Infinite Banking – Whole Life Investment

A debate has been raging in the insurance industry since 1977 when Arthur L. Williams Jr., founder of Primerica, mass marketed the concept of “Buy Term and Invest the Difference.” This concept took off like a wildfire and put the proponents of permanent life insurance on their heels. Both sides have been slinging the mud ever since.

Personally, I think both concepts have their merits. If you follow this blog or have been through my website you’ll clearly see that I’m a proponent of a niche within the permanent life insurance industry that is referred to as The Infinite Banking Concept. I’m a big believer in the concept and won’t take your time to re-hash why. See previous blogs. However, I will note that I have never believed that one product or concept fits all. I will use this blog to share both sides of this ongoing debate.

“Buy Term and Invest the Difference” - The concept is simple. Since term life insurance is so cheap as compared to permanent life insurance, it is suggested that you buy it and invest the difference in higher yielding investments.

Pro’s:

1. Cheap life insurance protection in case of premature death to protect your family. You can buy enough to make sure that your family’s lifestyle does not change when your income is suddenly stripped away., without breaking the bank.            
2. The securities markets have returned an average of approximately 10% going back to the 1950’s. These returns are much stronger than the 4-5% that most permanent life insurance policies will pay. The growth of your invested money should far exceed the growth in cash values within your permanent life insurance policy.

Con’s:

1. The name term insurance is derived for the period of time that you purchase it for. You buy it for a specific “term” usually 10 – 20 years. This insurance is cheap in your early years and gets progressively expensive as you age.
2. It is unlikely that this coverage will ever provide a benefit. Penn State University studied term life insurance and publised their results in 1993. Here is what they found:                                                                                                      1.  More than 90% of all policies are terminated or converted.
   2.  45% of all policies are terminated or converted in the first year.
   3.  72% of all policies are terminated or converted within the first 3 years.
   4.  The average duration before termination or conversion is 2 years.
   5.  Less than 1 policy in 10 survives the period for which it was written.
   6.  After 15-20 years exposure, less than 1% of all term life policies are still in force.
   7.  Only 1% of all term insurance resulted in death claims.
3. Term life insurance only offers one benefit – financial payout upon death.
4. Investment returns are subject to fluctuation. The level of risk taken will determine the level of growth. The performance risk is transferred to the owner.
5. Investment returns are typically quoted as gross rates of return. The net rate of return after capital gains taxes and transaction fees have been paid can be considerably lower.
6. Many people do not have the financial discipline to “invest the difference”. If not automatically invested then the cost difference ends up in lifestyle expenses.

“Permanent Life Insurance” – This type of insurance is permanent and guaranteed. It is considerably more expensive than term life insurance but offers numerous additional benefits, other than a death benefit.

Pro’s:

1. These policies have a cash accumulation feature. The cash values within the policy can be used as needed.
2. These policies are guaranteed. The death benefit is guaranteed to be paid and can’t be taken away. If it is a participating policy, the dividends can not be taken away or reduced. Your premiums are guaranteed. They can not increase as you age or your health detioriorates.
3. Tax deferred growth and tax advantaged distribution. The cash values grow tax-deferred and can come out tax-free via a policy loan.
4. Dividends received are non-taxable.
5. These policies offer a guaranteed internal rate of return typically 4-5%. This return is tax advantaged.
6. Can employ the Infinite Banking Concept of using the cash values to self-finance. This strategy can greatly increase wealth by decreasing wealth transfers through interest, taxes and fees paid to 3rd party financial institutions.
7. Offers a death benefit, life term life insurance, that will pass income tax-free to the polciy holder’s heirs. Unlike term life, it’s an instant and permanent asset. This asset can be used strategically as a living benefit (more on this next week).
8. Since the death benefit and premiums are guaranteed it can be used in a number of strategic tax, business, investing and estate planning applications.

Con’s

1. Permanent insurance is much more expensive and it’s not affordable for everyone.
2. Some families & businesses do not need the level of benefits that are provided.

In review: As is the case whenever multiple products are compared, it boils down to cost versus quality. Both term and permanent insurance are excellent. They fit the needs of different people and groups. Suze Orman and Dave Ramsey should know this. It’s common sense. The distinct differences of each should be thoroughly presented. One size DOES NOT fit all. The needs of each individual must be understood and the proper solution applied to each.

Scott Storace