I have been dancing around the “Be your own banker” concept for the last month or so after learning more about infinite banking. I finally figured out what I have never liked about whole life insurance. People use it for life insurance.
Let me tell you a story about myself and my wife and how the concept of the infinite banking system has been gaining my attention. We’re in our late 50’s and we have a house and several rental houses that are mortgaged for far longer than they should be. We have about $100k in an IRA that, to be blunt, hasn’t gained squat in several years. I make good money but most of it goes into paying off a lot of debt fairly slowly. I have a little covey of loans and credit card debt that is really money hungry and if I keep picking away at it the way I am it might never get paid off. I want a 20 year plan to get out of debt and created a retirement fund.
So the other day I was telling my wife about the infinite banking system and how it looked like it should work well for younger people but I had my doubts about what it could do for us. She asked if cashing out the IRA and putting it into something like this would work. So I’ve been playing with ideas. One of the big problems is that if we cash out the piece of junk IRA we take about a $40k penalty and tax hit. That’s the bad news. The good news is that if we do it happens to be about enough to pay off the covey of loans and credit cards I described above. I am currently paying about $2000 a month toward that covey and not effectively paying it off. If I free that up I can than pay that $2000 into a dividend paying whole life policy. By the third year I have repaid myself the $60k.
In the 5th year the policy has enough cash value to pay off one of the rental properties we have. At $2800 a month ($2000 plus the $800 I was paying for the rental house) we would have that paid back to ourselves in 5 years. In year 13 there is enough cash value to pay off our primary residence. The problem at this point is that I’m getting close to my 20 year window. But, by paying off my house I just freed up that much monthly payment, $2400 a month.
So, I am committed from the start to pay $2000 a month for 20 years. It is budgeted and isn’t cramping my lifestyle. So in the 13th year I now have $2400 a month that I can put into a short pay policy, 7 years, that in combination with the first policy will pay us back for the pay off on the house. So, at the end of 20 years I have paid off $550,000 in debt with the interest going to myself, not the bank, and have created guaranteed cash value of over $500,000. We own our best rental and our residence free and clear and have more cash than our IRA could have ever realized and, the kicker…..
The cash is in a whole life policy and is tax free. We can begin taking income from that and not pay taxes while living in our paid off house and collecting great rent. By the way, and this is extremely important. Even though this is done through a company that has paid dividends every year for 140 years, I assumed that none would be paid and went off of just premiums and guaranteed values. If they happen
Bottom line. What I need to figure out is how to use whole life and the concept of infinite banking to pay off our other rentals and have our cake and eat it too. I’m pretty sure I don’t have this right yet, but with the help of my friends I will shortly. If you have any questions or think I’ve got it all messed up, call or email me directly.
That’s the kind of math I like fretting over. I wonder if the dividends on whole life policies are paid based on the cash value or the specified amount (death benefit). If it’s based on death benefit, then the dividends can not grow astronomically to make a huge paid up addition. I still wonder why a participating whole life contract is so much better than a customized UL for this exercise. And there are so many ULs to choose from. They all project a different cash value growth illustration based on the math formula that defines the policy. And you can change your funding strategy over time, whereas with a basic whole life contract you are required to pay next year’s premium even if you triple-funded it this year. Can the dividend really be that valuable?
And to think that you just might end up liking New York Life afterall. But seriously, before finalizing any of these plans you really should read Douglas Andrew’s book Missed Fortune 101 to compare his similar approach. It is not an approach I have taken, but a friend of mine with a much larger cash flow read the book and ended up getting a $2.4 million high yield UL with State Farm a year ago to implement basically the same finacial vehicle that you write about. At the time he was woefully underinsured with a 21 year old $500,000 UL from Allstate that was illustrated to crash and burn in the next three years or so because he had borroed against it some years ago.
There is no such thing as a guaranteed high yield UL. Anyone that makes a decision to go this route based on high yield assumptions, or for that matter, non guaranteed dividends, is looking at the wrong side of the page.
Google “bank owned life insurance” (BOLI) and read their approach if you have not already studied it. For them it is used partly to fund employee benefits through certain tax incentives that go along with it. But it is also seen, as one banker put it, as “a muni bond that you don’t have to mark to market” every quarter or so. And 90% of the time a current assumption UL is the vehicle of their choice.
Jim,
Thanks for your comments. Bank owned life insurance and infinite banking are two completely different products and objectives. I don’t do or recommend doing anything with current assumption anything.
In your example, it appears that the cash value builds awfully fast in the first few years. For example, in the first 3 years it builds up $60,000 of cash value? My experience is that after 3 years, the cash value is minimal, about 1% of face value, which would indicate a $6,000,000 face value! Would you please put some numbers behind the example, i.e. face value and cash value build up at 3, 5, 10, 20 years? Thank you. Finally is this approach better than simply using the “premium” to pay off the existing mortgages, and once they are paid off to build up a retirement fund, and supplement it with term insurance?
A couple of things I may not have mentioned in the post you read. In order to maximize the bang for my buck I am using my 29 year old daughter as the insured. Works out much better than my tired old 58 year old self.
The other thing is you have to understand there is a huge difference between a dividend paying whole life policy funded to the MEC limit, and using just enough money to pay for the insurance.
Good questions.