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I've been researching the concepts of "Infinite Banking", "Be Your Own Bank", etc., as they seem to be hot topics right now. At first, I was extremely skeptical about the concept, however, I believe I understand the mechanics of it now, and I understand the benefit. I'm at a loss about how to start such a thing, however, and how to maximize its potential.

As I understand it, infinite banking requires whole life insurance to be truly successful, due to the nature of how a whole life insurance policy works. Whole life provides both a term policy as well as a dividends-paying investment. If my understanding is correct, when properly capitalized, you can eventually reach a point where the dividends cover the policy premium, and the account becomes fully self sustaining (not entirely sure about this one...seems the dividends payout is not guaranteed, so if someone understands this part better, I'd be grateful for more insight)? Once you have fully capitalized your policy and it does become self sustaining, you are then able to take loans out up to the cash value of the account, and all principal and interest payments go back into the policy, rather than into some random third party bank. I really love that concept, however I'm not really sure where to start.

My question is, how would I go about actually setting up such an account? For all the individuals and institutions that "rave" about this, they do come off as a bit scammish, and I don't want to work with someone who isn't giving me all of the details. Or, if I have to work with such a person, I would rather fully understand what they are trying to sell me, so I can make the decision to bug out if they sound like they are trying to pull a fast one.

Is it possible to do this with any whole life policy, or is it more specialized than that (based on what I've read and heard, it sounds more specialized.) If I am able to start such a policy, how would I go about maximizing its potential? I'm a 30 year old male, currently single, so finding some cash to capitalize with wouldn't be a huge problem. I don't make a ton of money, but more than enough to live comfortably on.

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Possible duplicate: money.stackexchange.com/questions/2609/… –  George Marian Aug 27 '10 at 19:04
    
Please read about it, and at least understand the arguments against whole life. There are reasons, but they are few –  MrChrister Aug 27 '10 at 19:26
    
@MrChrister: I've read plenty, and I believe you are referring to the MEC limit? I understand the risk in over-funding a whole life account, however that can be mitigated by understanding what the MEC limit is and keeping your funding below it. As I stated, I understand the mechanics...however I don't want to go out and just talk to any old random agent and set up an account for this particular purpose. I was hoping there were known firms or groups who I could work with who could help me set up a whole life account for the purpose of infinite banking. –  jrista Aug 27 '10 at 19:35
    
@George: My question is not whether infinite banking is a scam, rather its how to get my own "personal bank" going. As such, this should not be closed as a duplicate, as it is a different topic. I read the other thread, and I would like to point out that I have a diverse portfolio already. I have 401k, IRA, stock, and gold investments, as well as property investments. I'm looking to diversify further, and provide myself a way to take out loans for purchases without loosing all the interest to some random financial institution, be that a bank, credit card, whatever. –  jrista Aug 27 '10 at 19:38
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It is certainly evident from your question that you have done research on the topic. However, that does not tell us that you have seen the existing question(s) on this site. Have you read the accepted answer to that question? It goes into some detail, though likely not as much detail as you desire. Again, I linked to a possible duplicate and left it to the community to decide. –  George Marian Aug 27 '10 at 20:17

4 Answers 4

up vote 3 down vote accepted

Can't tell you where to go for a good policy, but I can tell you that most brokers make a hefty commission out of your payments for at least a year before you even start funding the tax sheltered investment account that you're trying to buy under the umbrella of life insurance. You'll have to do a lot of homework to hunt down a reputable discount broker or a direct policy purchase from the insurance company.

Life insurance requires insurable need. The description is vague enough, that you can probably still get the account despite being a single male with no apparent heirs to benefit, but it raises the question of why you are buying the insurance. Whole life policies require you to maintain a certain ratio of investment to premium payment and you will likely never be able access all of the money in the account for your own personal usage.

Compare several policies from several brokers and companies. Read all the critical sources you can about the pitfalls and dangers of commissions, fees and taxes eating the benefits of your account. Verify that the insurance company you buy the policy from is financially stable after the market crash. You are paying a commission to pool your money into their investment fund, and if your insurer goes under, you'll have to get a portion of your money (possibly only the principle) back from the state insurance commissioner. Some companies sold pretty generous policies during the bubble and have cut their offerings way down without fixing their marketing literature and rosy promises.

Finally, let us know what you find. It never hurts to see hard numbers and to run multiple eyes over the legalese in these contracts.

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Got the insurable need line from a salesman. He should have seen me coming when I actually knew about the benefits of standard retirement accounts, and wondered what good life insurance would do me. –  SpecKK Aug 28 '10 at 22:24
    
Thanks for the helpful answer, SpecKK. Good point about the insurable need, guess I never thought of that. If I find something, I'll be sure to post more info here. –  jrista Aug 28 '10 at 22:34
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Hi SpecKK. I wanted to thank you again for the advice. Turns out that these whole life insurance "infinite banking" plans are generally just a scam. I have a decent 401k plan through my company, and I learned that they allow the same thing...I can borrow up to 50% of my accounts value for a single $50 origination fee, no other fees, for any period and prime+% rate I choose. Payments+interest go back into my 401k. That was all I needed, and a $50 origination fee for the loan is far cheaper than fees for the alternatives. In a couple years, I should be able to buy a car with such a loan. –  jrista Dec 5 '10 at 18:36
    
@jrista Scam is probably a little to harsh of a word but the entire concept of infinite banking is garbage cooked up to sell insurance products to unsophisticated "investors". –  stoj Jan 6 '13 at 13:52

Keep in mind that the only advantage that using a tax favored account gives you is tax-free growth of the cash value of the policy. This "Infinite Banking" spin isn't some sort of new revolution in money management, its just a repackaging of techniques that people have been using for years to manage tax liability with some breathless marketing spiel.

Before you jump in, compute the following:

  • Pull out last years taxes. What is the ratio of gross income to total income and real estate tax liability? The assumption this system makes is that the average person paying 30% of their gross income.
  • What percentage of your gross income is interest payment? The system's assumption is that it's 25-35%. If you own a home, project out your loan amortization for a few years, as you're going to be stuck with this thing for many years.

Now comes the hard part:

  • The first 3 years (at least) of your payment stream with whole life is paying commissions to the agent. That's a steep price for admission to this scheme.
  • You need to figure out how the policy works and discount the sunk cost of commissions and overhead to understand what the true rate of return in on the money that you're going to overcapitalize the policy with. It's not as high as you think it is.
  • You need to keep making those insurance payments. Most people stop in 5-7 years, because it's expensive. Compute the cost of providing that cash flow, the impact of non-payment and factor that into your model.
  • Insurance is heavily regulated by each state. Understand how this fits in with that, especially if there is a possibility that you may move. All of your money will be tied into this.

Life insurance is sold, never bought. The guy pushing this does seminars at hotels sponsored by life insurance agents. The purpose of the program is to generate sales of insurance. Be wary.

If you actually have the significant amounts of money required to capitalize this, there are much better ways to get an income stream from that money -- you need a good financial advisor. And if you have a huge tax liability and a scheme like this somehow makes sense, find someone who does it for a living in your state who isn't a crook.

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Thanks for the info, duffbeer. I was not aware of the commissions to the agent...thats exactly the kind of info I'm looking for. As for tax liability, I actually don't think I am really that bad off, rather I think I'm in a pretty good position. Currently, about 22-23% of my gross income is interest payment, and I have my amortization schedule right next to my computer as I reference it every time I make a payment. The percentage of my interest to income will shrink to somewhere between 20-22% over the next 5 years. –  jrista Aug 29 '10 at 18:29
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The reason that I mention it is that if you aren't getting rooked by taxes, and don't have alot of debt, this sort of arrangement isn't going to benefit you too much. If I were sitting on some cash right now, I'd wait for a big dip in the market and invest in depressed high-yielding dividend stocks and MLPs. You'll easily net 10-12% gains with no hocus-pocus. –  duffbeer703 Aug 30 '10 at 0:21
    
Commissions do not equal anywhere near the first 3 years. Try somewhere closer to 60-80% of the first year, if that. –  user7954 Jan 5 '13 at 3:58

Why would you give them the money and borrow it back? If you didn't give it to them in the first place you wouldn't need to borrow! It makes no sense at all.

It USED to have a different use--as a tax dodge. You would buy "life insurance" for a low amount of coverage and way overfund it. Let the money grow and in your later years you would "borrow" against the extra value you had built up in the policy. Since this was a loan rather than a payout it wasn't income. When you died the tax liability went poof.

Thus so long as what you had to pay in life insurance + the inefficiency of the insurance company was less than the tax rate it was a good deal.

Congress closed this loophole a long time ago by prohibiting too great overfunding.

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There are a lot of false claims around the internet about this concept - the fact of the matter is you are giving yourself the ability to have money in a tax favored environment with consistent, steady growth as well as the ability to access it whenever you want. Compare this to a 401k plan for example....money is completely at risk, you can't touch it, and you're penalized if you don't follow the government's rules.

As far as commissions to the agent - an agent will cut his commission in half by selling you an "infinite banking" style policy as opposed to a traditional whole life policy.

@duffbeer703 clearly doesn't understand life insurance in the slightest when he says that the first three years of your premium payements will go to the agents pocket. And as usual offers no alternative except "pick some high yielding dividen stocks and MLPs" - Someone needs to wake up from the Dave Ramsey coma and realize that there is no such thing as a 12% mutual fund....do your research on the stock market (crestmont research). don't just listen to dave ramseys disciples who still thinking getting 12-15% year in and year out is possible.

It's frustrating to listen to people who are so uneducated on the subject - remember the internet has turned everyone into "experts" if you want real advice talk to a legitimate expert that understands life insurance and how it actually works.

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Welcome infinite banking. Would you like to address the falsehoods with some citations? Opposing opinions are welcomed, but they will go farther with some data to back it up. The accepted answer gave a path for the OP to evaluate the product, so you could offer a similar response. –  MrChrister Oct 17 '12 at 4:49

protected by Chris W. Rea Feb 13 '13 at 14:12

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