The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: onespeed on January 11, 2021, 07:40:43 AM
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Does anyone have thoughts about using Whole Life Insurance, from a mutual insurance company, as a tool to borrow money against yourself instead of using traditional banking methods? I know the Infinite Banking concept has been around for a very long time, but I wonder if the concept is still practical today to use as a cash flow tool. I have very limited knowledge on the subject as I just recently discovered it even exists a few days ago while reading the book "5 Day Weekend" by Nik Halik. Some of the flaws that jump out at me are it will likely take around a decade to start breaking even, where the dividends would cover the premiums. There is obviously no guarantees of dividends, only guaranteed increase in cash value if I understand it correctly, and there are obviously no guarantees on loan rates instituted by the insurance company. Failure to meet the premium would obviously trigger tax consequences and failure to pay back interest in a timely manner would result in a decreasing cash value and at some point trigger tax consequences. Some of the pros I've seen are once you break even, the premiums are covered and you can take out a private loan with the insurance company that is paid back on your terms and doesn't impact your credit score in any way if you don't pay it back. Once you reach death, the death premium would cover remaining interest and loan payments. The loan is borrowed against the insurance company's general fund, so your full cash value continues to gain value tax free, albeit obviously at a rate lower than the general stock market, however; it's probably better to look at this from the cash flow perspective as opposed to investment from what I understand. Your cash value won't decrease in value. Your beneficiary receives the death benefit tax free and can continue the infinite banking concept, as a "generational" personal banking system. I know there is a lot more to it, but just wondering if anyone has thoughts to add to my limited knowledge on this subject. I'm leaning toward not pursuing this personally, but like to understand my options.
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This has been discussed at length recently.
https://forum.mrmoneymustache.com/ask-a-mustachian/cash-flow-banking-infinite-banking-becoming-your-own-bank-whole-life-policies
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Not a recommendation, but one could probably earn a higher overall return by buying TLT or LQD and selling a call option against it. In a sense, you'd be borrowing against the probability that bonds appreciate. E.g. buy LQD for 135, sell a call at the 140 strike for $1.40, and earn a little less than 4% in a year (although the value in a year is not guaranteed).
That's what would be going on behind the curtain of the life insurance policy anyway!
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There's no way to come out ahead with a whole life policy. You're not only paying for very hefty sales commissions to the agent, but insurance companies are conservative in their investments. So at best you're going to pay a bunch of money in overhead to get a lower return than simply investing yourself would yield.
In the end you're wrapping a bunch of fees around other financial products (savings account, investments, and life insurance) and by disaggregating them you will come out well ahead.