Following up on yesterday’s email, I keep getting questions about “infinite banking,” “bank on yourself,” and other similar strategies involving whole life insurance.
I don’t talk about this much, but about 15 years ago, I actually spoke with Nelson Nash on the phone. Nash is, of course, the creator of The Infinite Banking Concept. Back then, I was still new in the business and I had lots of rookie questions.
Ultimately, the conversation ended with him telling me, quite frankly, that I had a “sophomoric” (his word) understanding of life insurance.
In retrospect, he was probably right at the time.
But, about 10 years ago, I started seeing some cracks in the foundation of the Nelson Nash Institute (which used to be named something else I can’t remember at the moment).
A few of his top advisors left the institute and started their own organizations, each borrowing heavily from Nash. Each had their own “take” on the concept and taught it to their clients with varying degrees of accuracy.
Nash himself went down a rabbit hole with some of the ideas he proposed.
All this added up to a bunch of fragmented explanations, contradictory conclusions, and a lot of confused policyholders.
And of course, the critics started to appear.
They accused Nash (and others) of selling yet another life insurance gimmick to cheat people out of their hard-earned money.
Maybe that’s true in some instances. I’ve run across a few cases where someone brought me a proposal from an “authorized” Infinite Banking Concept (and also “Bank on Yourself”) advisor and it turned out to be a lackluster design from a mediocre company.
In at least one case, the person had been sold a policy many years ago which was actually losing money… which, if you know anything about whole life insurance, is absolutely insane. These products are specifically designed to NOT lose money. Do you know how awful an insurance agent has to be at his job to design a whole life policy that loses money?
Anyway, I never became an “authorized advisor” of Nelson Nash or any of the offshoot organizations.
The way I figured it was that I had already made some friends in the industry, had connections to the VPs and presidents of some of these life insurance companies, and if I really wanted to know something, I could just ask a friend of mine (who is well connected in the business) or shoot one of my other contacts an email or call them.
What bugs me is the idea of “infinite banking” is an incredibly powerful idea which is not given the respect it deserves.
There’s something going on under the hood of life insurance that none of the critics really understand (nor do they want to understand) and it’s insanely irritating that whole life’s defenders do such a p*ss poor job of explaining it in a way that’s accurate and that actually helps people.
The story of infinite banking, and of whole life insurance, is really the story of life insurance and the life insurance industry itself.
The story started long before Nash was born… back when businessmen like John Wanamaker, the son of a poor brick maker, who took the idea of saving money seriously, built a $100 million empire using whole life insurance as a foundation of his success, along with his incredibly savvy business ideas.
Then came Dr. Solomon Huebner, who taught insurance as a college course at the Wharton School in PA.
It was the good professor who taught his 75,000 students — many of them insurance agents — to build up substantial cash values inside of whole life insurance, then use those cash values to create secured policy loans to finance business enterprises, investments, and the occasional luxury item. Also super-useful to pay off outstanding debts from banks, credit unions, credit card companies, and other lenders.
The idea spread throughout the 1900s, 1910s, ’20, 30′, ’40s, and 1950s.
But of course this is wholly unconvincing to critics.
There’s an underlying premise in every single one of these anti-whole life posts you see on the Internet, which is fundamentally different from the premise of those who like (and see the benefit of) whole life.
That anti-whole life premise (which is really an anti-life insurance premise) is that there is a “need” for life insurance which gradually disappears over time.
They call it “The Theory Of Decreasing Responsibility”.
Now… to be fair, there’s a certain appeal to this viewpoint because insurance is expensive, people generally are skeptical of the profit motive of insurers, and people believe their savings strategy is cheap and effective and has virtually no downside.
But insurance is always and everywhere a financing tool which exists to replace that which is lost.
A small amount of money (AKA the premium) finances a large amount of insurance to make the beneficiary whole for a loss… the loss is paid by the insured sum in the contract.
The thing being insured, however, is never a necessity in the most basic sense of the word, but rather a value people choose to acquire for its own sake or as a means to some other end. For example, people buy homeowner’s insurance because they value their home, not because they “need” a $500,000 residence. I’m sure most people could get by living in a studio apartment or some small residence but they don’t want to. It wouldn’t be fun. But… they could do it.
Likewise, people buy whole life insurance because they value their future income and savings, not because they (or their family) necessarily “needs” a specific amount of money in the future. Families without life insurance do manage to get by on less money. Again, it’s not pleasant, and most people wish they had more money… almost everyone wishes they had more money. But, stating it in terms of “need” often becomes an exercise in proving that which is arbitrary.
Do people need a $100,000 salary? Can’t they get by on less? Why or why not?
I hope you see where this is going. It’s impossible to prove “need” in the way that most people use that word.
But, it is a very simple thing to prove “value.” You simply ask two (or more) people what they would pay for something and then observe the transaction taking place. Whatever money changes hands is the objective value of that thing.
In the case of salary, people tend to be paid what they are worth (the protestations of politicians and union leaders notwithstanding). A seller (employer) buys the time of an employee and the employee agrees to be paid a certain amount and no less. That becomes the objective value of that person’s time, labor, and skillset. If they are worth more, they find a better paying job.
People also tend to recognize the significance of the loss of that income and tend to buy insurance to cover that risk of loss. People always need a place to live and likewise they always need income (and savings) until they die. Some people place a higher value on those things than others or recognize insurance as a cost effective way to protect those valuables.
What does this have to do with Infinite Banking?
Once again, whole life insurance is a financing tool. You are lending the insurance company money (i.e. your time, labor, and skillset) in the form of premium payments, and they are investing it for you and giving you life insurance and savings in return. Every premium dollar you give to the insurer must be invested to pay for the future death benefit (which is a combination of cash value and pure insurance).
BUT, you have the final say as to HOW that money is invested.
Which means, you can let the insurer invest it in its general investment account OR… you can take on policy loans and YOU become the investment — your earning capacity, income, or other investments you buy with those policy loans, drive the cash value growth of the policy.
Insurers are well aware of this fact, which is why they allow policy loans to begin with. Policyholders are a low risk investment, since most people committed to saving money are careful with how they use it and are keen to replace money borrowed. This is why outstanding policy loans are usually a small fraction of total invested assets at any given time.
Not everyone borrows money at the same time, and most people who do borrow money against their policy, repay those loans. In fact, smart people repay MORE than what they owe against their policy, thus increasing their cash value and improving long-term cash value growth within the policy.
Just as a bank’s capital (i.e. “corporate savings”) has a time value, so does an individual’s savings. Banks charge interest for the use of its savings. Individuals would do well to follow suit when it comes to their own personal capital.
In corporate finance, this is called “Economic Value Added.” In personal finance, there is no name for it… and in fact, some personal finance gurus call the idea “dumb.”
And yet… it is what makes the insurance, banking, and much of the corporate world run.
It is the core mechanics underlying infinite banking and why people tend to love their whole life policy once it’s been in force for several years.
Since you finance everything you buy anyway (you either pay someone else interest on loans or you give up interest on your savings by paying cash — creating an implied financing cost), you might as well be the one benefiting from this insurance arrangement. Which means, you might as well exploit the contract you own, by financing major purchases and also investments through your whole life policy, to grow and protect more and more of your savings.
Of course, you don’t have to do this, but why would you finance your purchases elsewhere or lose interest on your savings (by paying cash) when you don’t have to?
Because insurers guarantee a very specific amount of growth in your policy over time, you get the benefit of a continuously growing savings while you have use of the money for your own purposes.
This is the core idea — the principle — underlying the infinite banking concept.
It baffles me how some people ignore or gloss over this fact. An insanely valuable benefit literally unavailable anywhere else in the financial industry.
And this arrangement ultimately exists to give you a great degree of control over how much insurance and savings you accumulate over the long term, and by extension, how much of your valuable income and savings you are protecting… which is the whole point of insurance — to protect the value of your income and savings.
That whole life insurance gives you any control at all over this process is unheard of in other sectors of the financial industry.
It simply does not exist.
So in my weird way of thinking, smart folks will exploit the heck out of the “banking function” embedded in whole life insurance to grow and protect an increasing amount of their income and savings until they die.
Anywho, I laid out some of the nitty gritty details of how this works in practice, here in this video (along with a couple of examples):