Author Topic: Cash Flow Banking, Infinite Banking, Becoming Your Own Bank- Whole Life Policies  (Read 1398 times)

Defdefying02

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I recently did a deep dive on this whole Cash Flow Banking / Infinite Banking / Becoming Your Own Bank with Whole Life Insurance Policies.

I read Nelson Nash's Becoming Your Own Banker and What Would the Rockefellers Do?: How the Wealthy Get and Stay That Way, and How You Can Too by Garrett B. Gunderson. Along with consuming a ton of information available on YouTube.

It seems to me this whole strategy would be adored by a community like MMM. It is what the wealthy use to compound their savings, avoid taxes, eliminate paying interest, and turn over real wealth to their heirs, often for multi-generations.

Outside of the fact that the capitalization period; building your Cash Value, may take a few years... ie it's a delayed benefit type of thing; What am I missing?

Policies earn interest and an annual dividend. Your cash value is liquid and can be borrowed against. You can use it to pay for investments. Borrow Cash Value. Use the funds as a downpayment on a piece of real estate and use the cash flow from the rental property to pay back your loan with interest which continues to feed into the wealth-building machine. Oh, and by the way. While you borrow from your Cash Value your cash value stays in tact and continues to earn interest at a guaranteed 4% which keeps the compounding effect going. What savings tool allows you to assign two jobs to 1 dollar such as this. It's like fractional reserve banking but for yourself.

In one of MMM's youtube clips (E09) he talks about this community as being an advanced Financially calibrated group and that you don't need an Emergency Fund when you are on your path to FI. Since this is an Advanced Personal Finance Group, wouldn't the Cash Flow Banking Concept be a logical pro move? 

I'm thinking this is my next move. I would love to get a rounded opinion from those of you who have employed this strategy in your own personal journeys.

Sibley

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On the contrary, most here think whole life policies are a scam, or if not that bad certainly not great. Because we are educated. Why would you lock yourself into a low investment return with minimal/no flexibility? For very specific situations, a whole life policy may be a good tool. Those situations are rare. Take your money and stick it into the market, leave it alone.

Your sales pitch isn't appreciated.

Defdefying02

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@Sibley
I don't sell this stuff. I'm not in the industry. I've read up on it as I indicated in my post and it seems to me to have many advantages if you can get past the initial funding period and pay up extra cash in the beginning couple of years.

I totally get that at first, your premium is large compared to the cash value. Over time that reverses and your cash value is much larger than the total premium paid in. I read some posts on here that mention it's a strategy of the wealthy. Wealthy people are usually the ones with tax-advantaged strategies for preserving their wealth and that seems to be the goal of many on here. Financial independence is an indication of wealth.

I'm truly looking for some people on this blog who have seen the strategy out to get their feedback. Rober Kiyosaki say's 401K's are a SCAM. Should we all get out of that as well since some think it's a scam?
« Last Edit: October 25, 2020, 01:21:40 PM by Defdefying02 »

Sibley

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https://forum.mrmoneymustache.com/ask-a-mustachian/using-whole-life-insurance-policys-for-early-retirement/
https://forum.mrmoneymustache.com/investor-alley/cash-out-a-whole-life-insurance-policy-or-not/
https://forum.mrmoneymustache.com/welcome-to-the-forum/high-cash-value-whole-life-insurance/
https://forum.mrmoneymustache.com/ask-a-mustachian/help-me-understand-whole-life-insurance/
https://forum.mrmoneymustache.com/ask-a-mustachian/advice-for-someone-currently-5-years-into-whole-life-insurance/
https://forum.mrmoneymustache.com/taxes/what-to-do-with-whole-life-insurance-now-that-we-don't-need-the-benefit/
https://forum.mrmoneymustache.com/case-studies/whole-life-insurance-(vul)-dilemma/
https://forum.mrmoneymustache.com/investor-alley/why-whole-life-universal-life-insurance-is-a-bad-idea/
https://forum.mrmoneymustache.com/ask-a-mustachian/should-i-keep-existing-whole-life-insurance-policy/
https://forum.mrmoneymustache.com/ask-a-mustachian/hybrid-whole-life-insurance-and-long-term-care/

There's more too, I just got tired of copying and pasting. https://lmgtfy.app/?q=site%3Aforum.mrmoneymustache.com+%22whole+life%22

You're in the wrong place if you're looking for a bunch of people who think whole life policies are wonderful. We're a diverse group so I'm sure there's some. You might have better luck at bogleheads, but I'm not over there at all so could be wrong. Yes, there are specific situations where they are good tools. If you think you have one, go ahead and buy a policy. It's your money.

As for 401ks - they aren't perfect, but they are what we have to work with, we don't necessarily have better options available. That isn't the case with whole life. And Robert Kiyosaki isn't perfect either.

maizefolk

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I would love to get a rounded opinion from those of you who have employed this strategy in your own personal journeys.

So you want a rounded opinion, but only from the people who thought it was a good idea (and as a result employed the strategy)?

I fear that contradiction ensures that either you'll be frustrated that people ignore the second part of your request, or you will get a very biased and non representative set of feedback.

reeshau

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It seems to me this whole strategy would be adored by a community like MMM. It is what the wealthy use to compound their savings, avoid taxes, eliminate paying interest, and turn over real wealth to their heirs, often for multi-generations.

I compound my savings by 1) avoiding high-fee products and 2) investing in the stock market, which has the highest historical yield.

I avoid taxes through my 401(k) and IRA plans.  I have plenty in those, no need for more.

I will publicly confess that I expect my estate to be less than $11.5M, so I can pass it through to my heirs tax-free anyway.

I will teach my children to live the frugal lifestyle I have, thereby securing their future for multi-generations.


If I owned an 8-figure family business, or had such a high-flying lifestyle (multiple cars and yachts) that a 401k was pocket change, then there are things insurance could do for me. Peddled to anyone in the 99%, they are just a way to siphon off some of their cash, due to their fears.

On value:
The cash value you build up *is forfeited* if / when the policy pays off.  It will either only ever pay a portion of you contributions, or would pay the same as an equivalent term policy, but having cost you a ton more.

Keep insurance over in the insurance corner, and investments in the investment corner.  There is no need to convolute them.

Telecaster

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^ What Sibley said. 

Variations of this...I don't know if "scam" is the right word...let's call it a "strategy" has been around for a while.  He's the basic pitch:  You buy a whole life policy.  You pay into the policy for a few years and it has a cash value.  You can then borrow against the cash value for things you would normally borrow money for and instead of paying the bank interest, you pay yourself interest!  What could be better?

Here's what the scammers don't tell you:  The cash value necessarily is less than the amount you've paid in premiums.  So if you'd paid $40K in premiums (or whatever) the cash value of your policy will only be $34K (or whatever).  The technical term for this is "guaranteed loss."  But it is worse than that, because you can't borrow the full cash value.  You can only borrow 90% or something.  So of the $40K that came out of your pocket, you only have access to $30.5K.   Basically, you are looking at a 25% loss right off the top with this strategy.

And it gets worse:  You're not really paying yourself interest.  The insurance company still charges you interest (usually a low rate) which they keep.  It is only the amount you pay above that rate that goes to "yourself."  But you are just taking a dollar from one pocket and putting it in another, so you can't really pay yourself interest in any event.

By contrast, if you saved up $40K on your own you would have....$40K.  $40K is a lot more than $30.5K, and there are no strings with the $40k. 

Bottom line is that whole life is bad idea to begin with.  And there is just nothing you can do to turn it into a good idea.  The Be Your Own Banker strategy is simply an extremely expensive way for you to lose control of your money. 


Arbitrage

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You might have better luck at bogleheads, but I'm not over there at all so could be wrong. Yes, there are specific situations where they are good tools. If you think you have one, go ahead and buy a policy. It's your money.


Just going to note that you definitely aren't going to get a positive opinion on Whole Life/Permanent Life policies at Bogleheads, either. 

Insurance agents love to sell these things for good reason - they make tons of money off of them.  Where do you think that money comes from? 

Mr. Green

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My wife and I took a serious look at "Banking on Yourself" back in 2007 or so when we were in our mid-20s. We had a close family friend who was a life insurance agent and a private wealth manager who gave us all kinds of hypotheticals on what policies could look like.

We almost did it, but I'm glad we didn't. First, starting a life insurance policy that has significant premiums (over $50,000 a year for my wife and I combined) and then having the policy paid up after a certain number of years means you have to continue earning the level of income required to support those premiums. What if I lost my job? The policy can be modified by reducing the overall value but there are limits to how far you can go with that before it becomes a modified endowment contract (MEC), which is a taxable event.

Also I was leery of the high costs of insurance that come at the end of a long life span. If you live into your 90's or beyond then there is a good chance that your policy will consume itself and leave nothing for whoever you'd like to inherit your money. Not necessarily a bad thing if you're only looking to fund your life but not a very efficient use of money.

Right after we decided not to do it the big crash of 2008 happened and AIG almost went bankrupt. They had to be bailed out by the US government. The largest and most stable of life insurance companies here, that would have been the end of the industry most likely. That was yet another example of why it would have been a terrible idea to have put our life savings into a life insurance policy. There is no guarantee that those companies will stay solvent through 80+ years which is how long we could potentially live.

In the end we didn't do it simply because we would not have total control of our situation. There is certainly a lot of flexibility with the way policies allow you to take out loans against them but the income requirements until the policy is paid up and then also the dependency on another company to stay solvent in order for it to be viable were too great a risk for our primary savings vehicle.

Another thing to consider is that interest rates are changing in ways they never have before. European banks are considering negative rates and it's not impossible that we may end up in the same situation here in the United States within the next decade or two. it's hard to say what kind of effect if any this would have on the kind of returns life insurance companies can generate safely which is how they make money in order to pay out benefits. It may or may not be a brave New world kind of thing but this isn't something that I wanted to risk my life savings on finding out the hard way that things are changing in a way that is unfavorable for life insurance.

And of course, now having a much better personal finance education, I would join the chorus of other voices that would tell you you could take that same money and put it in a nice index fund and beat the pants off of a whole life insurance policy over 80 years.

Mr. Green

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To add one last thought I would simply say if you think about the general financial principles of how investment returns work then you are naturally going to earn less money with a life insurance policy than you would if you were invested in the stock market.

life insurance or insurance of any kind for that matter generally requires a somewhat stable source of income. Companies have to be able to pay out benefits even when revenue is down. Therefore they cannot invest in the most risky of assets. Or at least they shouldn't be. AIG got caught up in the whole derivatives problem in 2008 which is what brought down both mortgage companies and others alike. however there were a whole lot of people who were unaware of just how ugly those derivatives were under the covers.

If companies have to invest in lower performing assets to generate smoother returns that is going to directly impact the type of returns that you will see in your life insurance values. Similar risk mitigation can be accomplished in a investment portfolio by spreading money across bonds instead of being solely invested in stocks. A life insurance product may generate millions of dollars over your lifetime but an equivalent investment in equities would probably generate tens of millions. There is a risk with anything of course and if you are simply not liking the swings of equities as a reason for investigating life insurance then you might look at holding more bonds.

also consider that life insurance policies take considerable commissions. Look at that like 401K investors look at management fees. The higher the fund or policy fees the more it cuts into your returns, and big dollar whole life insurance policies have some of the highest fees paid out to agents of all types of insurance.

Defdefying02

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@Sibley - Thank you for all the links. I took the time to read through them all and your efforts putting that together were not in vain. : )



Defdefying02

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I would love to get a rounded opinion from those of you who have employed this strategy in your own personal journeys.

So you want a rounded opinion, but only from the people who thought it was a good idea (and as a result employed the strategy)?

I fear that contradiction ensures that either you'll be frustrated that people ignore the second part of your request, or you will get a very biased and non representative set of feedback.

What I meant by "well rounded" was someone who had actually used the cash value portion of a Whole Life Policy to take a loan against it for seeding another investment vehicle. Earning a spread on both the new investment AND while continuing the compound effect with the cash value in the policy.

I don't think it's crazy to look for the opinion of someone who has actually employed a strategy for their feedback as opposed to those who haven't. Similar to if i asked you all what your thoughts about investing in real estate and i got a bunch of people who had never done it but told me; why would you ever consider that... You will be getting calls in the middle of the night for toilets overflowing and haven't you heard about what happened in 2008. Investors lost it all.

Experienced investors would tell me a about the power of safe leverage with adequate reserves, how you stand to gain by Amortization (tenants buying your homes for you), power of depreciation (tax-advantaged cashflow), the potential for appreciation and extra income (cash flow every month) Without hearing both sides i don't feel you can have a well-rounded understanding of the potential benefits and pitfalls to avoid etc.

Just my thought on how i seek to understand before taking action. I'm not looking for people to just agree with me so i do truly appreciate the passion everyone has for their own opinions and takes on the subject.

Defdefying02

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@Telecaster

And it gets worse:  You're not really paying yourself interest.  The insurance company still charges you interest (usually a low rate) which they keep.  It is only the amount you pay above that rate that goes to "yourself."  But you are just taking a dollar from one pocket and putting it in another, so you can't really pay yourself interest in any event.

You bring up a good point here and this should certainly be investigated. I'm curious what rate or APR, inclusive of origination fees, the Insurance Company would take as it's cut versus what would go towards the policyholder's cash value.

Malcat

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I'm not going to get into the details, but I used to work in this industry.

I've seen many, many cases mapped out where whole insurance products were an intelligent tool, but we're talking about cases of incorporated professionals investing hundreds of thousands a year.

I would never recommend it for someone who has the option to put the bulk of their savings into normal investment accounts. It just doesn't make sense.

As I said, I worked in this industry and even I didn't invest in these products because although I was high income, it still didn't make sense for me, and I despised the inflexibility and demands on my cash flow. It's like having a giant mortgage to pay.

Sibley

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I'm not going to get into the details, but I used to work in this industry.

I've seen many, many cases mapped out where whole insurance products were an intelligent tool, but we're talking about cases of incorporated professionals investing hundreds of thousands a year.

I would never recommend it for someone who has the option to put the bulk of their savings into normal investment accounts. It just doesn't make sense.

As I said, I worked in this industry and even I didn't invest in these products because although I was high income, it still didn't make sense for me, and I despised the inflexibility and demands on my cash flow. It's like having a giant mortgage to pay.

One of the few cases where I am ok with whole life insurance (or something similar to it) is actually at the micro end. A term life insurance policy with set premiums, which at the end of the term (or can be paid off early with the same result) converts to a whole life with no premium due. No loans, but is a pretty sure bet to pay the funeral home when you die. Works out pretty well for lower income individuals. But it's a wildly different purpose, and most people on this site don't need that kind of thing.

Laura33

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The reason you are thinking it looks good is that you are combining a number of different strategies and pulling out the positives of each, while overlooking the negatives.  Tease that apart and the numbers aren't so great.

Start with the whole life policy.  That is actually three things: a term life premium; a commission to the broker; and a cash value.  Say you do $10K/yr.  Say $1K goes to term life, $1K goes to commissions, and $8K goes to your cash value.  In fact, that's pretty generous for the early years, which tend to be far more fees and less cash value.  But we're making this up here.  After 5 years, you have around $40K in your cash value.  Compare that to buying your own term life insurance and investing the rest:  you'd have $45K in the market.  In fact, the difference will be even bigger than $5K, because your cash value will grow at that guaranteed rate, while over the long term, what you invest in the market will grow at a faster rate -- and your heirs will have the full value of the life insurance at the end of the day, too.

That is completely separate from investing in real estate, which is its own great way to make money, because it lets you use leverage and have other people pay your loans.  You can fund it any number of ways -- sell your investments, take out bank loans, take out 401(k) loans, whatever.  Borrow from yourself and pay interest to yourself?  Sounds like a great deal, right?  But look at a 401(k) loan:  you are taking money that is in the market, selling that part of your investments, and then paying that back over time.  So really, you are giving up market earnings on that part of your investments and effectively converting it into a bond, with your only returns being the value of the interest you're paying yourself.  How is that different or better than simply taking out a bank loan at current 3% (deductible) interest rates and leaving the rest of your money in the market? 

The "sell" of these things is the "guaranteed 4% return."  But read the fine print very, very closely.  4% of what?  What happens when the market drops?  What happens to that math when you take out a loan to fund your real estate purchase?   If you take out all that money, what do your heirs actually get -- and do you then need to pay for even more life insurance to make sure they're covered if you're using yours as an investment vehicle?

But hey, do your own analysis.  But don't base it on the rosy projections -- base it on whatever someone will actually guarantee you, in writing.  Because that's what you're going to get.  And compare that to what you could do yourself at Vanguard -- because that's really what this option is comparable to.  Then evaluate any real estate deals on top of that -- borrowing from the cash value (using math that is, once again, based on the guarantees), vs. taking out a commercial loan vs. borrowing from your 401(k) or other options you may have.  Oh, and don't forget to evaluate the cost of any life insurance coverage you need to make sure your family is covered.

The truth is you build wealth one day at a time.  There are a ton of people out there selling ideas to move that timetable forward.  But I'm very, very suspicious of anything that looks like three-card monte -- particularly when it's being sold by someone who makes a commission every time you move the cards around. 

cchrissyy

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This idea that "rich people do this" has the ring of truth of it but stop and ask yourself, do they really? or does this only sound like the sort of thing they do? my understanding is yes sometimes rich people avoid loans from retail banks and choose to borrow from themselves, or their business, or their family, but that doesn't imply they're usually borrowing against life insurance it's more likely against stock holdings or real estate. It might be that you just aren't familiar with the ways people can spend and borrow out of their investment accounts so the idea of borrowing against whole life seems interesting when really it is just one example out of many financial tools.

Malcat

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This idea that "rich people do this" has the ring of truth of it but stop and ask yourself, do they really? or does this only sound like the sort of thing they do? my understanding is yes sometimes rich people avoid loans from retail banks and choose to borrow from themselves, or their business, or their family, but that doesn't imply they're usually borrowing against life insurance it's more likely against stock holdings or real estate. It might be that you just aren't familiar with the ways people can spend and borrow out of their investment accounts so the idea of borrowing against whole life seems interesting when really it is just one example out of many financial tools.

Precisely. When we were working with high net worth clients, they did this among many, many, many other things. Why? Not because it magically makes more money or anything, but because when you have a lot of money, it helps to have a lot of places to put it, especially tax sheltered places.

Most mustachians are able to minimize their taxes without engaging in suboptimal strategies, but when you're dealing with 10+ times the amount that typical people save in a year, you start needing places to stash all of it where it won't get taxed into oblivion.

If you're looking at a few million in net worth, then you don't need to resort to such expensive tactics.