More wisdom from the late, great, John Wanamaker:
Twenty years ago I had a capital of about a half million dollars. I then realized that a business man with a half million of capital and a million and a half of insurance on his life would have better credit than one with a half million of capital and no insurance — so I took the insurance. I now find that trading on the credit it created I made more profit than if the money which went into insurance had gone directly into my business.
Translation: John Wanamaker figured out that if he bought whole life insurance, he could build up a bunch of cash value, and borrow against it to build a huge business empire, and that this would be way more profitable than just reinvesting all the profits into his business.
Is that a dumb idea? I dunno. There aren’t too many folks walking this Earth with a $100 million business empire (which is worth anywhere between $1 and $30 billion today, depending on how you calculate the inflation rate). Wanamaker was one of them, so I trust he knew what he was doing.
And more from Dr. Solomon Huebner, who taught insurance and economics at the Wharton School:
Furthermore, life insurance also serves as additional blanket collateral with reference to all the other loans that the insured may have effected through the pledge of property assets, thus again securing a better rate of interest. If Wanamaker, because of his heavy life insurance, obtained a slightly better rate of interest, let us say one-eighth or one-quarter of 1 per cent on the millions of credit granted on the basis of his merchandise, he probably realized a business saving which counterbalanced a very substantial portion, if not all, of the total premiums paid on his insurance, at the same time enjoying the growing cash value on his policies.
Again, the clever use of whole life insurance to finance business activities. Huebner actually advocated the use of policy loans as a sort of default type of loan option that everyone should consider… that all personal (and probably also all business) loans should move towards being collateralized loans and that one of the best forms of collateral (maybe the best) was life insurance.
Reason I bring this all this up is because the kids these days are going gaga for the shiny new life insurance marketing that promises to teach you how to be your own banker using life insurance.
Don’t get me wrong, those ideas are making whole life insurance secksy again, and the core idea of using whole life insurance to finance major purchases isn’t wrong. It’s a very good idea if done correctly, and life insurance loans are dirt cheap, but… these marketing systems also tend to hype things in a way that makes some aspects of life insurance harder to understand. For example, they call it “your own personal monetary system” or “your own private bank”.
It’s not a bank. It’s a whole life insurance policy. Why are we pretending otherwise? Doesn’t that make it more confusing when we ignore the fact that it’s life insurance? Why can’t whole life insurance be good on its own merits? Why do we have to borrow (no pun intended) from another industry? — an industry, I might add, which already sits on somewhat shaky ground as it is and doesn’t have a stellar reputation in the public’s eye.
Is it because of the bad press whole life insurance gets? OK, but that bad press is based on non-sequiturs, wrong premises, and outright lies, so why run from that fact? That’s something to embrace and an opportunity for life insurance agents, and policyholders, to band together and correct misinformed journalists while shunning the shysters continue to peddle their lies.
Instead, what we have are an endless number of marketing gimmicks, like the idea that whole life insurance is a bank… I mean, it’s just weird. I kind of understand why people are skeptical about whole life insurance. These promoters make it seem almost magical when it’s not.
They also make it sound like they’re the first ones to discover the loan provisions embedded in every whole life policy contract since the 1800s.
It reminds me of what’s happening on the political scene today and all the shenanigans from both the left and the right. People on the left hate the “make America great again” slogan used by President Trump. Which is amusing to me because… it was the exact same slogan Bill Clinton used. Literally, his words were “I believe that together we can make America great again”. But Clinton didn’t make up that slogan. It was used earlier by Ronald Reagan in 1980. The videos are online, freely available for anyone to see. And yet, “MAGA” is only associated with Trump. Why? I have no Earthly idea. Better marketing? Prevalence of social media? Trump is more bombastic than both Clinton and Reagan put together and people seem to be drawn to that?
Either way, left, right, center, “make America great again” is a great slogan.” I want America to be great and I want Americans to be great people.
Speaking of making America great, one of the things that made America great was a great savings rate and more… the ability to save through whole life insurance policies so they could accomplish great things.
For those of you without the benefit of flash photography (or for those who are totally confused by this long rant), not long ago I flapped my gums about why I don’t promote the “according to Hoyle” version of this whole life insurance “banking” concept (marketed by various promoters with trademarked names we can’t say in public). Instead, I choose to edjumucate folks through my life insurance guide (including the results section) and a couple of not-so-secret projects I’m currently working on. This rant is sort of a followup to those previous rants because people keep nagging asking me about what I think about this concept.
At this point, it kind of sounds like I’m down on it, but the reality is… I love using the loan features in my whole life policy and I encourage my clients to love those loan features, too. It’s almost impossible to find a loan that’s cheaper than a life insurance policy loan, especially considering how the insurer calculates the interest on those loans.
My wife and I have financed lots of things with our policies, paid far, far, less than we would have paid borrowing money anywhere else, and the process has made it much, much, easier to crank up our savings rate to almost superhuman levels. We don’t worry about taking on policy debt for major purchases because it doesn’t negatively impact our long-term savings plan.
And that’s the thing. We look at it as a way to improve our ability to save. We don’t look at it as an excuse to raid our whole life cash values to spend money just because we have a life insurance policy with available cash value. And a lot of these systems and marketing angles surrounding this “banking” concept focus so heavily on the idea of taking out policy loans that they sort of lose sight of the idea that the whole idea of taking on policy loans is to make borrowing money cheaper. And, the lower you can make your borrowing costs, the more money you can save over the long-term.
But… all this is only relevant when you absolutely need a loan for something. If you don’t need a loan for something, then it doesn’t make sense to take on policy loans. I do agree with the idea that, because of opportunity cost, you essentially finance everything you buy — you either pay interest to someone else or you lose interest on your savings. It’s just that, if you are doing this correctly, you are naturally going to chip away at the things you “need” to buy in life and instead you’re going to develop a more balanced financial plan with a high savings rate to pay for your future needs and wants. The rest, as they say, will take care of itself.
And that’s really what it’s all about: saving more money, not necessarily spending more money. You don’t need help spending money. You (probably) need help saving money, and saving it in a way that allows you to still do the things you want to do.
If I work up the hutzpah, I might come up with my own marketing gimmick. Instead of focusing on how much money you can borrow and spend from your whole life insurance policy, I’ll sell the idea that you can save an “infinite” amount of money through life insurance premiums and paid up additions. I’ll call it The Infinite Savings Concept (I’m joking).
