of IBC/BOY on insurance company marketing material? They have compliance departments, lawyers & regulators to make sure materials are relatively ok. That the ‘educational’ materials on the concept do not appear on Mass Mutual, Prudential, etc paper raise a red flag for me but I haven’t done a complete survey. I’d also expect to see just about every tax preparer market this if it was legit (vs a liability).

  79. Chris,
    You are right there aren’t any insurance companies advertising IBC/BOY to the public. This is typical protocol for insurance companies. They promote their strength and diversity of products to the public, and they promote ideas of how to sell their products to advisors and agents. Also you won’t find many “tax preparers” marketing a concept they know nothing about. You must consider their jobs are Preparing Tax Returns and not being Tax Planners. That’s ok too b/c I don’t think most of us really want our accountants to be CREATIVE.

    Here’s some resources on the topic if you are interested:

    Blog on 401k’s and some things you might not have thought about before.

    Article written by an economist on IBC who spent two years with insurance companies to determine the viability of the concept

    Podcasts in June and July with two different CPA’s discussing their history with IBC

  80. Hi
    After weighing the merits of whole life insurance I just purchased a policy earlier this year. I’m a doctor that has no relationship to the financialplanning industry. I will hopefully give you an update on the policy next year.

  81. Wow! I can’t say I fully understood everything(in not in the finance industry) but I tried. What do you think about a whole life policy for your child. My thought process is, true it has a low return but it’s garuanteed. So if when my child was born I opened a policy(it’s cheaper cuz she’s so young) and put money in for the next 20 yrs, I would have a decent college fund for her. Now this may be better then an ESA, because if the market isn’t doing well when she goes to college, I have money that I could count on despite the fact that there are lower returns. Thoughts???
    Thank you very much!

    • I think whole life insurance as a college savings fund is a terrible idea. First, you’re paying for insurance you don’t need. Second, you get the low returns (partly as a result of paying for that.) Third, you’re passing up the opportunity to get significant tax breaks from using a 529 and/or an ESA. Fourth, if you surrender the policy to get the cash value, all gains are fully taxable at marginal rate. If you borrow from it to keep them tax-free, you pay interest. Fifth, the guarantees on a whole life policy are quite low, usually less than inflation, especially over the 10-20 years most people save for college.

      Does all this mean you should cancel your policy? Not necessarily. Unfortunately, the low returns and high costs are heavily front-loaded, so at a certain point, these may be worth keeping.

  82. Thank you for taking the time to answer my question.
    What about if I’m not sure if I want to use this money for education or something else(like a wedding or travel abroad), does that change the equation? Also if I need this money to be a garenteed amount, does that outweigh the potential tax breaks? What If when we need the money the markets in a downturn, even if it will recoup in a few yrs. it won’t help me pay. Thanx for your time.

  83. Kevin:

    I will have a rather long winded response, but may make things clearer. I, too, am a doctor. I have a patient that is in the financial industry. Yes, he is on commissions. No, I do not use him for my financial estate, but we always talk about finances when he comes to the office because he knows I “geek out” on stats and am probably more educated than 95% of anyone in the financial industry. He said my having a WL insurance policy set up this way gives so much flexibility for the future that I don’t realize how smart it was that I started one. He always has to run the numbers because every situation is different, but it is occurring on a more frequent basis with this clients that these hidden nickel-and-dime taxes will hit people much harder than they realize in disposable cash flow during the retirement years. Having the capability of tax free withdrawals via policy loans is a great “insurance” plan (bad pun).

    If you are going to do this for grandchildren or great-grandchildren, the smarter move may be to an IUL policy. I have had conversations with Mark Orr, but never did a policy for my kids because I went through a divorce and it would have created a huge mess. These types of insurance policies follow different stock market indexes. there is a cap and a floor. Because it follows the price of the stock market (you do not get the added return of dividends, only the price movement), over an extended period of time you should do 2-3%/year better than a WL policy. And the expenses are shown up front versus hidden in the annual premium of a WL policy. Starting with a seven year old, if someone lived to the average age of 80, the expense of the policy would average to roughly 1% / year. And you get the flexibility of policy loans like a WL policy. Mr. Orr favored Allianz to set up these types of policies.

    So, my policy. The good? I will be at premium = cash value at the anniversary of this upcoming year, which would be 4 years old. The bad? I tried to extrapolate how much are the annual fees/year to keep this policy active. As best as I could figure it, I estimate by holding until death it will cost about 2%/year to keep active. So, was this the best “investment”? No. But what it did do is be my bond substitute that will keep up with or slightly beat inflation, be there for my life, have a tax-free income via policy loans if I need it, and pass on to heirs estate-tax free if I didn’t.

    Hope this helped

      • It may be closer to 96% but I know it’s not far off. It was the second policy we did. My ex has the less favorable structure. Mine being second, he threw me a deal. Yes, it’s a lot of PUAs. Even from Year 1, going up to the MEC line, it was about 77-80% cash value compared to premiums paid. So, yes, it is possible to structure these favorably. Part of it is the agent, the other part is how the insurance companies interpret the MEC definitions. There can be a lot of leeway in that interpretation depending on the insurance company.

        Understanding more of the nuances, there are ways of using direct recognition policies to look like non-direct recognition policies so you get the higher dividend credit each year. That’s an advanced course, and not for this thread but it always goes back to how it is first structured.

  84. Kevin,
    You are asking the right questions and as several have responded already there isn’t a one size fits all strategy. My wife (dentist) and I decided that we want to keep savings and investing separate. 529 plans use mutual funds which are investments and as you mentioned can lose money, up to 100% of your investment. Whole Life (not Equity Indexed UL) is a savings vehicle. Savings is somewhere you store money for a future event or expense and expect 100% of it to be there when you need it. This is 1 of 5 reasons I chose WL over 529 plans. If you care to read the other reasons here’s a link.

    There’s a great case study if you like to read in a book called A Path to Financial Peace of Mind by Dwayne Burnell, MBA

    I’ll go record a video doing a mathematical comparison and re-post here to shine more light on the two.

  85. Thanks for the insight on the guaranteed fund I wasn’t aware of that. So it sounds like if you want to SAVE money into a 529 plan then that would be the only option. I’ll be glad to compare that in the video I’m recording later today to the guaranteed option in the WL policy.

    • I hope WL comes out way ahead, even the guaranteed option, at least for any time period longer than 5 years. My beef with your terminology is that (using your terminology) if your expense lies 15-20 years in the future, you should be investing toward it, not saving toward it. Let the portfolio do some of the heavy lifting so it isn’t all brute force saving.

  86. I suggest you read the book (Infinite Banking Concept by Nash,it has a free PDF version on the net) twice and read it with an open mind, no biases (that’s a tough sell hahaha). Read the grocery store example more than two times and not just read but internalize it with an open mind.

    “You finance everything that you buy. It’s either you take a loan and pay the interest to someone else or if you pay in cash then you give up the interest you could have earned otherwise”

    • I’ve read it. I don’t buy the argument that buying an insurance policy I don’t need in order to save up for expensive stuff is a good idea. Especially for people who climb rocks. Looked at the price of life insurance for rock climbers lately? But as I mentioned to you yesterday, if you want to Bank on Yourself or Infinitely Bank, knock yourself out. My path to wealth (make a lot, carve out a big chunk of it to build wealth, and invest it in a reasonable manner) seems to be working just fine without it. When I need $20K to buy a car or something (which seems to be the whole point of these schemes), I can cash flow it out of recent earnings. I’m not putting my emergency fund into whole life insurance, and everything else I’ve got I invest into assets with a higher expected return than whole life insurance.

      • WCI wrote:

        I’ve read it. I don’t buy the argument that buying an insurance policy I don’t need in order to save up for expensive stuff is a good idea. Especially for people who climb rocks. Looked at the price of life insurance for rock climbers lately? But as I mentioned to you yesterday, if you want to Bank on Yourself or Infinitely Bank, knock yourself out(I am in a coma right now) . My path to wealth (make a lot, carve out a big chunk of it to build wealth, and invest it in a reasonable manner) seems to be working just fine without it. When I need $20K to buy a car or something (which seems to be the whole point of these schemes), I can cash flow it out of recent earnings

        Vince wrote:

        then you give up the interest and paid out of pocket

        WCI wrote:

        I’m not putting my emergency fund into whole life insurance

        Vince wrote: financial planning 101: emergency fund needs be in a savings account for ready immediate cash during times of emergency that’s why its called emergency fund, I actually think emergency fund is the only money you should have in a bank considering the low interest on deposits and the way banks are earning through commercial loans on your deposits! Banking is a process!

        WCI wrote: and everything else I’ve got I invest into assets with a higher expected return than whole life insurance.

        Vince wrote: As written in the book you have read “When first exposed to the rationale of The Infinite Banking Concept a person will almost always think— and often voice the thought, “but I can get a higher rate of return by investing in _________.” Unfortunately that person has not understood the message! We are not addressing the yield of an investment—we are discussing how you finance anything that you buy. It is always better to finance it through your bank than out of your pocket.

        [Edited for clarity]

  87. Good evening.

    I have been using this system for about 6 years.

    I haven’t looked at the returns recently, so I’ll do that, and get back to you. Maybe even a guest post if I find the time.

    One problem with IBC is that it is SOLD, by well meaning individuals who don’t understand just how powerful the system can be, then used inefficiently, for things like irresponsible consumer spending, New cars, etc.

    Whole life is the vehicle, not the investment.

    WCI, do you own your home? Market value, less any mortgage? Humor me, and I’m guessing I’ll have you looking to get in the “dividend paying whole life” game as your New Year’s resolution.


    • Have you tried buying whole life insurance as a rock climber? It’s highly unlikely I’ll be buying any more life insurance in my life. I simply don’t have a need for it. If you like it, it’s not the worst thing in the world if done well, but it’s hardly a key element in a good financial plan.

      Hope it works out well for you.

    • John The Pharmacist. Please, for the sake of those following the post, continue down your line of reasoning as to where you convince W.C.I. to make “dividend paying life” a New Years Resolution.


  88. A reader sent me this link via email:


    This is a big write-up by a blogger about “infinite banking.” He spent over 100 hours researching it before writing it up. Far more than most obviously. At any rate, he arrived at the same conclusion I did:

    Essentially, what I found from talking to these people can be summed up in one long sentence.

    Unless I specifically need a permanent death benefit and/or am already maxing out essentially all of my other investment options (which I am not, but may be in the future when I’m making more money), the only people that are telling me that Infinite Banking is a good idea are the people who will directly receive money by me purchasing a policy.

    This is a huge red flag for me personally.

    why would I bother with all of the headaches of a whole life policy, potentially being done-over by a life insurance agent, the low/negative returns during the accumulation period, and all of the inflexibility that would go along with a whole life, when I can get about the same performance with something I firmly understand?

    For me, it is clear that Infinite Banking is not right for me (and likely the vast majority of normal folks reading this) because…

    It doesn’t result in “stellar” performance that I cannot obtain on my own (as we saw above).
    It is difficult to understand, there are a lot of complexities that could easily mess the whole thing up, and gives me a headache trying to wrap my head around.
    I could not find anyone that is not being paid a life insurance commission that could convince me it was a good idea.

    Unlike others who have reviewed Infinite Banking and decided it wasn’t suited for themselves or indeed the vast majority of people, I do NOT think this strategy is the “devil walking the Earth.” In fact, there are some valuable things to learn from the strategy, and I think that the aim of it (having steady, reliable, tax-free access to cash) is well-intended.

    More specifically, there are some really good instances where Infinite Banking would be nicely suited. I’ve listed a few of these below:

    People that do not have the discipline to “invest the difference”
    If you really have trouble saving money for retirement and are the type of person that needs some external encouragement, being required to send in a monthly/yearly premium to the life insurance company might not be the worst thing ever.
    People that really need a death benefit in retirement
    For most people, I think that having a death benefit in retirement is likely a nice thing to have, but probably not a requirement.
    However, if you are someone that really does need a death benefit during retirement since you have people that depend on you financially (and your savings cannot cover it), whole life insurance is really your best bet to obtain this.
    People that are pretty wealthy and are looking for another place to diversify, stash money, and avoid estate taxes.
    As I mentioned above, if I was to the point where I had so much money that I needed to find a place to put money tax-free, I wouldn’t be all that opposed to using whole life insurance.
    However, in this case, it really wouldn’t be Infinite Banking, but more just using whole life insurance…

    I highly recommend you read his post if you are seriously considering doing this.

  89. This IS a great blog post. One that was one of the turning points for me to BUY whole life. One thing is that the author drastically underestimates his need for life insurance. 446,000. Like that is all the money his family will need if he dies before sixty?? C’mon, like half a million dollars is all the earning potential that he would ever have if his life is cut short.
    But again, a great article that really digs in deep into the intricacies of Whole life and cash flow banking.

    • I don’t know the author’s circumstances, but I agree $446K is a pretty low amount of life insurance unless he’s got a 7 figure portfolio somewhere. But if he’s having an issue affording enough term, buying whole life isn’t the solution.

  90. I propose a challenge to any/all of the whole life agents who are following this post. For the benefit of those who doubt the efficiency of a whole life policy, including those already following and for all those in the future: Can an infinite banking expert articulately and succinctly explain how borrowing from your whole life policy at a higher rate of interest than the policy dividend is currently returning you is economically advantageous? Thank You

        • Chris:

          I agree. Have the discussion here, so I’ll try and start as I have mentioned in earlier posts why I have it. I have no bias nor any commission to worry about.

          Instead of thinking of the absolute rate, there are two other points to consider: The flexibility of payments and the spread (the spread just like a bank looks at it to be profitable). I’ll deal with the spread part first. The concept is if you can get a loan at SIMPLE interest for 5% and compound your cash value at 4.5%, over time the compound interest wins. In my example, about three years your compounding wins over simple interest. But that is only half the story. The half which is left out is if I can get that car loan at 1.9%, why would I want a loan at 5%? I wouldn’t. That’s dumb UNLESS you have difficulty getting that excellent rate. You have your “bank” as your backup to make loans to yourself.

          The real key, if you don’t have the diligence or the evenness of cash flow, is the flexibility of payments. Let’s go back to the car example. $10,000 loan from your policy at 5% simple interest. At the end of one year, your new loan value is $10,500. You could have driven the car for one year and not had to make a single payment. Then on day 365, write a $10500 check and you are done. Want to wait 24 months? No problem if you have the cash value to support the loan – they’ll float another 5% on the $10,500. Want to wait until you sell the car 5 years later? Fine, it will still accrue but the life insurance company doesn’t care. Why? Why are they not concerned? Because if you die before the loan is paid back, they reduce the death benefit by the corresponding loan amount.

          I believe right now that with my policy the loan rate and the dividend rate were both 5%. Exactly equal. Why? I have no idea. I currently don’t have any loans outstanding with the life insurance so it’s not part of my current equation of life. But it’s there if I need it.

          Hope that starts things.

          • I guess if finding $10K to buy a car represents a big deal in your life, then this might be relevant. If I need $10K to buy a car, I wait until my next paycheck, carve out part of the amount that would have gone toward investments, and buy a car with it. For there to be an amount that I could take a loan that would really affect me, I would need cash value in the hundreds of thousands (to buy rental property), and I’m simply not willing to pay for that much insurance I don’t need in order to have a bank.

            • WCI:

              I am trying to answer a question. It’s great that you make somewhere between $350-400K/year as given by your smart answer, but you know what? Most people don’t. The average doctor doesn’t and I’ll guess the average person reading this thread doesn’t either. Chris wanted to start the conversation, so I tried and used as an example of an even number of $10,000 to put numbers to the theory. Go back through my messages and you can see this is way down the list from an investment perspective, but can still be a useful asset tool. As long as people have a better education about a tool, do whatever you want, but being a pompous jerk stating, “I just need to wait two weeks to save 10 grand,” thanks, but I don’t care.

              • No, that’s exactly my point. If you’re making $200K instead of $400K, it’s the same issue. In order to have sufficient cash value that it is meaningful to borrow some of it out, you’ve got to have a policy that involves buying much more permanent insurance than you probably ought to be buying. That and I dislike the focus that the Bank on Yourself crowd has on spending. If people could get rid of that focus, they would find they didn’t need to borrow money, from themselves, a bank, or anyone else, in order to purchase what they want.

                Instead of buying a whole life insurance policy to buy an RV, just buy the RV. If you can’t do that with cash in a reasonable period of time, perhaps you shouldn’t be buying it anyway. The only exception I can think of would be real estate; but in that sphere, it’s relatively easy to beat the rates on life insurance with a simple mortgage from a conventional lender. I suppose if a lender won’t lend to you, that would be one thing. But if a lender isn’t going to lend you money for a real estate project, you’ve got to wonder if maybe it isn’t such a smart project in the first place.

  91. I agree with WCI that we shouldn’t be spending money to just spend money. Contrary to Keynesian belief you cannot spend your way into prosperity.

    I think the point that is being overlooked is that our money must be stored somewhere whether temporary or for long periods of time. If you list out the characteristics of what you want in the perfect place to store money for that period of time you will probably include the following: safe, liquid, tax advantaged, competitive return, creditor proof, etc.

    If we are investing our dollars they typically flowing from a savings account or money market to those investments and back when we sell those investments to capture the profit (typically) prior to being reinvested.

    Compare your savings and money market accounts against the criteria listed above and they don’t meet many of the ideal criteria. This is why as a financial professional I use and recommend the use of a properly structured whole life policy (in the right situations, it’s not a one-size fits all) to be this core foundational tool in someone’s portfolio.

    It’s not Mutual funds, stock’s, real estate (for those willing to except the risk) of OR Whole Life Insurance, it’s AND Whole Life Insurance

    Too bad you are not in or near Birmingham, AL this week. There’s going to be a great demonstration of this being given by Robert Murphy Ph.D, Carlos Lara, & Nelson Nash. http://conta.cc/1x9Ogbp

    • I don’t need Nelson Nash or anyone else to explain the concept. I understand how it works just fine. I just don’t buy it as some magic elixir for my finances. If it all works out perfectly, then I may be slightly better off than I would be otherwise. If it doesn’t I’ll probably come out behind. Your characteristics for a perfect place to store money are different from mine. I also include such things as 1) No negative return for the first few years, 2) No need to deal with a life insurance agent, 3) No need to answer pesky questions about risky activities, 4) No need to have a physical, 5) No need to ask an insurance company or pay interest in order to get my money etc etc. And it’s not creditor proof in every state. And competitive return? Depends on what it’s competing with I suppose. Liquid means I can get my money within a day or two. Not wait a week or two for the insurance company to process my surrender or loan. But hey, if that’s what you find attractive, “bank on yourself” with a whole life policy.

      • I realize you have a strong dislike/distrust of whole life insurance, however I feel some of your arguments against it are kind of soft, so I’m wondering if there is a something you aren’t telling us…
        Here are your arguments: No negative return – Have you ever had a negative return in the stock market? Most investments have some risk, you have identified one of the main “risk” of WL, the “negative return” for a few years…
        Dealing with Life agents – Life insurance agents are just people. You deal with them every day. You are the customer. Don’t let them sell you. Buy the product that will help you achieve your unique goals.
        Risky activities – I’m sure you will pay some additional premium for climbing rocks. Have you ever looked into what that would be?
        Physical – don’t you do this to other people all day long? You pee in the cup, they take some blood. Ten minutes later, you are back climbing rocks.
        Ask insurance company for YOUR money – I send a fax, i get a check in 3-4 days. My bookie is always real understanding with the process, so my kneecaps are still intact. This shouldn’t be your emergency fund, just another place to park money once all of the other priorities are in place.
        Interest – you pay interest, but it goes into Your policy, so it’s a wash.

        You mentioned real estate investing in another comment, which is what I use my policies to invest in. You don’t need the entire amount. My wife and I just borrowed the downpayment from the policy, and got a mortgage on the properties. The rent pays the mortgage and pays back the loan to the policy. It’s kind of freaking sweet, really. The differences are marginal at first – our first policy loan on a rental property put $3000 of interest back into our policy the first year. Also, my rental company deducted that interest, because interest is a deductible expense for a business, which saved us another $1500 or so in taxes. So we’re $4500 to the positive in year one as a result. That was in 2010, and we have picked up a few more properties, gradually increasing in value, using cash from the policy for downpayments as needed, and repaying those loans from the rental income, while taking full advantage of all of the tax benefits along the way, deducting depreciation, interest expense (including what we pay into our policy!), etc.

        This isn’t going to work for everyone, but for most people with enough discretionary income, it is going to work very well when structured correctly and carried out diligently.

        I was a little put off by your response to some of my previous comments, which i took to be disrespectful. I had not previously (and still have not) calculated what my actual returns are as a result of using this system. What returns would I count? Certainly the actual dollars inside the policy, and probably also the tax savings for interest paid by the company back to my policy. How about the depreciation? Rental income? I shared my comments on your site because I believe that for the right person, this can be invaluable. I sometimes hesitate to share, because I do fear that if even 1 percent of the population was doing this WELL, congress would make it illegal overnight. Fortunately for me, most people don’t have the discipline to follow through, and very few people will ever use this to its full potential, and as such will likely fly under the radar for many more decades.
        I have a policy for my first daughter (and need to find time to set one up for my 2nd daughter) which we plan to use to teach them these valuable lessons about money. I’m hopeful that they will have their own little investment projects using their policies as a tax-advantaged funding source before they are out of high school, but we’ll have to wait and see. I’m using this as a vehicle for college savings instead of a 529 because a 529 will directly reduce the amount of financial aid she will qualify to receive. The WL policy won’t even show up on the FAFSA.
        That’s how I’m using life insurance. It will work for some, and won’t for others. Hope this helps someone.

        • I’m not sure what you think I’m not telling you. I don’t have a dog in this fight. I don’t make more money if a reader buys life insurance nor if they don’t.

          Yes, I have looked into the additional premium, not for a BOY/IB policy, but for a term policy. It more than quadrupled the cost.

          If you’re not sure how to calculate your returns, I would recommend you learn how to use the XIRR function with Excel: http://whitecoatinvestor.com/how-to-calculate-your-return-the-excel-xirr-function/

          I’m interested to see how much need-based financial aid your children receive given your income as a pharmacist and all these rental properties you own.

          • Are you making the assumption that because your quote for term life was 4x higher, that a WL policy will also be 4x higher premium because you climb rocks? It does seem that many of your arguments are based on feelings and assumptions, not facts… Do you NOT have term life because the premium is too high? (rhetorical) How much of your money for your term policy will you get back? (don’t get me started on the idiocy of return of premium riders!) The answer in most cases is $0.00. The argument could be made, and would be true in many cases, that term life is more expensive that WL, as every penny you pay in is gone – certainly for you as the insured! Also, something like 7% of term policies lapse due to non-payment every year, so those won’t pay out either. What percent of policies actually pay out during the term? I can’t find a solid number, but I’ve seen estimates of about 1 percent. So you are essentially paying for an “option” that has a 1 percent chance of expiring “in the money”. Not a very good endorsement for a cheap product, is it?

            How much need-based financial aid will my daughters qualify for? ALL of it, based on the current guidelines (here: http://www.finaid.org/fafsa/smallbusiness.phtml ) anyway. We’ll see what happens in the future. The good news is that I have about 14 years to plan for the first one, and 16 to plan for the second. I’m planning on not having any W-2 income by the time the first one is in college.

            • The fact that term life doesn’t pay out means it’s a bad thing to buy is a myth.

              The insurance component of whole life is generally more expensive than the insurance component of term. I doubt the WL premium would be four times as high, but I suspect the insurance component of the premium would be at least that high.

              Every penny you pay in insurance costs for any type of policy is “gone”. That’s the cost of insurance. The goal is to lose as little as possible while maintaining needed coverage. Whole life simply obscures things by combining the insurance policy you need with one you don’t plus an investment.

              I’m glad your kids will get significant need-based financial aid. Mine, like those of most high income/high net worth folks, probably will not. Mostly because they won’t need it, but also because most need based financial aid is loans and I’m going to make sure they don’t get those. Not to mention they are highly likely to qualify for merit-based aid and will likely attend an inexpensive college anyway. Investing in whole life to minimize assets reported on the FAFSA is a bit of a myth anyway, since retirement accounts don’t count toward that anyway.

                • I didn’t say it was a bad thing, I simply make the point that very few of them pay out, so in reality 99% of term premiums are wasted; a complete loss.

                  You state that every penny you pay in insurance is “gone”. This contradicts what you say regarding my wife’s policy. After X years, her policy will have a Y% return. That is different than your term policy, right? Your return on “investment” is always a negative number, today and every day in the future (unless you die, but the odds are less than 1%, as stated above) and YOU don’t get to enjoy those returns!

                  My kids should be able to qualify to take out loans in their names, as a result of our planning, just like their mother and I did. While I think it is great that you are going to pay for your childrens’ education (after their scholarships, of course), and I sometimes wish that my parents would have done that for me. However, I think my kids will benefit from taking responsibility for their education and the funding thereof.

                  Whole life is never reported as an asset on your Fafsa. While 401k account balances are not reported, the amounts that both parents and the student contribute to a retirement plan are counted as income in that year. 529 accounts however will directly reduce the amount of aid that a student will qualify for. That and the limited number of options for that money is why I feel it is a suboptimal vehicle for most people.

                  Why do you think that my rental income and assets will count on my kids’ FAFSA? Did you read the situations where they do NOT count on the FAFSA? Assume that one of situations applies here, as that is the case.

                  I may sell them and buy more life insurance, as life insurance is a great estate planning vehicle as well, but at this time the plan is to let them cash flow and build our wealth, while paying for themselves and generating tax deductions, and possibly do a 1031 into larger or more productive properties, if that makes sense at the time.

                  • It’s not a complete loss. If a 30 year term policy expires without me dying I received insurance for 30 years. That’s hardly a loss. And besides, it is also lost with whole life. The part that is not lost with whole life is the premium that pays for the insurance that covers the death benefit AFTER 30 years and the premium that pays for the cash value. Same loss either way. I ought to add that to my myths of whole life series. You sure you don’t sell this stuff? You’d be pretty good at it.

                    How wonderful that your children will be able to get student loans. Sounds like a great solution to college planning. If that works for your family wonderful. I had assumed that you were going to use your whole life policy or all your real estate investments to pay for that, but I guess not. Your goal was apparently just to hide your assets so your kids could get loans. I’m not sure that’s really a big issue worth doing any financial gymnastics for. It’s not like you’re required to pay for your kids’ college. They’re just required to report your assets and income on the FAFSA.

                    Why is it such a bad thing that 529 accounts will reduce how many LOANS they can get. Isn’t the whole point of a 529 to reduce how many loans they have to get? I guess if by limited options you mean they can only invest in thousands of mutual funds and individual securities then I guess that’s limited I suppose. Seems like that isn’t a big deal though. If you don’t want to invest in publicly traded securities, then invest outside a 529 as you are. It’s a free country.

        • John, can you explain how the loan repayment on your rental property “put 3,000 dollars of interest back into your policy”? Was that above what your loan value was? what was the rate that you borrowed it at? What was the rate that you put it back in at? This is a concept that I am still struggling to grasp fully. Thank You

          • This is the basic way that infinite banking works. You borrow from it, you pay it back, with the appropriate amount of interest. Is your insurance agent helping you with this process, or do you have a good CPA who understands this type of system? While you can do well without either, I feel that having both of those pieces in place will contribute to your success with this type of system.
            Believe it or not, some agents use this type of marketing to sell policies, without making sure they will fit the clients’ needs.
            In my policy, I was able to borrow the cash value as soon as the policy was written. We literally waited for the policy to go live, and sent the loan request in shortly thereafter.
            Here is a link to my wife’s policy illustration: https://docs.google.com/document/d/1i7HclNSscE-pyLi5H81Jx40YJ8tmoMMme0FcAIcmXgk/edit?usp=sharing
            Being male, mine is slightly less efficient, but hers is the first one I found, and it’s after midnight. I’m happy to share mine after I dig it up.

            If your policy isn’t this efficient (or at least close), you might want to look for a new insurance agent.

            • And don’t forget to subtract the cost of the otherwise unneeded CPA from your returns when you calculate them.

              Your wife’s policy shows a negative return until year 8, when it is 0.43% per year on the guaranteed scale and a negative return until year 6 on the projected scale. At year the return on that scale is 2.3%. I guess if you find those types of returns exciting, then great, buy lots of whole life. But those are pretty similar to most of the better whole life policies I look at. At 25 years, those returns improve to 2.67% guaranteed (pretty good actually, lots of these I look at are closer to 2%) and 4.66% (that one’s about average for policies I look at.) If those are acceptable returns to you for tying your money up for decades, then buy as much as you like. They’re not for me, not to mention my personal returns would be lower due to the additional cost of insurance I would face. It wasn’t very long ago that I was getting 5.25% in a money market fund.

              • How is that money market looking for you today? I used to get 7% in my savings account – in 1982. You could probably have gotten a 10 % return in a WL policy back then too.

                I’m not following you on the CPA… My CPA doesn’t charge anything extra for helping me with this, if that is what you are getting at? YMMV, of course.

                This is a system that will work in any economic environment. It isn’t for everyone.

                You have repeatedly stated that “your money is tied up” – that is not true. I am using my money exactly the way I choose, outside of my policy, using the cash value from the policy.

                You state that your personal returns would be lower due to the additional costs of insurance, but you are ASSUMING that, as you have not actually looked, per your previous posts. It’s okay to guess, but please don’t state it like it is a fact.

                I understand that you aren’t interested, and these posts are really for the benefit of your readers that are interested. I really do enjoy lively discussions with intelligent people, so I’m happy to attempt to refute any argument you would like to continue to make.

                • I have no need to continue to comment on a post I wrote over two years ago. While I might find a discussion lively for a day or two, dragging it out over 26 months isn’t particularly interesting to me. After 195 posts on this thread, I think those who want to bank on themselves will do so, while most will find this to be an idea that isn’t particularly helpful in their financial lives. I’m glad it works out well for you. If you promise not to post again on this thread, I promise not to reply to your post.

                  I’m not sure why you think it would be worth my time to get an official quote including a physical on an insurance policy I would not purchase even if I qualified for the lowest cost of insurance available. It seems unethical to me to waste the salesman’s time. If the insurance industry wanted to give me a sweet deal on an awesome whole life policy, they should have done that the first time around. What I’m doing now is clearly working (I’m a millionaire 8 years out of residency with a half paid off house who is now financially independent of medicine and on track to be financially independent of any type of work by my mid 40s) and the arguments being made by you and the other proponents has failed to convince me that I’m missing out on anything particularly beneficial to me. If one of my readers thinks buying a whole life policy is going to help them reach their financial goals, then more power to them.

                  • If this thread is still alive after 26 months and 195 comments, that would probably make it one of your most popular, yeah?

                    Why do you think that is? People want to LEARN about this, and there are precious few resources out there. Many of the reviews are written exactly like yours, and the other person that you quoted above who spent “over 100 hours” researching this. Frankly, that is about enough research time to just scratch the surface. My wife and I spent a few months, and probably 200 hours researching, reading, re-reading, scouring the web, meeting with ins agents, talking to others that are doing this, etc.

                    Not all insurance agents are the same! Neither are all insurance companies – some have policies that work well for this and MOST do not! Insurance guys are used to giving quotes, and any that I have talked with have been very cordial – I spoke with 4 before deciding which company to go with, and 1 of the last 3 told me (when he saw my first illustration) that he wouldn’t waste MY time, because his company couldn’t even come close to what the first one would do!

                    The insurance industry is made up of all different types of company – the only kind that you would even need to consider for infinite banking are the Mutual companies (owned by policyholders) that offer participating WHOLE LIFE policies (no VUL, IUL, etc) that are designed to work with infinite banking.

                    Insurance agents have to eat too, and unfortunately many of them will take advantage of high income individuals (because they feel you can afford it?) and won’t give them the best policy for cash value. This is why no one should be SOLD a policy – they should BUY the policy that works for them.

                    Again, my goal is not to convince you – but to provide information for others that are interested. This is clearly an interesting topic to many – I’ve seen a few other blogs that mirror yours – lots of posts on the Infinite Banking reviews!

                    I am DOING this, not just talking about it, and I think I have good information to share with interested parties. IF you would prefer that I do not do that on your blog page, I can respect that, and I would invite them to email me if those are your wishes.

                    • I’m not sure why it took you 200 hours to understand Bank on Yourself. It’s not that complicated. If you think it’s awesome, do it. As I’ve said before, it’s not the stupidest thing in the world to do. But I hardly think it’s some revolutionary path to wealth. As I’ve said 100 times before, if you love whole life and think it is the solution to all your financial woes, buy as much of it as you like. I promise not to stop you. If you just like to argue with someone on the internet, well, ..find somebody else.

                      I find your evangelical fervor on this subject interesting. You actually feel so strongly about this awesome financial opportunity that you want people to email you and talk to you about it. Forgive my skepticism, but that seems like a lot of unpaid work for someone to want to do voluntarily…..unless…..maybe it’s not unpaid…..

                      And no, 196 comments over 2 years is not particularly popular. Most of the posts published this month already have over 100. It’s just that any thread mentioning whole life becomes a magnet to insurance agents who can’t seem to resist leaving comments for years. You feel so passionately about this subject, why not start your own website about it?

  92. I am an IAR. I don’t use WL all that much. But the whole idea of IBC or BOY actually works. But ONLY if you save up money that you would have spent on something today, and instead finance the purchase.

    But here’s the thing Insurance companies won’t tell you. —> You don’t have to do it with Life insurance.

    Example. Save up $30k to buy a car.

    Invest $30K into a relatively safe investment. (Let’s say in a bond ladder or something similar for long term – let’s just say 5% over 30 years.)

    Finance car at bank for 2% and pay off over 3-5 years. Your investment will fluctuate but if you can handle the payments it won’t hurt your lifestyle much. (which is key, living within means is paramount to make this work)

    Then finance new car after using old car value for down payment. $30k still invested.

    $30K invested for 30 years grows to $134,032!

    Tadah! You just made money that you wouldn’t have had if you paid cash for all your vehicles.

    With BOY they just do it with life insurance. But you don’t have to. No tax benefits really, but it’s still a way to capture your future wealth.

    When people sit with me I show them both options. But I still think the idea of capturing every possible amount of interest you can is very important.

    2 cents. Life insurance is good and bad. Risk averse people will love it. And people that can ride out the market won’t. Why is this such a hard concept to understand?

    • Darren, if you are doing infinite banking, you should be doing it in a way that is tax-favored.
      If you have $5000, and $5000 only, to invest in the stock market, would you invest it in an IRA or in an account that is not tax-favored?
      You are essentially suggesting that one should use the outside account, where each transaction has tax consequences, rather than using it in the most efficient way when you talk about life insurance.
      Infinite Banking is powerful if you are disciplined and willing to learn how to use it.
      A little knowledge can be dangerous.

  93. Just stumbled on this thread. Appreciate the wealth of information. I have an existing NYL WL policy I purchased (for better or worse) 25 yrs ago And now wondering if I can take advantage of the policy by adding substantially to my PUA and get a decent safe return. I’m already fully invested in my 401k and IRA accounts along with significant market risk. Looking for a place to store cash besides a paltry savings account. This IB strategy sounds like it might be a good thing for me. Must admit I still haven’t grasped why I’d choose to use the loan option if I can pay with cash. Thanks for letting the thread continue its a good read.

    • JW:

      It would be great if you could get the IRR on the policy so people have at least one example of a good in-standing policy and possible expectations. NYL should be able to provide that.

      I’ll take a stab about the PUAs. My guess is you cannot. With the insurance company I am using, if you don’t put in any PUAs that year, and I think the lowest is $150 in PUAs, then you are locked out moving forward. The way the policy is designed from the start is crucial in having the maximum effectiveness.

      I have always said this is option #5 or 6 in terms of an estate plan. If you keep enough disposable cash at hand to buy whatever you want, then it doesn’t make sense to take a loan, UNLESS you can do a positive leverage event like John the Pharmacist has been doing with real estate. It has not been necessary for me to take any loans, but it is that emergency stash which is compounding faster than a money market and compounding tax-free. And by taking policy loans later in life, it will be tax-free money withdrawn (which reduces the cash value which reduces the death benefit to the heirs who should be happy to receive anything). If you have a variable paying job, like in sales on commission, then having that safety net can be a good thing PROVIDED you pay the loans back in the early years.

      My .02 cents.

    • JW, here’s a video I did on cash vs borrowing from a life policy.

      NYL is anti-IBC. They actually just send out a thing to all their agents letting them know if they use the term or marketing strategy they will be terminated. So it might not be a topic your agent will want to address.
      Banking regulators are squeezing down on this b/c of the term Bank and how people are misrepresenting the living benefits of life insurance as saying you have your own bank. A few insurance companies like NYL have decided it’s not worth the hassle.

      I think using life insurance as a foundation for other investing makes a ton of sense b/c of the safety, liquidity, steady growth, and tax advantages afforded properly structured policies. It’s not a magic elixir, it’s not get rich quick, but let’s be real nothing is. However it’s also not a Gov’t. Tax Qualified Plan and I see that as a HUGE +.

      I wish you well in your pursuit.

      • Thanks Russ, interesting point on the NYL stance on this practice. Especially after just talking to the agent who said it’s OK and is going to run some numbers for me. Maybe they have to permit it if the policy doesn’t specifically forbid it, as opposed to openly marketing the idea? Anyway I’m anxious to see how this plays out.

        • That’s great news that you can add PUA’s to the policy. You might have to do some sort of medical underwriting but no big deal. You are right you can do anything with the policy that you want that doesn’t violate the contract. Using the living benefits from cash value life insurance isn’t what is being attacked, it’s just the verbiage.

  94. Thanks Howard I’ll post once I’ve reviewed with the agent. I take your point on the loans later in life that wouldn’t need to be repaid, a nice feature. Of course at that point the cash value can also be accessed tax free up to the accumulated premium payments – if I understand what I’ve been reading correctly?

    • JW:

      You are correct and something I forgot about until you wrote it. Your beginning “loan” should be done as a return of premium. The advantage is that there is no interest accumulation until you remove that premium put in. You are still removing the cash value which will ultimately reduce the death benefit, but because it is not technically a loan until that premium is completely extracted, you at least delay that for a period of time.

      • If you are doing a loan – do a LOAN, not a partial surrender.

        Loans will reduce death benefit by amount of loan, plus interest if applicable.

        A partial surrender will decrease your benefit by more than than amount of the loan.

        Howard, I’m not sure what you mean by “it is not technically a loan until that premium is completely extracted” – perhaps you mean that one can do a partial surrender up to the basis without any tax consequence? That is true.

        But you can take LOANS for any amount above your basis, and have no tax consequence, because the IRS does not consider proceeds from a loan to be taxable, including loans from life insurance policies.

        JW – talk to you agent, but remember the agent might be bringing bias to the table. If you have a CPA, this would be worth sending him/her an email about.

        • John:

          I’ll worry about loan vs surrender hopefully many years from now, but I know you can extract your basis without penalty (is probably the best way to put it).

          To follow up with Russ’ comment, I don’t know what NYL is saying to the agents, I am hoping (without issue) that JW can get an IRR so we have some reality of numbers versus theory. Yes, it’s only one policy, but we have to start somewhere.

          • John,
            I have seen a lot of these policies that are 10,20 & even 60 years old. If and that’s a big IF they paid premiums the whole time and didn’t use the dividend to reduce the premium. The IRR at 20-25 years has been anywhere from 3%-5.5% depending on the age of it. Unfortunately b/c of bad advice most have used the dividend to reduce the premium and don’t have a whole lot of cash earning that rate. Secondly Paid Up Riders didn’t come on the scene until about 15 years ago. It’s been in the last 5-10 years that most agents have become aware of these and why they should use them. Our founding partner has been in the business for 40 years and until 2009 didn’t know you could use a Paid-up Rider until we were introduced to Nelson Nash.

          • Pulled my last policy statement. My cash value is 42k after 25 years of 1038 premium payments. Believe that puts the return right around 3.75%. Nothing to write home about but I was buying insurance, not so much investing at the time. The policy was 100k.

            • Remember what you are comparing to. Insurance companies invest not in the stock market, but in bonds. So you need to compare your return to a bond fund. So here is one from Fidelity which started close to the same time you started:


              Since this money is after-tax you put in to the life insurance, it’s best to look at the after taxes on distributions and we see for the life of the fund the CAGR was 4.34%. So you purchased your policy for 0.6%/yr is how I see it, with access to the money as loans if needed.

              Now I know it’s not exactly correct because a $1000 was put in every year. I couldn’t find a link online that would help accurately calculate that, but it’s a start. Thanks for sharing.

              • WCI:

                I agree. It’s not the greatest and my guess is for two reasons. First, as you said, it’s a small policy so the admin expenses can’t be absorbed over a larger pool. Second, no PUAs. Just a base policy if I understood JW correctly.

                • WCI, Howard,
                  Talked to the agent today and he confirmed that I will be able to add PUA to the policy. I guess looking at this as an investment in the future, it will be interesting to see what limitations exist on those PUA’s, and what impact the additions will have on the future interest earned. Got to say if I can get 3.75% on the additions I’ll be pretty satisfied in putting a portion of my cash in play. I’ll get the details next week.

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