The Big Downside: The Insurance Is Expensive
The idea of having this “fund” that you can tap at any time sounds appealing, but there are always downsides. Insurance companies aren’t offering these policies out of the kindness of their heart. They are offering these policies to make money, and that profit come from you.
It’s important to compare Infinite Banking and Whole Life Insurance to their alternatives. The alternative here being using a traditional bank to save and borrow if needed, and an investment firm to invest.
When you have a whole life policy, you have the following expense considerations:
- A well-structured whole life policy’s cash value doesn’t even start to break even for 5 to 7 years. Many policies aren’t well structured, and you might never break even…
- Agent commissions on these policies create a real incentive for insurance sales people to sell whole life policies that aren’t always in the customer’s best interest.
- If you plan to borrow from your policy’s cash balance, it’s still a loan with rates ranging from 4-8% on average. You don’t get free access to your cash balance.
Let’s Look At Some Math
It’s always easier to look at some math and see how this can work. Remember, each policy is different, and you have to look at the underlying math!
A reader recently shared his 7 year old guaranteed whole life insurance policy with us. It was issued in 6/2012. The reader is 40, male, healthy, and got the policy then at 33, when he was probably even healthier!
It’s a guaranteed whole life policy until age 99. It has a current death benefit of $1,551,262, with a current face value of $1,549,562. The monthly premium is $1,982.72.
This reader has been paying his policy for 79 months – so he’s paid a total of $156,634 for this policy.
Guess what the current cash value is in 2019? Just $88,459.
Read more: What is the Infinite Banking Concept? Part 2
That’s almost a -40% return of the past 7 years…
But remember, if we’re looking at this through the lens of infinite banking, you’re getting life insurance AND a bank account.
If you want to separate the two – he has $88,459 in “investments/cash value” and paid $68,175 for a $1,500,000 insurance policy.
Any way you slice this it’s bad. If you wanted to get a $1.5 million term life policy, this reader would probably pay about $115/mo in a worst case. So, in the same 79 months he’s had the policy, he could have had the same insurance coverage for just $9,085. That’s a $59,090 difference! (Get a quote for yourself from the best online term life insurance companies).
I’m also assuming that he got a 0% return on his investments – because if you start changing the math on the life insurance portion, the return goes negative quickly!
And remember, we’re talking about the stock market from 2012 to 2019 – one of the longest bull markets in history! So this reader is getting a 0% return at best (likely negative though), that’s just wrong.
Also, if you wanted to tap your cash value, you’re still going to be paying interest on your loan – and if you’re in a financial position to fund a life insurance policy like this, you are also probably in a financial position to get the best loan rates available.
This is an example of a really poorly structured whole life insurance policy, but I think it illustrates what can happen very well. You spend a lot of money on insurance, and you don’t get the benefits promised by an insurance sales person.
For more information please see the list of Infinite banking whole life insurance