Infinite Banking Concept Without Life Insurance

(Nearly) Everything you say is correct.

However, there are other levels of understanding and usage.

1)Infinite banking is a concept, not a vehicle. (You did well in showing how the cousin of infinite banking—velocity banking—can be used using a different vehicle to better utilize your working capital (income before expenses). You then charge your expenses to credit annd your working capital lowers the balance of that line of credit for 30 days before you tap into it to avoid credit card expenses.) All the salesman of insurance will not separate out the concept from the vehicle itself because they want you to use their vehicle. Wealthy people have been borrowing against margin accounts to pay for things and make a 6% spread for ages, for instance. For most people that is an inappropriate level of risk, but there is still some value that can be created from the concept with or without the vehicle.

2)The vehicle’s optionality combined with the death bennefit (legacy value) does have some value. But for a nuanced, complicated reason.

Here’s Ernst & Young on using permenant life insurance (whole life, and the poorly structured kind where the salesman earns way more in fees) as a volatility buffer in retirement. See “sequence of returns” charts and see also “Ray Dalio’s “holy grail” chart to see where the value comes from,

https://www.ey.com/content/dam/ey-unified-site/ey-com/en-us/insights/insurance/documents/ey-benefits-of-integrating-insurance-products-into-a-retirement-plan.pdf

The numbers professionally calculated through appropriate measures from an unbiased source don’t lie.

3)For the same reason bond funds or dollar cost averaging has value, the infinite banking concept has value. if you believe the chances are good that the stock market will offer a better entry in 7 years… (that doesn’t mean lower price that just means if you believe it will underperform its historical average the first 7 years and overperform in the next 7 or experience significant volatility offering better entry points in terms of future return from that entry), then building up value in “safe” assets might be a good idea. I’m not suggesting that whole life is the best source of the safe funds, but that it could serve that function. Be sure to calculate after tax return, but also be aware that it doesn’t come without cost as you lay out.

4)In your line of credit example, you could ALSO earn a spread paying down your line of credit of 7-10% by borrowing at 5% from the policy, you could ALSO take a 401k loan, and ALSO a margin loan and ALSO hold expenses on 0% introductory rate cards and ALSO recast the mortgage back to a 30 year, and use the increased net cashflow to pay down the line of credit much faster. This isn’t without the costs that you illustrated, but the flexibility may create value and when it does you can use that function. In my view if you see the fed tapering money supply and raising interest rates to fight inflation and stocks are at historic performance and at new highs, using your loans from equity and cash value in order to pay down debt, directing new capital to safer assets or repayment of debt, and de-risking to build up value to tap into makes sense. If however you have a steep 20% or more bear market, then you may want to tap into the value to increase risk and leverage. This creates counter-cyclical investing, the average investor underperforms the index substantially for many reasons, one of which being when they have the most money to invest, credit in the system is at the high as are peaks in stock markets, when they have the least, and are most likely to need to borrow or withdraw from retirement accounts after layoffs, and in financial trouble, stocks are the cheapest. This leads to very poor returns for the average person, not including the fact 80% of fund managers underperform, 90% of individuals can’t select those that do, and other consequences like hidden fees and risks in typical retirement plans.

5) If you are going to use leverage as I described, you’ll want to have assets in vehicles that can survive bankruptcy such as retirement accounts in some cases and insurance or using corporate structures and trusts and a lot of complicated things that probably aren’t going to be for most people. Life insurance can be a gray area if you use it actively if a judge rules you did it to defraud or avoid other debts, which is another reason that if you use this, you don’t want it to be THE tool by any means, just A tool.

If you see Ray Dalio’s chart showing bennefit of having lower standard deviation with the same return using multiple asset classes for diversification, you may understand why Ernst and Young showed both higher income in retirement (set to 90% probability of survival to compare apples to apples), and higher legacy value for private life insurance using whole life compared to buy term and invest the difference. If you understand sequence of returns and why early volatility during retirement has a huge cost in terms of probability of survival, and how withdrawing from the life insurance or deferred annuity to enable the investment time to bounce back to historical return, and Ray Dalio’s value of diversification, you can see where the value of the numbers provided comes from. And if you combine that with the counter cyclical nature it, or other vehicles could provide, you can see why there may be value.

Nelson Nash’s book explains that we finance everything we buy. Every expense has an outlay of cash and either lost opportunity to make money elsewhere, or we pay out towards the banking function that other people require. His suggestion in my view is more similar to an equity loan where you maintain the value. I view this as a concept not the vehicle. In the vehicle it isn’t precisely an equity loan, but when you borrow from the insurance company and maintain growing cash value while they put a lien equal to the outstanding balance of the loan, it functions almost exactly the same with differences in the growth of that “equity”…. and in the concept, I want to use both… long term I want to lean more heavily on margin debt except when the market is in the toilet, but in general I would prefer to make a larger spread as a result of using my investments, not selling, and freeing up more of my working capital to pile into investments as opposed to savings. Nevertheless.. Nelson Nash started this concept when interest rates were way higher and life insurance paid way higher dividends. The returns are not great right now, and you are right to question if WL is even a good source of capital at all. Not if you don’t want insurance at all and can borrow against Tbills, gold, stocks, helocs, and even savings account, or having a seperate margin account that invests in counter cyclical investments like CLOs, corporate bonds, Tbill funds and long term bond funds with low fees. Term only 2% pay out. That is a liability and payments are an expense. Whole life is an asset capable of putting money into your pocket or at least boosting the legacy value while enabling you to take on risks knowing that part of your life is covered forever, although there may be better assets. See Ernst and Young chart, buy term and invest the difference is inferior to the way they used permanent whole life in retirement for the simulation. But, It is perhaps not a good asset if you also think the future benefits aren’t going to improve. That doesn’t mean there may not be some value in some small percentage for diversification and volatility buffer purposes… but it is probably not a good core vehicle as it is often pitched. Not selling is going to be much more tax efficient, and even a negative spread can be positive in practice as it can be using a heloc to pay down a mortgage due to deployment of working capital to reduce the balance and high overall cashflow relative to the debt to pay it off quickly.it becomes a positive spread on money borrowed. In his example you borrow at 5% rather than 8.75% and the additional money saved goes back into additional PUAs through additional policies or paying into the policy.compared to saving cash, this way you keep the “equity” once it is repaid, and regain not only the borrowing power, but more borrowing power than you started with. Whether the policy earns 3% or 6% long term depends on if you look at the legacy value growth or liquidity of the policy, but the alternative you do drain cash.

Life insurance companies as described do act as fiduciaries to policy holders, they do have to make estimates about how much they will pay out and they usually are going to make conservatives estimates and when they do they also are going to be borrowing from the federal funds rate to make investments just as banks do, but they are going to share the benefits among the policy holders. Life insurance companies are pooling risk and attempting to make counter cyclical investments, and they will lend out money and have capital in bonds, and a very small portion (5%) in private equity which tends to produce significantly greater returns than the stock market at the cost of less liquidity. They probably won’t invest in equities and if they do it will be very small allocation, and it will probably be ultra conservative value funds paying dividends invested on the basis of cashflow because they know their clients typically want counter cyclical results and they know the risks of people tapping into value are usually correlated to the stock market such as layoffs, recessions, loss of income, etc when surrender rates or requests for loans are the highest.but because the risks are pooled and the life insurance companies have the value of time, and the high security of 100% collateralization of the loan, the stability is closer to a savings account with some capital locked up into a C.D. for a longer term up front and returns competitive with bonds in the long term and it can be used for more access to the liquidity while also providing the growth of legacy value. If that doesn’t sound good to you, it’s not for you. While the premium payment is an obligation, if you don’t use all of the cash value all of the time, you will have the buffer of borrowing from the policy to make premium payments to get through any rough patch, and since the loan is an unstructured loan much like a margin loan or heloc but without the risk of margin call, you could theoretically just draw down and decrease the legacy value in exchange for more retirement income, particularly when the policy value has snowballed enough to where you can make small relative withdrawals.

I don’t think the value of life insurance is zero. I don’t think it is for everyone, I don’t think you want to “run all of your expenses through” life insurance without any consideration for other investments, I don’t think you want to assume you can “use your same dollar twice” without respect for the upfront loss of liquidity that in a vacuum would be better off being 100% in an investment in terms of total return, but in reality probably allow you to dollar cost average in to opportune times when used as a volatility buffer for recessions, I think it makes sense as an early build up of a financial safety net and emergency capital, as well as an additional volatility buffer in retirement, and can be used as an additional velocity banking tool particularly in strong markets and in bubbles while you build up the total borrowing power. I think borrowing in late bear or early bull markets will produce extraordinary returns and the combination of reduced risk through diversification of multiple asset classes plus increased leverage through making a spread off borrowing at 5% to invest at 10% (more like 20% if you invest in early bull markets), will produce vastly superior risk adjusted returns overall. Meanwhile the risk is also asymmetric in the sense that if you do go bankrupt, you do not start at zero unless the judge makes an unusual ruling, or unless you abuse the tool to commit fraud.there may be some decisions to not tap into the cash value to bail yourself out if you are deeply enough underwater on enough leverage and loans, instead tapping into bankruptcy protection and then leveraging the cash value to buy assets aggressively yet again at superior prices. This would be an extreme contingency in event of emergency only, but I would say under the age of 40 or someone who is under 60 with significant assets might have value in this for themselves, and maybe someone might insure a family member if they watch over their finances or plan to kick them out at a certain age.there may also be a debt consolidation angle, but I haven’t looked into the claims enough to say with any confidence. I wouldn’t feel comfortable deploying capital anywhere else but high interest loans if I had enough debt to where consolidation made sense, and if the cost of debt was low enough, I would prefer deploying capital into a vehicle where a higher rate of return could be obtained such as a 401k or margin account. And then I could use a 401k loan or margin loan later o pay off debts and redirect the cashflow into the margin account or 401k. There probably is a point where the numbers make sense when you have 10% heloc and 7% mortgage and you already have some investments but you don’t have a large enough cash buffer, or even when you use a heloc plus margin loan to pay for a large drop in and that way you can better utilize your working capital to then eventually use both heloc+policy loan to repay debt. The use of heloc to effectively build up a massive credit line to then consolidate your debt to 5% unstructured loan might be better because it frees up a lot more capital to then invest at 10-20% in the market or in a recession to buy rental properties and then use margin or heloc from that property to pay down debt and eventually de-risk that 5% loan sometime when you think the risk of additional dollars no longer justifies the potential future returns and reduced future opportunity cost. But I don’t have access to the types of numbers or enough understanding about the future of life insurance to know, and this is a complicated vehicle, it’s very possible I am missing something, the claim of non guarenteed return comes from life expectancy increasing or beating expectation plus changes in assumptions vs interest rates and from whatever conservative risk estimates the companies made. While it’s extremely rare, theoretically life insurance companies could become insolvent if for instance the US government defaults and the so called “guaranteed portion” of the return isn’t there at the same time the corporate bonds blow up. A Great Depression where both bonds and stocks collapse in deflation and an extreme event that changes what money is and government deciding to not pay old obligations could possibly still wipe out your “guarentees” in that event your risk isn’t protected from diversification, it’s made worse over just holding whatever singular cash or currency or asset survives. In such an extreme event perhaps your debts would also be wiped out, it’s hard to say.

Overall, I think you make good points but miss a few reasons why this could be a tool in part of a financial strategy that will probably work out well for some people.

Thanks for the info… I had never heard of infinite banking (and will steer clear). As another alternative, I have often used the margin on my Interactive Brokers account (Rate = Fed Funds+ .5%-1.5%) to borrow my own money for short term projects.

Your Family Bank has been involved with IBC Life Insurance for 14 plus years and oddly enough there are no consumer complaints. A scam should have loads of complaints, but maybe I'm missing something.

The cash value is not a separate pot of money. There is a formula for this. (Net Amount at Risk + cash value - any outstanding loans = net death benefit). The cash value is a component of the death benefit; the equity in the policy is not on top of it. It is a part of it. This is literally in the study material to become an agent.

It's obvious you don't understand the concept of present value. So instead of “available cash value” to borrow against while alive, it would perhaps be easy for you to understand if it was labeled “present value of your death benefit” that you can borrow against.

Although I don't see myself climbing on to the infinite banking train anytime soon the one concept about this that I can appreciate is being able to borrow against an asset with a stable value and contractually guaranteed rates.

When you have a guaranteed return rate of 5% and can consistently borrow at 3% while using it as a storage place for cash (when not in use ) I can see how it would act as a supercharger to your savings over the long run. Even considering the initial drag up front.

Now, all of the downsides you've named are the reasons that I've never signed up but I would love to replicate some of the better parts of that with another asset class. HELOCs obviously have some of these same benefits but the contractual guarantee that you can borrow the money isn't nearly as strong and the ability to scale it is also fairly limited.

Treasury direct also offers some interesting options there but the liquidity isn't quite as simple (or free). At least based on my limited understanding.

Any suggestions on other asset classes that you could build a similar option around?