Infinite Banking Concept or Whole Life Insurance

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.

21 thoughts on “Infinite Banking Concept or Whole Life Insurance”

  1. If you could get access to every dollar you put into a Whole Life contract on a tax-favored basis, how much does the death benefit truly cost you? The contract is guaranteed to increase for the rest of your life. The big difference with Whole Life vs. Term is that you won’t outlive it and you’ll have access to your cash at anytime without having to rely on a traditional bank for terms. How many people in this country would be benefit from being their own banker? Furthermore, the money in a Whole Life contract continues to grow guaranteed each year even when borrowed against. What other asset does that? Finally, for those educated about the Federal Reserve and how bankers run this world with fiat money they control, this savings system is a full reserve system. It is not inflationary like the fractional reserve banking system you most likely use to park your cash before spending or investing it. The type of banking you do (like everyone else not practicing IBC) contributes to 90% of the inflation we experience. You should read Mr. Murphy’s book How Privatized Banking Really Works.

  2. The Infinite Banking Concept has some good angles to it. I know it isn’t for everyone, but it does have it’s good pieces. It’s unfortunate that whole life is so look down on for no reason. If people knew what you could do with it I think it would be more accepted.

    Like I said, it’s not for everyone…but it’s not the devil like many talking heads will make you think.

  3. JLM Wealth Strategies said it very well. The tax benefits are similar across all properly designed cash value accumulation products. WL is for those that are willing to pay more for more guarantees. Index and variable contracts allow the client to take on more risk for the possibility of higher crediting rates.

  4. Whole life insurance is rarely good for anyone. It’s a terrible product and here’s why:

    A cash value policy is an insurance product that packages insurance and savings together. The “savings” portion is usually in underlying mutual funds that anyone can buy on their own. This product is frequently marketed as an “investment”, aggressively so by commissioned agents. The returns are horrible.

    With typical whole life, most of the “savings” portion of the premium in the initial years disappears in commissions and expenses. After that, the investment portion of whole life typically produces a return of less than 3%. The same investments, outside the policy, typically average over 10% over the entire life of the investor.

    With whole life and universal life, the savings you finally build up after being ripped off for years don’t go to your family upon your death. The only benefit paid to your family is the face value of the policy.

    Apples-to-apples, it is better off to get a term policy providing the same death benefit (much cheaper), and invest your savings separately.

    Thomas
    Life Ant

  5. There are a lot of misconceptions about IBC. It’s important to work with an advisor who is very knowledgeable and very transparent with what to expect.

    If you are looking to learn more about IBC, I recommend reading The Wealthy Family. You can download the first few chapters of the book for free at http://www.thewealthyfamily.com

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