I have never been a fan of whole life insurance. I have always thought of it as a rip off. If you need life insurance, then get term life insurance. You don’t need to mix two things – life insurance and savings/ investments.
Robert Murphy has written a post about the Infinite Banking Concept (IBC). Apparently, which I did not know, he has given this a lot of thought and done some extensive research and writing on it.
To summarize IBC, you get a whole life insurance policy and make payments toward it. In the future, if you need a loan for something (let’s say a car), then you can simply take a loan from your policy. You don’t have to worry about showing collateral or getting a credit check done (as you would with a bank). Your insurance policy is your collateral. For more details and probably a more accurate description, I would suggest reading Murphy’s post on this. I will warn you that it is quite long though.
I have a great deal of respect for Robert Murphy as an economist. I am always open to new ideas and this IBC is intriguing. With that said, I am still highly skeptical of the IBC and whole life insurance in general.
I can possibly see benefits to buying whole life insurance for a limited number of people. Generally, I still think it is a scam though. There are salesmen who solicit people to buy whole life insurance policies and these salesmen make a living doing this. This doesn’t automatically make it bad, but I suppose it is due to the nature of the business.
I understand there are salespeople and there is marketing in almost every industry. A car salesman makes a commission, but it doesn’t mean that you are getting ripped off when you buy a car. But there are significant differences. You can go online and get a quote for a term life insurance policy without speaking to anyone. They will call you up and verify your information. They may send out a nurse to you to get a physical to make sure you are healthy. If you are young and healthy, you can get term life insurance that is quite inexpensive. There really is no need for a salesman. You aren’t picking out much in the way of special features. It is mostly just the term length and the price per month or year. You don’t really need a big sales pitch for that.
Whole life insurance is mixing things. It is mixing life insurance and your savings and investments. For this reason, it makes the numbers rather confusing. I think the industry likes it this way. But we all know there is no free lunch (at least those reading this blog who call themselves Austrians). There is no magical rate of return just because it is a whole life policy. There are no special interest rates to be earned. The salesman’s commission has to come from the payments you are making on your policy (so to speak).
Ironically, I think a whole life insurance policy is probably only good for people who are not disciplined with their money. It is like a forced savings plan. You pay your monthly premiums and it builds up some savings for you over time.
If you are disciplined and can put away the same amount into a savings account and perhaps other investments, then you will likely be better off. Your contributions to savings would have to be reduced by the small premiums you would pay for a term life insurance policy, if we are to compare them equally.
So if you buy a 30 year term policy when you are 25 years old, then that will cover you until the age of 55. Meanwhile, let’s say you put away $250 per month. That will add up to $3,000 per year. Even without any interest, this can start to add up over several years. Using the IBC theory, you can simply take a loan from yourself and pay yourself back. If you have $100,000 saved in the bank and you take out $20,000 to buy a new car, then you can go ahead and make “car payments” to yourself. It is up to you if you want to pay interest on it. Framing the whole thing this way almost sounds ridiculous, but it is really not much different than the IBC, so far as I can tell.
The key here is that you still have to make your “car payments” if you want to replenish your funds. But this is no different than with a whole life insurance policy. If you borrow this money from your policy, then you will be making extra monthly payments of several hundred dollars on top of the premiums that you are already paying. Again, there is no such thing as a free lunch here.
I am still not really seeing any advantages to the IBC, other than it being a good plan for those who lack discipline in their financial life. If anything, IBC would be a disadvantage because of the commissions and fees that you are handing over, when you can simply do much of it on your own and cutting out the middle man (the salesperson).
In conclusion, I might have to read more of Robert Murphy on this subject. I respect him and I want to make sure there is not something that I am overlooking. But for right now, I would suggest sticking with a good term policy if you need life insurance. Take care of your saving and investing separately. I don’t see a need to combine the two together and confuse them. That is how you get ripped off.