401K: Continue Contributions or Stop?
Rental Property Investor · East Grand Forks, MN · Member since 2018 · 10 posts · 21 votes
I recently purchased my first rental property with no money down. I did so by necessity as I am cash broke! However, I do put a substantial amount of money into my 401K account every pay check. I have always been relying on having a very nice nest egg waiting for me when I retire, but like many of you, am starting to realize that I don't want to wait until I am 65 to enjoy it.
For the last 10 years I have been so focused on building up my 401K, but now for the 1st time I am really considering stopping all contributions to focus on real estate investing. I ran the calculations and found that my projected 401K value when I retire will be cut in half if I stop contributing now (age 36) and leave what I have in there.
I'm looking for advice! Have any of you taken the plunge yet, how has your experience been? Any recommendations??? Thank you!!!
Matt
@Matt Hangsleben this is a tough question. I stopped contributing to mine years ago when I learned at a financial education seminar that if the employer doesn't match, it doesn't make sense to keep contributing to the max amount. If your employer matches, I would continue to contribute, but lower the contribution. If you do that, however, you need to take the additional monies that you now have (after taxes now) and put it into a fund that you will use for some other investment. It's far too easy to spend it. The idea is that through your real estate and other investments, you won't even have to dip into that 401(K) later on, so the fact that it will be far less won't be an issue. But that really depends on how you plan to ramp up your investing. If I were you (and I did this) I would consult with a registered investment adviser about overall wealth planning and your goals...and I don't mean a financial advisor..there is a difference. You don't want someone trying to sell you products, you want someone trying to help you analyze your current status, where you want to go and how much you will need.
@Matt Hangsleben I have been going over this with a friend of mine as well. Glad you brought it up.
Okay, not borrowing your own money then. Borrowing against your own money...? Say I default on the loan, do you liquidate all or some of my life insurance policy to pay for it? I really am truely asking because I don’t understand this stuff. It sounds like you may structure it a better way than the two policies I just cancelled. To pay a bit over $500 and have a $29 cash value roughly two years sounds crazy to me. I am guessing when I‘m 65 years old 10k won‘t buy as much for me as my $15 a month will today, so I bailed. I also don‘t think I‘ll need leverage on 10k at 65 years old, I’m hoping to be swimming with dolphins by then. Also, I was not offended by the hater comment, in your defense I did call it a crappy middle class investment. You likely are helping some people that are not good at managing their money.
A policy loan is just like any other loan. You are giving the bank an assignment of collateral against your policy. If you default, you will have to surrender cash value to satisfy the loan. In the case of a policy loan from the insurance company, however, the loan can actually stay on the books forever.
So just to compare two situations...
First, if you simply use your own money to make an investment and it goes bad, the money is gone, right?
Second, if you overfund a policy and borrow against it to make the same bad investment, now you have a life insurance death benefit and zero net cash value. If you die, the death benefit will be reduced by the amount that you owe back to the insurance company. The cash value is still in the account, it just has a lien against it from the insurance company. To the extent that the cash value continues to earn dividends, you can keep borrowing against it to pay the loan interest.
This is the way that a life insurance retirement plan works. The collateral securing a policy loan is growing and compounding and keeps up with the ever growing and compounding loan balance.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
This is what a properly designed policy looks like. This was on a 46 year old female, non-smoker, preferred. I'm using an IUL chassis so that you can see the itemized expenses. This is the primary difference between Whole Life and Universal Life: one is a black box and the other is unbundled into its component parts. One of my Whole Life designs would look very similar, you just wouldn't see the itemized expenses.
Notes:
1. 6.38% is the interest crediting rate. This is well below IUL historical returns and consistent with current Mass Mutual and Penn Mutual dividends right now.
2. The Death benefit is reduced to absolute minimum right after last premium is made. Note the small difference between the cash value and the death benefit at this time. Its this gap that represents the risk to the insurance company. The cost of insurance represents the cost of a 1-year term to cover this gap.
3. The COI gets more expensive every year as the insured ages, but the net amount at risk gets smaller. Notice that the COI as a % of cash value remains constant. This totally blows a hole in the argument that rising insurance costs as you age will cause a UL to lapse.
4. Note that COI as a percentage of Cash Value varies around 0.25%. This is in line with the expense ratio of most index mutual funds. But this policy will provide about 3 times the after tax income at retirement. This policy could sustain an annual income stream of $48,000 tax-free to age 120. Not bad for only 5 premiums of $50K.
5. I have the illustration that this is based upon.
6. Every design looks just like this. The relative ratios of premium and cash value remain constant. Its the death benefit that changes from case to case.
7. This has an early cash value rider that eliminates the surrender charges. Surrender value = Accumulation Value.
Hope this helps everyone understand what an overfunded policy is supposed to look like.
I've seen many debates here on BP and other forums about infinite banking and for the mos part they devolve into ad homineim back and forths between the two camps, much like this one is shaping up to become.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
Infinite banking is just a process not a specific product. My guess is it was created by a life insurance sales man to sell more insurance.
The process is just borrowing against your whole life insurance instead of paying the bank interest. You pay yourself interest. Not a bad concept assuming you have lots of consumer loans. Arguably it would be better to not have so many loans. Instead of a car loan, just pay cash for a decent used car.
The way I look at whole life insurance as an investment is by asking, where does the money go?
Here is where it goes:
- Agent commission/admin costs
- Term life (risk pool for those who die early)
- Stocks (minority)
- Bonds (majority long term low risk)
Looking at it logically, why wouldn't I just get a low cost term policy and invest the rest myself in bonds or other low risk investments? Or better yet in real estate with high returns!
In my experience insurance agents push very hard to sell whole life policies. So hard that it is obvious these policies pay very lucrative commissions.
No. Infinite Banking is not a process. It is a sales system devised, as you suspected, by insurance salesmen. Specifically, Nelson Nash. Policy Loans are mandated by State Statute in all 50 states.
For example: https://statutes.capitol.texas.gov/Docs/IN/htm/IN....
The law very specifically states that insurance companies are required to make loans to their policy holders secured by the cash value of those policies. I just find it absolutely astounding that someone can read this far and still think that you are simply borrowing your own money and paying yourself back with interest.
Read the blog post that I linked to. You can see exactly how a life insurance policy works under the hood. The insurance company itself is buying term and investing the difference. Its nothing but the client saving up their own death benefit with the shortfall made up by the risk carried by the insurance company... in one year term pools.
You can talk about consumer debt all you want, but the fact is, if you were going to invest the money anyway, then you'll make more by getting the cash into a life insurance policy and then leveraging it. It will be working in two places at once. If the investment goes bad, you are no worse off.
I just read your blog post and it says the same thing I said accept you don't mention agent commission and fees. That is the dirty little secret, that as much as 80-100% of the first years payments go to commission. Average over the life of the policy could be 15% or more of payments going to commissions. It varies by provider, agent and insurance type. So when you say that you're "no worse off", it completely ignores these significant fees.
Here is one of many articles out there that talk about these fees. I have no affiliation with the author or site:
I've seen many debates here on BP and other forums about infinite banking and for the mos part they devolve into ad homineim back and forths between the two camps, much like this one is shaping up to become.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
Infinite banking is just a process not a specific product. My guess is it was created by a life insurance sales man to sell more insurance.
The process is just borrowing against your whole life insurance instead of paying the bank interest. You pay yourself interest. Not a bad concept assuming you have lots of consumer loans. Arguably it would be better to not have so many loans. Instead of a car loan, just pay cash for a decent used car.
The way I look at whole life insurance as an investment is by asking, where does the money go?
Here is where it goes:
- Agent commission/admin costs
- Term life (risk pool for those who die early)
- Stocks (minority)
- Bonds (majority long term low risk)
Looking at it logically, why wouldn't I just get a low cost term policy and invest the rest myself in bonds or other low risk investments? Or better yet in real estate with high returns!
In my experience insurance agents push very hard to sell whole life policies. So hard that it is obvious these policies pay very lucrative commissions.
No. Infinite Banking is not a process. It is a sales system devised, as you suspected, by insurance salesmen. Specifically, Nelson Nash. Policy Loans are mandated by State Statute in all 50 states.
For example: https://statutes.capitol.texas.gov/Docs/IN/htm/IN....
The law very specifically states that insurance companies are required to make loans to their policy holders secured by the cash value of those policies. I just find it absolutely astounding that someone can read this far and still think that you are simply borrowing your own money and paying yourself back with interest.
Read the blog post that I linked to. You can see exactly how a life insurance policy works under the hood. The insurance company itself is buying term and investing the difference. Its nothing but the client saving up their own death benefit with the shortfall made up by the risk carried by the insurance company... in one year term pools.
You can talk about consumer debt all you want, but the fact is, if you were going to invest the money anyway, then you'll make more by getting the cash into a life insurance policy and then leveraging it. It will be working in two places at once. If the investment goes bad, you are no worse off.
I just read your blog post and it says the same thing I said accept you don't mention agent commission and fees. That is the dirty little secret, that as much as 80-100% of the first years payments go to commission. Average over the life of the policy could be 15% or more of payments going to commissions. It varies by provider, agent and insurance type. So when you say that you're "no worse off", it completely ignores these significant fees.
Here is one of many articles out there that talk about these fees. I have no affiliation with the author or site:
Look at the previous post. Does that look like 80 - 100%???? I keep repeating this over and over: these overfunded policies are NOT the same as the minimally-funded Whole Life you are thinking of. THAT image shows ALL of the cost in the policy. Nothing else is subtracted from the premium or cash value.
You ALWAYS max out the 401k plan. You don't know what the future holds. You could lose everything thru fault or no fault of your own. At least you will STILL have your retirement as that is exempt from BK proceedings.
My $.02
I've seen many debates here on BP and other forums about infinite banking and for the mos part they devolve into ad homineim back and forths between the two camps, much like this one is shaping up to become.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
Infinite banking is just a process not a specific product. My guess is it was created by a life insurance sales man to sell more insurance.
The process is just borrowing against your whole life insurance instead of paying the bank interest. You pay yourself interest. Not a bad concept assuming you have lots of consumer loans. Arguably it would be better to not have so many loans. Instead of a car loan, just pay cash for a decent used car.
The way I look at whole life insurance as an investment is by asking, where does the money go?
Here is where it goes:
- Agent commission/admin costs
- Term life (risk pool for those who die early)
- Stocks (minority)
- Bonds (majority long term low risk)
Looking at it logically, why wouldn't I just get a low cost term policy and invest the rest myself in bonds or other low risk investments? Or better yet in real estate with high returns!
In my experience insurance agents push very hard to sell whole life policies. So hard that it is obvious these policies pay very lucrative commissions.
No. Infinite Banking is not a process. It is a sales system devised, as you suspected, by insurance salesmen. Specifically, Nelson Nash. Policy Loans are mandated by State Statute in all 50 states.
For example: https://statutes.capitol.texas.gov/Docs/IN/htm/IN....
The law very specifically states that insurance companies are required to make loans to their policy holders secured by the cash value of those policies. I just find it absolutely astounding that someone can read this far and still think that you are simply borrowing your own money and paying yourself back with interest.
Read the blog post that I linked to. You can see exactly how a life insurance policy works under the hood. The insurance company itself is buying term and investing the difference. Its nothing but the client saving up their own death benefit with the shortfall made up by the risk carried by the insurance company... in one year term pools.
You can talk about consumer debt all you want, but the fact is, if you were going to invest the money anyway, then you'll make more by getting the cash into a life insurance policy and then leveraging it. It will be working in two places at once. If the investment goes bad, you are no worse off.
I just read your blog post and it says the same thing I said accept you don't mention agent commission and fees. That is the dirty little secret, that as much as 80-100% of the first years payments go to commission. Average over the life of the policy could be 15% or more of payments going to commissions. It varies by provider, agent and insurance type. So when you say that you're "no worse off", it completely ignores these significant fees.
Here is one of many articles out there that talk about these fees. I have no affiliation with the author or site:
Look at the previous post. Does that look like 80 - 100%???? I keep repeating this over and over: these overfunded policies are NOT the same as the minimally-funded Whole Life you are thinking of. THAT image shows ALL of the cost in the policy. Nothing else is subtracted from the premium or cash value.
In your example, year one is 19.3%, but that is with $50K payment. I am assuming insurance agents are getting some percentage of the policy total as commission. Assuming someone younger is making $200 monthly payments ($2400 per year), how much would go towards fees? Are you telling me it would still be $19.3% or does the percentage go up when people are not making huge lump payments?
The other question is when the withdrawals start. You say a 46 year old could sustain $48K (withdrawals) until they are 120 years old, but you never say what age the first withdrawal is taken at?
One thing that jumps out at me on your chart is the balance after putting in $50K for five years, so total of $250K contributed over 5 years. At the end of 5 years she has paid $44,710 worth of fees. She has $247K, so the five year return with fees is negative.
The next five years don't look much better. You are getting a yearly average return of around 4% in years 6-10. So at the ten year mark, you have put $250,000 into this policy and have a value of $305,485. By comparison, if I put $50K into high yield Discover Bank CD's every year for 5 years with maturity at the 10 year mark (last CD is $50K for 5 years). Based on current rates, I would get $62,073 worth of interest in an FDIC insured CD. So my total cash after ten years is $312,073. In other words, just investing in bank CD's I can outperform this over the first ten years.
In the interest of fair disclosure, this does not include any life insurance, so you are taking your chances that she will live ten years. But this is also putting money into the most conservative investment. If I put that $50K each year into real estate, I could easily fund a term policy and make a better return.
So when you talk about average return over 6%, what period is that covering? Is that over 20 years and how does withdrawal play into that. Obviously if you are withdrawing, it will cut into your returns.
@Matt Hangsleben
If you truly think you will grow the money faster and invest it rather than spend it I would stop contributing but the average person normally just unevenly invests the extra money deposited. Arguments for continuing to contribute are that banks love when investors have capital outside of real estate so that does help especially on business lending. Secondly you can do a 401k loan up to 50k or 50 percent whichever is more at Prime plus 1. That interest you pay is actually being paid back to yourself growing your 401k so you don't lose it. Later on if you leave your employer you can roll into a Solo 401k or a self directed. Now if you had a huge balance in your 401k then I may say just contribute what they match but hopefully these give you some more things to think about.
I've seen many debates here on BP and other forums about infinite banking and for the mos part they devolve into ad homineim back and forths between the two camps, much like this one is shaping up to become.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
Infinite banking is just a process not a specific product. My guess is it was created by a life insurance sales man to sell more insurance.
The process is just borrowing against your whole life insurance instead of paying the bank interest. You pay yourself interest. Not a bad concept assuming you have lots of consumer loans. Arguably it would be better to not have so many loans. Instead of a car loan, just pay cash for a decent used car.
The way I look at whole life insurance as an investment is by asking, where does the money go?
Here is where it goes:
- Agent commission/admin costs
- Term life (risk pool for those who die early)
- Stocks (minority)
- Bonds (majority long term low risk)
Looking at it logically, why wouldn't I just get a low cost term policy and invest the rest myself in bonds or other low risk investments? Or better yet in real estate with high returns!
In my experience insurance agents push very hard to sell whole life policies. So hard that it is obvious these policies pay very lucrative commissions.
No. Infinite Banking is not a process. It is a sales system devised, as you suspected, by insurance salesmen. Specifically, Nelson Nash. Policy Loans are mandated by State Statute in all 50 states.
For example: https://statutes.capitol.texas.gov/Docs/IN/htm/IN....
The law very specifically states that insurance companies are required to make loans to their policy holders secured by the cash value of those policies. I just find it absolutely astounding that someone can read this far and still think that you are simply borrowing your own money and paying yourself back with interest.
Read the blog post that I linked to. You can see exactly how a life insurance policy works under the hood. The insurance company itself is buying term and investing the difference. Its nothing but the client saving up their own death benefit with the shortfall made up by the risk carried by the insurance company... in one year term pools.
You can talk about consumer debt all you want, but the fact is, if you were going to invest the money anyway, then you'll make more by getting the cash into a life insurance policy and then leveraging it. It will be working in two places at once. If the investment goes bad, you are no worse off.
I just read your blog post and it says the same thing I said accept you don't mention agent commission and fees. That is the dirty little secret, that as much as 80-100% of the first years payments go to commission. Average over the life of the policy could be 15% or more of payments going to commissions. It varies by provider, agent and insurance type. So when you say that you're "no worse off", it completely ignores these significant fees.
Here is one of many articles out there that talk about these fees. I have no affiliation with the author or site:
Look at the previous post. Does that look like 80 - 100%???? I keep repeating this over and over: these overfunded policies are NOT the same as the minimally-funded Whole Life you are thinking of. THAT image shows ALL of the cost in the policy. Nothing else is subtracted from the premium or cash value.
In your example, year one is 19.3%, but that is with $50K payment. I am assuming insurance agents are getting some percentage of the policy total as commission. Assuming someone younger is making $200 monthly payments ($2400 per year), how much would go towards fees? Are you telling me it would still be $19.3% or does the percentage go up when people are not making huge lump payments?
The other question is when the withdrawals start. You say a 46 year old could sustain $48K (withdrawals) until they are 120 years old, but you never say what age the first withdrawal is taken at?
One thing that jumps out at me on your chart is the balance after putting in $50K for five years, so total of $250K contributed over 5 years. At the end of 5 years she has paid $44,710 worth of fees. She has $247K, so the five year return with fees is negative.
The next five years don't look much better. You are getting a yearly average return of around 4% in years 6-10. So at the ten year mark, you have put $250,000 into this policy and have a value of $305,485. By comparison, if I put $50K into high yield Discover Bank CD's every year for 5 years with maturity at the 10 year mark (last CD is $50K for 5 years). Based on current rates, I would get $62,073 worth of interest in an FDIC insured CD. So my total cash after ten years is $312,073. In other words, just investing in bank CD's I can outperform this over the first ten years.
In the interest of fair disclosure, this does not include any life insurance, so you are taking your chances that she will live ten years. But this is also putting money into the most conservative investment. If I put that $50K each year into real estate, I could easily fund a term policy and make a better return.
So when you talk about average return over 6%, what period is that covering? Is that over 20 years and how does withdrawal play into that. Obviously if you are withdrawing, it will cut into your returns.
1. Small policies are the same. Everything you need to analyze a small policy is in that table. The premium charge is always 5.5% of the premium. The Policy Issue Charge is tied to the death benefit and will be about the same relative to the 1st year premium. All of the commissions come out of those fees that are shown. Everything is there.
2. The client can start taking policy loans for income at any age they want. I used age 65 when I calculated $48,000. The Rule of Thumb for an overfunded policy is 8% of whatever the cash value is in the year you want to retire. Go down to 6 or 7% if you want to increase each year for inflation. Mind you, Financial Advisors typically use the old 4%-Rule, which is more like 3.5% now, to determine how much income someone can take from their retirement savings and not risk running out of money before they die.
see: https://www.cnbc.com/2015/04/21/the-4-percent-rule...
3. Most people look at it this way... after five years you can get all of your money back and you would have had the insurance death benefit for 5 years.
Pay attention to the income, not the accumulation. Accumulation is just a number on your account statement. You need Income to actually pay your bills. That policy will generate more income at any time than the same amount of money invested in a brokerage account/IRA/401(k). See #2: 8% vs 4% from the same amount.
4. You are very mistaken if you think the CDs will provide more income than this policy will. This client could take over $24,000 tax-free a year for the rest of their life. The following chart shows a comparison of a traditional brokerage account assuming the 4%-Rule and Income from Policy Loans at 8%. This chart assumes that the "Status Quo" is an account growing at 10% annually with no volatility. There is a corresponding chart that shows accumulation. And it shows the "Status Quo as having more value from beginning to end. But again, the value is just a number on a quarterly statement. Its income that pays bills.
@Matt Hangsleben - This should partly answer your initial post/question. This stands on its own merit as a retirement savings plan, but unlike a 401(k), you don't have to wait until age 59 to access the wealth you have accumulated. You can put that money to work in two places at once every day between now and when you retire.
5. This chart shows you putting the same $50,000 into real estate and earning a 12% return (Status Quo) and me putting $50,000 into a high cash value policy and using a policy loan to invest in the same real estate at 12% (Double Play). My accumulation includes the cash value and the wealth I'm creating on the side with the real estate investments. This one IS Accumulation. Do you want to see the corresponding Income chart?
6. Read carefully: Policy loans are loans against the policies cash value. The cash value never leaves the policy. It continues to grow and earn interest/dividends every year... even after you start taking loans for income. Every year the insurance company is loaning you their money. Your cash value is the collateral securing the loan.
All of the loans are paid off out of the death benefit upon death. The beneficiaries of the policy will get any remaining death benefit.
I think that if you are already contributing to your 401k, that you should continue to do so until you're ready to retire. Like a wise man once said, "Compounding Interest is the 8th wonder of the world". 2018 was the worst year on the stock market in about 30 years, so that may be throwing off some of your projections. I check my 401k balance on a regular basis for projections at retirement and as long as you can average a 5-10% annual return on your investment (which is very doable), it's going to create a nice nest egg for you down the line. I actually used a 401k loan to purchase and renovate my first investment property 3 years ago. That loan will probably be paid off before the end of this year and my plan is not to touch it again, but to continue contributing until I'm ready to retire.
Every 401k plan is different, but the one that my company offers gives you the option to buy individual stocks which has really showed great returns over the last 10 years. Not to mention the tax benefits. My plan is to continue with Real Estate Investing, but to also continue contribute to my 401k so that I can have a nice nest egg (401k) and reliable income (Real Estate) when I'm ready to retire. I'm 40 and plan on waiting until I'm 65 or 67 to retire, which gives me 25-27 years to invest in Real Estate and my 401k. If you're 36 and looking to do something similar, that means you would have 29-31 years to invest and manage your growth. I would highly suggest doing both.
Good to hear your experience, @Gordon Starr. I am currently working on doing the same thing. I think there is a very good chance that employers think about what contributions they are going to make when setting a salary, and lower the salary based on that. So, not sure the employer match qualifies as being as high of a return as one might think.
I've seen many debates here on BP and other forums about infinite banking and for the mos part they devolve into ad homineim back and forths between the two camps, much like this one is shaping up to become.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
Infinite banking is just a process not a specific product. My guess is it was created by a life insurance sales man to sell more insurance.
The process is just borrowing against your whole life insurance instead of paying the bank interest. You pay yourself interest. Not a bad concept assuming you have lots of consumer loans. Arguably it would be better to not have so many loans. Instead of a car loan, just pay cash for a decent used car.
The way I look at whole life insurance as an investment is by asking, where does the money go?
Here is where it goes:
- Agent commission/admin costs
- Term life (risk pool for those who die early)
- Stocks (minority)
- Bonds (majority long term low risk)
Looking at it logically, why wouldn't I just get a low cost term policy and invest the rest myself in bonds or other low risk investments? Or better yet in real estate with high returns!
In my experience insurance agents push very hard to sell whole life policies. So hard that it is obvious these policies pay very lucrative commissions.
No. Infinite Banking is not a process. It is a sales system devised, as you suspected, by insurance salesmen. Specifically, Nelson Nash. Policy Loans are mandated by State Statute in all 50 states.
For example: https://statutes.capitol.texas.gov/Docs/IN/htm/IN....
The law very specifically states that insurance companies are required to make loans to their policy holders secured by the cash value of those policies. I just find it absolutely astounding that someone can read this far and still think that you are simply borrowing your own money and paying yourself back with interest.
Read the blog post that I linked to. You can see exactly how a life insurance policy works under the hood. The insurance company itself is buying term and investing the difference. Its nothing but the client saving up their own death benefit with the shortfall made up by the risk carried by the insurance company... in one year term pools.
You can talk about consumer debt all you want, but the fact is, if you were going to invest the money anyway, then you'll make more by getting the cash into a life insurance policy and then leveraging it. It will be working in two places at once. If the investment goes bad, you are no worse off.
I just read your blog post and it says the same thing I said accept you don't mention agent commission and fees. That is the dirty little secret, that as much as 80-100% of the first years payments go to commission. Average over the life of the policy could be 15% or more of payments going to commissions. It varies by provider, agent and insurance type. So when you say that you're "no worse off", it completely ignores these significant fees.
Here is one of many articles out there that talk about these fees. I have no affiliation with the author or site:
Look at the previous post. Does that look like 80 - 100%???? I keep repeating this over and over: these overfunded policies are NOT the same as the minimally-funded Whole Life you are thinking of. THAT image shows ALL of the cost in the policy. Nothing else is subtracted from the premium or cash value.
In your example, year one is 19.3%, but that is with $50K payment. I am assuming insurance agents are getting some percentage of the policy total as commission. Assuming someone younger is making $200 monthly payments ($2400 per year), how much would go towards fees? Are you telling me it would still be $19.3% or does the percentage go up when people are not making huge lump payments?
The other question is when the withdrawals start. You say a 46 year old could sustain $48K (withdrawals) until they are 120 years old, but you never say what age the first withdrawal is taken at?
One thing that jumps out at me on your chart is the balance after putting in $50K for five years, so total of $250K contributed over 5 years. At the end of 5 years she has paid $44,710 worth of fees. She has $247K, so the five year return with fees is negative.
The next five years don't look much better. You are getting a yearly average return of around 4% in years 6-10. So at the ten year mark, you have put $250,000 into this policy and have a value of $305,485. By comparison, if I put $50K into high yield Discover Bank CD's every year for 5 years with maturity at the 10 year mark (last CD is $50K for 5 years). Based on current rates, I would get $62,073 worth of interest in an FDIC insured CD. So my total cash after ten years is $312,073. In other words, just investing in bank CD's I can outperform this over the first ten years.
In the interest of fair disclosure, this does not include any life insurance, so you are taking your chances that she will live ten years. But this is also putting money into the most conservative investment. If I put that $50K each year into real estate, I could easily fund a term policy and make a better return.
So when you talk about average return over 6%, what period is that covering? Is that over 20 years and how does withdrawal play into that. Obviously if you are withdrawing, it will cut into your returns.
1. Small policies are the same. Everything you need to analyze a small policy is in that table. The premium charge is always 5.5% of the premium. The Policy Issue Charge is tied to the death benefit and will be about the same relative to the 1st year premium. All of the commissions come out of those fees that are shown. Everything is there.
2. The client can start taking policy loans for income at any age they want. I used age 65 when I calculated $48,000. The Rule of Thumb for an overfunded policy is 8% of whatever the cash value is in the year you want to retire. Go down to 6 or 7% if you want to increase each year for inflation. Mind you, Financial Advisors typically use the old 4%-Rule, which is more like 3.5% now, to determine how much income someone can take from their retirement savings and not risk running out of money before they die.
see: https://www.cnbc.com/2015/04/21/the-4-percent-rule...
3. Most people look at it this way... after five years you can get all of your money back and you would have had the insurance death benefit for 5 years.
Pay attention to the income, not the accumulation. Accumulation is just a number on your account statement. You need Income to actually pay your bills. That policy will generate more income at any time than the same amount of money invested in a brokerage account/IRA/401(k). See #2: 8% vs 4% from the same amount.
4. You are very mistaken if you think the CDs will provide more income than this policy will. This client could take over $24,000 tax-free a year for the rest of their life. The following chart shows a comparison of a traditional brokerage account assuming the 4%-Rule and Income from Policy Loans at 8%. This chart assumes that the "Status Quo" is an account growing at 10% annually with no volatility. There is a corresponding chart that shows accumulation. And it shows the "Status Quo as having more value from beginning to end. But again, the value is just a number on a quarterly statement. Its income that pays bills.
@Matt Hangsleben - This should partly answer your initial post/question. This stands on its own merit as a retirement savings plan, but unlike a 401(k), you don't have to wait until age 59 to access the wealth you have accumulated. You can put that money to work in two places at once every day between now and when you retire.
5. This chart shows you putting the same $50,000 into real estate and earning a 12% return (Status Quo) and me putting $50,000 into a high cash value policy and using a policy loan to invest in the same real estate at 12% (Double Play). My accumulation includes the cash value and the wealth I'm creating on the side with the real estate investments. This one IS Accumulation. Do you want to see the corresponding Income chart?
6. Read carefully: Policy loans are loans against the policies cash value. The cash value never leaves the policy. It continues to grow and earn interest/dividends every year... even after you start taking loans for income. Every year the insurance company is loaning you their money. Your cash value is the collateral securing the loan.
All of the loans are paid off out of the death benefit upon death. The beneficiaries of the policy will get any remaining death benefit.
The difference seems to be your definition of income. You are talking about policy loans as income. Those loans can eventually dip down into your original contributions which means at death, there could be little to nothing left. Maybe your original money gains interest every year, but so does your loan. My whole life policy charges 8% interest, so if I stack my policy with loans, I will eventually run out of "collateral" and I either pay or the policy folds. On a brokerage account if you take 4% safe withdrawal, that keeps all the original principal intact. It really isn't fair to compare the two. A more accurate comparison would be a reverse mortgage. Where you get money every month, then sell the house when you die to pay off the money you were loaned.
I am also still confused on how the client in this example could start withdrawing $24,000 immediately. Within ten years, the loans would be over $240K and with an original contribution of only $250K. It seems like sustaining that for 30-40 years without withdrawing more than your cash value would be difficult. When you referred to her withdrawing immediately did you mean year 1 or where you talking about year 6 or 10?
I do appreciate you taking the time to put together thoughtful responses. I am genuinely interested in learning more here. Any strategy that can help me get ahead is worth considering.
I've seen many debates here on BP and other forums about infinite banking and for the mos part they devolve into ad homineim back and forths between the two camps, much like this one is shaping up to become.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
Infinite banking is just a process not a specific product. My guess is it was created by a life insurance sales man to sell more insurance.
The process is just borrowing against your whole life insurance instead of paying the bank interest. You pay yourself interest. Not a bad concept assuming you have lots of consumer loans. Arguably it would be better to not have so many loans. Instead of a car loan, just pay cash for a decent used car.
The way I look at whole life insurance as an investment is by asking, where does the money go?
Here is where it goes:
- Agent commission/admin costs
- Term life (risk pool for those who die early)
- Stocks (minority)
- Bonds (majority long term low risk)
Looking at it logically, why wouldn't I just get a low cost term policy and invest the rest myself in bonds or other low risk investments? Or better yet in real estate with high returns!
In my experience insurance agents push very hard to sell whole life policies. So hard that it is obvious these policies pay very lucrative commissions.
No. Infinite Banking is not a process. It is a sales system devised, as you suspected, by insurance salesmen. Specifically, Nelson Nash. Policy Loans are mandated by State Statute in all 50 states.
For example: https://statutes.capitol.texas.gov/Docs/IN/htm/IN....
The law very specifically states that insurance companies are required to make loans to their policy holders secured by the cash value of those policies. I just find it absolutely astounding that someone can read this far and still think that you are simply borrowing your own money and paying yourself back with interest.
Read the blog post that I linked to. You can see exactly how a life insurance policy works under the hood. The insurance company itself is buying term and investing the difference. Its nothing but the client saving up their own death benefit with the shortfall made up by the risk carried by the insurance company... in one year term pools.
You can talk about consumer debt all you want, but the fact is, if you were going to invest the money anyway, then you'll make more by getting the cash into a life insurance policy and then leveraging it. It will be working in two places at once. If the investment goes bad, you are no worse off.
I just read your blog post and it says the same thing I said accept you don't mention agent commission and fees. That is the dirty little secret, that as much as 80-100% of the first years payments go to commission. Average over the life of the policy could be 15% or more of payments going to commissions. It varies by provider, agent and insurance type. So when you say that you're "no worse off", it completely ignores these significant fees.
Here is one of many articles out there that talk about these fees. I have no affiliation with the author or site:
Look at the previous post. Does that look like 80 - 100%???? I keep repeating this over and over: these overfunded policies are NOT the same as the minimally-funded Whole Life you are thinking of. THAT image shows ALL of the cost in the policy. Nothing else is subtracted from the premium or cash value.
In your example, year one is 19.3%, but that is with $50K payment. I am assuming insurance agents are getting some percentage of the policy total as commission. Assuming someone younger is making $200 monthly payments ($2400 per year), how much would go towards fees? Are you telling me it would still be $19.3% or does the percentage go up when people are not making huge lump payments?
The other question is when the withdrawals start. You say a 46 year old could sustain $48K (withdrawals) until they are 120 years old, but you never say what age the first withdrawal is taken at?
One thing that jumps out at me on your chart is the balance after putting in $50K for five years, so total of $250K contributed over 5 years. At the end of 5 years she has paid $44,710 worth of fees. She has $247K, so the five year return with fees is negative.
The next five years don't look much better. You are getting a yearly average return of around 4% in years 6-10. So at the ten year mark, you have put $250,000 into this policy and have a value of $305,485. By comparison, if I put $50K into high yield Discover Bank CD's every year for 5 years with maturity at the 10 year mark (last CD is $50K for 5 years). Based on current rates, I would get $62,073 worth of interest in an FDIC insured CD. So my total cash after ten years is $312,073. In other words, just investing in bank CD's I can outperform this over the first ten years.
In the interest of fair disclosure, this does not include any life insurance, so you are taking your chances that she will live ten years. But this is also putting money into the most conservative investment. If I put that $50K each year into real estate, I could easily fund a term policy and make a better return.
So when you talk about average return over 6%, what period is that covering? Is that over 20 years and how does withdrawal play into that. Obviously if you are withdrawing, it will cut into your returns.
1. Small policies are the same. Everything you need to analyze a small policy is in that table. The premium charge is always 5.5% of the premium. The Policy Issue Charge is tied to the death benefit and will be about the same relative to the 1st year premium. All of the commissions come out of those fees that are shown. Everything is there.
2. The client can start taking policy loans for income at any age they want. I used age 65 when I calculated $48,000. The Rule of Thumb for an overfunded policy is 8% of whatever the cash value is in the year you want to retire. Go down to 6 or 7% if you want to increase each year for inflation. Mind you, Financial Advisors typically use the old 4%-Rule, which is more like 3.5% now, to determine how much income someone can take from their retirement savings and not risk running out of money before they die.
see: https://www.cnbc.com/2015/04/21/the-4-percent-rule...
3. Most people look at it this way... after five years you can get all of your money back and you would have had the insurance death benefit for 5 years.
Pay attention to the income, not the accumulation. Accumulation is just a number on your account statement. You need Income to actually pay your bills. That policy will generate more income at any time than the same amount of money invested in a brokerage account/IRA/401(k). See #2: 8% vs 4% from the same amount.
4. You are very mistaken if you think the CDs will provide more income than this policy will. This client could take over $24,000 tax-free a year for the rest of their life. The following chart shows a comparison of a traditional brokerage account assuming the 4%-Rule and Income from Policy Loans at 8%. This chart assumes that the "Status Quo" is an account growing at 10% annually with no volatility. There is a corresponding chart that shows accumulation. And it shows the "Status Quo as having more value from beginning to end. But again, the value is just a number on a quarterly statement. Its income that pays bills.
@Matt Hangsleben - This should partly answer your initial post/question. This stands on its own merit as a retirement savings plan, but unlike a 401(k), you don't have to wait until age 59 to access the wealth you have accumulated. You can put that money to work in two places at once every day between now and when you retire.
5. This chart shows you putting the same $50,000 into real estate and earning a 12% return (Status Quo) and me putting $50,000 into a high cash value policy and using a policy loan to invest in the same real estate at 12% (Double Play). My accumulation includes the cash value and the wealth I'm creating on the side with the real estate investments. This one IS Accumulation. Do you want to see the corresponding Income chart?
6. Read carefully: Policy loans are loans against the policies cash value. The cash value never leaves the policy. It continues to grow and earn interest/dividends every year... even after you start taking loans for income. Every year the insurance company is loaning you their money. Your cash value is the collateral securing the loan.
All of the loans are paid off out of the death benefit upon death. The beneficiaries of the policy will get any remaining death benefit.
The difference seems to be your definition of income. You are talking about policy loans as income. Those loans can eventually dip down into your original contributions which means at death, there could be little to nothing left. Maybe your original money gains interest every year, but so does your loan. My whole life policy charges 8% interest, so if I stack my policy with loans, I will eventually run out of "collateral" and I either pay or the policy folds. On a brokerage account if you take 4% safe withdrawal, that keeps all the original principal intact. It really isn't fair to compare the two. A more accurate comparison would be a reverse mortgage. Where you get money every month, then sell the house when you die to pay off the money you were loaned.
I am also still confused on how the client in this example could start withdrawing $24,000 immediately. Within ten years, the loans would be over $240K and with an original contribution of only $250K. It seems like sustaining that for 30-40 years without withdrawing more than your cash value would be difficult. When you referred to her withdrawing immediately did you mean year 1 or where you talking about year 6 or 10?
I do appreciate you taking the time to put together thoughtful responses. I am genuinely interested in learning more here. Any strategy that can help me get ahead is worth considering.
Your problem is that you have a policy that charges an 8% loan rate. Yours will go backward. Especially if the loans are "direct recognition". This highlights the importance of talking to a good agent to make sure you get a good policy. Here are the loan options on the policy I am showing...
You can get a line of credit from a bank at Prime. That is a much better option for you than a loan from your carrier. Many insurance companies offer a fixed loan option where the loan interest rate is equal to the interest crediting rate on the cash value (see pic above). The loan balance and the collateral securing it will exactly offset each other.
Since an Indexed UL allows the cash value to capture some of the "Equity Premium", the cash value growth should exceed the loan balance. I say "should" because the IUL will have year to year variation.
The 4%-Rule does NOT keep the principal intact. Someone starting retirement in 2000 using the 4%-Rule would have run out of money before the decade was out. The market doesn't always go up.
Your example was comparing 10 years of CDs to the cash value. That $24K income is starting at the beginning of Year 11, not Year 1.
I can see how having a policy where your cash value is growing at 5% and your loan rate is 8% would make you think the way that you do/did?. But if you knew you could get a loan at 5%, you should start to see the beauty of what is possible. Now take an IUL where the cash value can grow at 6 - 7% average while borrowing at a point or two below that (equity mkt returns vs debt mkt returns).
I've seen many debates here on BP and other forums about infinite banking and for the mos part they devolve into ad homineim back and forths between the two camps, much like this one is shaping up to become.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
Infinite banking is just a process not a specific product. My guess is it was created by a life insurance sales man to sell more insurance.
The process is just borrowing against your whole life insurance instead of paying the bank interest. You pay yourself interest. Not a bad concept assuming you have lots of consumer loans. Arguably it would be better to not have so many loans. Instead of a car loan, just pay cash for a decent used car.
The way I look at whole life insurance as an investment is by asking, where does the money go?
Here is where it goes:
- Agent commission/admin costs
- Term life (risk pool for those who die early)
- Stocks (minority)
- Bonds (majority long term low risk)
Looking at it logically, why wouldn't I just get a low cost term policy and invest the rest myself in bonds or other low risk investments? Or better yet in real estate with high returns!
In my experience insurance agents push very hard to sell whole life policies. So hard that it is obvious these policies pay very lucrative commissions.
No. Infinite Banking is not a process. It is a sales system devised, as you suspected, by insurance salesmen. Specifically, Nelson Nash. Policy Loans are mandated by State Statute in all 50 states.
For example: https://statutes.capitol.texas.gov/Docs/IN/htm/IN....
The law very specifically states that insurance companies are required to make loans to their policy holders secured by the cash value of those policies. I just find it absolutely astounding that someone can read this far and still think that you are simply borrowing your own money and paying yourself back with interest.
Read the blog post that I linked to. You can see exactly how a life insurance policy works under the hood. The insurance company itself is buying term and investing the difference. Its nothing but the client saving up their own death benefit with the shortfall made up by the risk carried by the insurance company... in one year term pools.
You can talk about consumer debt all you want, but the fact is, if you were going to invest the money anyway, then you'll make more by getting the cash into a life insurance policy and then leveraging it. It will be working in two places at once. If the investment goes bad, you are no worse off.
I just read your blog post and it says the same thing I said accept you don't mention agent commission and fees. That is the dirty little secret, that as much as 80-100% of the first years payments go to commission. Average over the life of the policy could be 15% or more of payments going to commissions. It varies by provider, agent and insurance type. So when you say that you're "no worse off", it completely ignores these significant fees.
Here is one of many articles out there that talk about these fees. I have no affiliation with the author or site:
Look at the previous post. Does that look like 80 - 100%???? I keep repeating this over and over: these overfunded policies are NOT the same as the minimally-funded Whole Life you are thinking of. THAT image shows ALL of the cost in the policy. Nothing else is subtracted from the premium or cash value.
In your example, year one is 19.3%, but that is with $50K payment. I am assuming insurance agents are getting some percentage of the policy total as commission. Assuming someone younger is making $200 monthly payments ($2400 per year), how much would go towards fees? Are you telling me it would still be $19.3% or does the percentage go up when people are not making huge lump payments?
The other question is when the withdrawals start. You say a 46 year old could sustain $48K (withdrawals) until they are 120 years old, but you never say what age the first withdrawal is taken at?
One thing that jumps out at me on your chart is the balance after putting in $50K for five years, so total of $250K contributed over 5 years. At the end of 5 years she has paid $44,710 worth of fees. She has $247K, so the five year return with fees is negative.
The next five years don't look much better. You are getting a yearly average return of around 4% in years 6-10. So at the ten year mark, you have put $250,000 into this policy and have a value of $305,485. By comparison, if I put $50K into high yield Discover Bank CD's every year for 5 years with maturity at the 10 year mark (last CD is $50K for 5 years). Based on current rates, I would get $62,073 worth of interest in an FDIC insured CD. So my total cash after ten years is $312,073. In other words, just investing in bank CD's I can outperform this over the first ten years.
In the interest of fair disclosure, this does not include any life insurance, so you are taking your chances that she will live ten years. But this is also putting money into the most conservative investment. If I put that $50K each year into real estate, I could easily fund a term policy and make a better return.
So when you talk about average return over 6%, what period is that covering? Is that over 20 years and how does withdrawal play into that. Obviously if you are withdrawing, it will cut into your returns.
1. Small policies are the same. Everything you need to analyze a small policy is in that table. The premium charge is always 5.5% of the premium. The Policy Issue Charge is tied to the death benefit and will be about the same relative to the 1st year premium. All of the commissions come out of those fees that are shown. Everything is there.
2. The client can start taking policy loans for income at any age they want. I used age 65 when I calculated $48,000. The Rule of Thumb for an overfunded policy is 8% of whatever the cash value is in the year you want to retire. Go down to 6 or 7% if you want to increase each year for inflation. Mind you, Financial Advisors typically use the old 4%-Rule, which is more like 3.5% now, to determine how much income someone can take from their retirement savings and not risk running out of money before they die.
see: https://www.cnbc.com/2015/04/21/the-4-percent-rule...
3. Most people look at it this way... after five years you can get all of your money back and you would have had the insurance death benefit for 5 years.
Pay attention to the income, not the accumulation. Accumulation is just a number on your account statement. You need Income to actually pay your bills. That policy will generate more income at any time than the same amount of money invested in a brokerage account/IRA/401(k). See #2: 8% vs 4% from the same amount.
4. You are very mistaken if you think the CDs will provide more income than this policy will. This client could take over $24,000 tax-free a year for the rest of their life. The following chart shows a comparison of a traditional brokerage account assuming the 4%-Rule and Income from Policy Loans at 8%. This chart assumes that the "Status Quo" is an account growing at 10% annually with no volatility. There is a corresponding chart that shows accumulation. And it shows the "Status Quo as having more value from beginning to end. But again, the value is just a number on a quarterly statement. Its income that pays bills.
@Matt Hangsleben - This should partly answer your initial post/question. This stands on its own merit as a retirement savings plan, but unlike a 401(k), you don't have to wait until age 59 to access the wealth you have accumulated. You can put that money to work in two places at once every day between now and when you retire.
5. This chart shows you putting the same $50,000 into real estate and earning a 12% return (Status Quo) and me putting $50,000 into a high cash value policy and using a policy loan to invest in the same real estate at 12% (Double Play). My accumulation includes the cash value and the wealth I'm creating on the side with the real estate investments. This one IS Accumulation. Do you want to see the corresponding Income chart?
6. Read carefully: Policy loans are loans against the policies cash value. The cash value never leaves the policy. It continues to grow and earn interest/dividends every year... even after you start taking loans for income. Every year the insurance company is loaning you their money. Your cash value is the collateral securing the loan.
All of the loans are paid off out of the death benefit upon death. The beneficiaries of the policy will get any remaining death benefit.
The difference seems to be your definition of income. You are talking about policy loans as income. Those loans can eventually dip down into your original contributions which means at death, there could be little to nothing left. Maybe your original money gains interest every year, but so does your loan. My whole life policy charges 8% interest, so if I stack my policy with loans, I will eventually run out of "collateral" and I either pay or the policy folds. On a brokerage account if you take 4% safe withdrawal, that keeps all the original principal intact. It really isn't fair to compare the two. A more accurate comparison would be a reverse mortgage. Where you get money every month, then sell the house when you die to pay off the money you were loaned.
I am also still confused on how the client in this example could start withdrawing $24,000 immediately. Within ten years, the loans would be over $240K and with an original contribution of only $250K. It seems like sustaining that for 30-40 years without withdrawing more than your cash value would be difficult. When you referred to her withdrawing immediately did you mean year 1 or where you talking about year 6 or 10?
I do appreciate you taking the time to put together thoughtful responses. I am genuinely interested in learning more here. Any strategy that can help me get ahead is worth considering.
Your problem is that you have a policy that charges an 8% loan rate. Yours will go backward. Especially if the loans are "direct recognition". This highlights the importance of talking to a good agent to make sure you get a good policy. Here are the loan options on the policy I am showing...
You can get a line of credit from a bank at Prime. That is a much better option for you than a loan from your carrier. Many insurance companies offer a fixed loan option where the loan interest rate is equal to the interest crediting rate on the cash value (see pic above). The loan balance and the collateral securing it will exactly offset each other.
Since an Indexed UL allows the cash value to capture some of the "Equity Premium", the cash value growth should exceed the loan balance. I say "should" because the IUL will have year to year variation.
The 4%-Rule does NOT keep the principal intact. Someone starting retirement in 2000 using the 4%-Rule would have run out of money before the decade was out. The market doesn't always go up.
Your example was comparing 10 years of CDs to the cash value. That $24K income is starting at the beginning of Year 11, not Year 1.
I can see how having a policy where your cash value is growing at 5% and your loan rate is 8% would make you think the way that you do/did?. But if you knew you could get a loan at 5%, you should start to see the beauty of what is possible. Now take an IUL where the cash value can grow at 6 - 7% average while borrowing at a point or two below that (equity mkt returns vs debt mkt returns).
We can both agree my insurance agent sucks. Oddly he is one of the top grossing agents for his company. My policy opened in 2005 has lower cash value than the sum of payments. That seems odd to me. I will admit I am very disillusioned with insurance and investment brokers. Between this and mutual fund adventures at Wells Fargo, I got sold a major bill of goods in the early 2000's. It is one of the reasons I moved into real estate. I like the control and every dollar I put in has returned double digit returns yearly.
You are right if you retired in 2000 and took out 4% annually that you could be running low on cash by this point (depending on what you invested in). That is mainly because of four bad years early in the retirement. Assuming better timing, it would look completely different. Luckily for me I am not counting on the stock market or life insurance for my retirement.
Question on funding a policy. In the example you gave, she put all the money in over 5 years. My current policy has an annual premium with smaller chunks that I am paying on for many more years. Do some people fully fund it the first year then just leave the policy? I assume funding it early has the advantage of more years compounding.
Is one of the main goals of these policies to use it as a tax shelter?
Say for example, I dumped $100K into a policy, could I have it fully funded and then start drawing out year two? Like taking $9K as loans each year tax free and could that be sustained for 50 years? Or whatever the number, maybe it is $8K every year.
@Matt Hangsleben
What you really need to answer is what are you goals for your retirement?
Do you plan on retiring early? How are you going to manage that? If so how early?
I have dealt with the same planning. All I do is enough to get the employer match because it’s free money. After that I’m putting money into index funds and our rental property business.
We plan on retiring by 50 so I know we need to cover 15 years worth of expense before o can hit my 401k up. Worst case I withdrawal early and get hit with penalties but that’s only in an absolute emergency.
If you have a serious plan to retire early and are capable of executing it would be advisable tp figure out your monthly income needed then begin the march to cash flow to cover those expenses. Once you hit that number, you’re financially independent.
I've seen many debates here on BP and other forums about infinite banking and for the mos part they devolve into ad homineim back and forths between the two camps, much like this one is shaping up to become.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
Infinite banking is just a process not a specific product. My guess is it was created by a life insurance sales man to sell more insurance.
The process is just borrowing against your whole life insurance instead of paying the bank interest. You pay yourself interest. Not a bad concept assuming you have lots of consumer loans. Arguably it would be better to not have so many loans. Instead of a car loan, just pay cash for a decent used car.
The way I look at whole life insurance as an investment is by asking, where does the money go?
Here is where it goes:
- Agent commission/admin costs
- Term life (risk pool for those who die early)
- Stocks (minority)
- Bonds (majority long term low risk)
Looking at it logically, why wouldn't I just get a low cost term policy and invest the rest myself in bonds or other low risk investments? Or better yet in real estate with high returns!
In my experience insurance agents push very hard to sell whole life policies. So hard that it is obvious these policies pay very lucrative commissions.
No. Infinite Banking is not a process. It is a sales system devised, as you suspected, by insurance salesmen. Specifically, Nelson Nash. Policy Loans are mandated by State Statute in all 50 states.
For example: https://statutes.capitol.texas.gov/Docs/IN/htm/IN....
The law very specifically states that insurance companies are required to make loans to their policy holders secured by the cash value of those policies. I just find it absolutely astounding that someone can read this far and still think that you are simply borrowing your own money and paying yourself back with interest.
Read the blog post that I linked to. You can see exactly how a life insurance policy works under the hood. The insurance company itself is buying term and investing the difference. Its nothing but the client saving up their own death benefit with the shortfall made up by the risk carried by the insurance company... in one year term pools.
You can talk about consumer debt all you want, but the fact is, if you were going to invest the money anyway, then you'll make more by getting the cash into a life insurance policy and then leveraging it. It will be working in two places at once. If the investment goes bad, you are no worse off.
I just read your blog post and it says the same thing I said accept you don't mention agent commission and fees. That is the dirty little secret, that as much as 80-100% of the first years payments go to commission. Average over the life of the policy could be 15% or more of payments going to commissions. It varies by provider, agent and insurance type. So when you say that you're "no worse off", it completely ignores these significant fees.
Here is one of many articles out there that talk about these fees. I have no affiliation with the author or site:
Look at the previous post. Does that look like 80 - 100%???? I keep repeating this over and over: these overfunded policies are NOT the same as the minimally-funded Whole Life you are thinking of. THAT image shows ALL of the cost in the policy. Nothing else is subtracted from the premium or cash value.
In your example, year one is 19.3%, but that is with $50K payment. I am assuming insurance agents are getting some percentage of the policy total as commission. Assuming someone younger is making $200 monthly payments ($2400 per year), how much would go towards fees? Are you telling me it would still be $19.3% or does the percentage go up when people are not making huge lump payments?
The other question is when the withdrawals start. You say a 46 year old could sustain $48K (withdrawals) until they are 120 years old, but you never say what age the first withdrawal is taken at?
One thing that jumps out at me on your chart is the balance after putting in $50K for five years, so total of $250K contributed over 5 years. At the end of 5 years she has paid $44,710 worth of fees. She has $247K, so the five year return with fees is negative.
The next five years don't look much better. You are getting a yearly average return of around 4% in years 6-10. So at the ten year mark, you have put $250,000 into this policy and have a value of $305,485. By comparison, if I put $50K into high yield Discover Bank CD's every year for 5 years with maturity at the 10 year mark (last CD is $50K for 5 years). Based on current rates, I would get $62,073 worth of interest in an FDIC insured CD. So my total cash after ten years is $312,073. In other words, just investing in bank CD's I can outperform this over the first ten years.
In the interest of fair disclosure, this does not include any life insurance, so you are taking your chances that she will live ten years. But this is also putting money into the most conservative investment. If I put that $50K each year into real estate, I could easily fund a term policy and make a better return.
So when you talk about average return over 6%, what period is that covering? Is that over 20 years and how does withdrawal play into that. Obviously if you are withdrawing, it will cut into your returns.
1. Small policies are the same. Everything you need to analyze a small policy is in that table. The premium charge is always 5.5% of the premium. The Policy Issue Charge is tied to the death benefit and will be about the same relative to the 1st year premium. All of the commissions come out of those fees that are shown. Everything is there.
2. The client can start taking policy loans for income at any age they want. I used age 65 when I calculated $48,000. The Rule of Thumb for an overfunded policy is 8% of whatever the cash value is in the year you want to retire. Go down to 6 or 7% if you want to increase each year for inflation. Mind you, Financial Advisors typically use the old 4%-Rule, which is more like 3.5% now, to determine how much income someone can take from their retirement savings and not risk running out of money before they die.
see: https://www.cnbc.com/2015/04/21/the-4-percent-rule...
3. Most people look at it this way... after five years you can get all of your money back and you would have had the insurance death benefit for 5 years.
Pay attention to the income, not the accumulation. Accumulation is just a number on your account statement. You need Income to actually pay your bills. That policy will generate more income at any time than the same amount of money invested in a brokerage account/IRA/401(k). See #2: 8% vs 4% from the same amount.
4. You are very mistaken if you think the CDs will provide more income than this policy will. This client could take over $24,000 tax-free a year for the rest of their life. The following chart shows a comparison of a traditional brokerage account assuming the 4%-Rule and Income from Policy Loans at 8%. This chart assumes that the "Status Quo" is an account growing at 10% annually with no volatility. There is a corresponding chart that shows accumulation. And it shows the "Status Quo as having more value from beginning to end. But again, the value is just a number on a quarterly statement. Its income that pays bills.
@Matt Hangsleben - This should partly answer your initial post/question. This stands on its own merit as a retirement savings plan, but unlike a 401(k), you don't have to wait until age 59 to access the wealth you have accumulated. You can put that money to work in two places at once every day between now and when you retire.
5. This chart shows you putting the same $50,000 into real estate and earning a 12% return (Status Quo) and me putting $50,000 into a high cash value policy and using a policy loan to invest in the same real estate at 12% (Double Play). My accumulation includes the cash value and the wealth I'm creating on the side with the real estate investments. This one IS Accumulation. Do you want to see the corresponding Income chart?
6. Read carefully: Policy loans are loans against the policies cash value. The cash value never leaves the policy. It continues to grow and earn interest/dividends every year... even after you start taking loans for income. Every year the insurance company is loaning you their money. Your cash value is the collateral securing the loan.
All of the loans are paid off out of the death benefit upon death. The beneficiaries of the policy will get any remaining death benefit.
The difference seems to be your definition of income. You are talking about policy loans as income. Those loans can eventually dip down into your original contributions which means at death, there could be little to nothing left. Maybe your original money gains interest every year, but so does your loan. My whole life policy charges 8% interest, so if I stack my policy with loans, I will eventually run out of "collateral" and I either pay or the policy folds. On a brokerage account if you take 4% safe withdrawal, that keeps all the original principal intact. It really isn't fair to compare the two. A more accurate comparison would be a reverse mortgage. Where you get money every month, then sell the house when you die to pay off the money you were loaned.
I am also still confused on how the client in this example could start withdrawing $24,000 immediately. Within ten years, the loans would be over $240K and with an original contribution of only $250K. It seems like sustaining that for 30-40 years without withdrawing more than your cash value would be difficult. When you referred to her withdrawing immediately did you mean year 1 or where you talking about year 6 or 10?
I do appreciate you taking the time to put together thoughtful responses. I am genuinely interested in learning more here. Any strategy that can help me get ahead is worth considering.
Your problem is that you have a policy that charges an 8% loan rate. Yours will go backward. Especially if the loans are "direct recognition". This highlights the importance of talking to a good agent to make sure you get a good policy. Here are the loan options on the policy I am showing...
You can get a line of credit from a bank at Prime. That is a much better option for you than a loan from your carrier. Many insurance companies offer a fixed loan option where the loan interest rate is equal to the interest crediting rate on the cash value (see pic above). The loan balance and the collateral securing it will exactly offset each other.
Since an Indexed UL allows the cash value to capture some of the "Equity Premium", the cash value growth should exceed the loan balance. I say "should" because the IUL will have year to year variation.
The 4%-Rule does NOT keep the principal intact. Someone starting retirement in 2000 using the 4%-Rule would have run out of money before the decade was out. The market doesn't always go up.
Your example was comparing 10 years of CDs to the cash value. That $24K income is starting at the beginning of Year 11, not Year 1.
I can see how having a policy where your cash value is growing at 5% and your loan rate is 8% would make you think the way that you do/did?. But if you knew you could get a loan at 5%, you should start to see the beauty of what is possible. Now take an IUL where the cash value can grow at 6 - 7% average while borrowing at a point or two below that (equity mkt returns vs debt mkt returns).
We can both agree my insurance agent sucks. Oddly he is one of the top grossing agents for his company. My policy opened in 2005 has lower cash value than the sum of payments. That seems odd to me. I will admit I am very disillusioned with insurance and investment brokers. Between this and mutual fund adventures at Wells Fargo, I got sold a major bill of goods in the early 2000's. It is one of the reasons I moved into real estate. I like the control and every dollar I put in has returned double digit returns yearly.
You are right if you retired in 2000 and took out 4% annually that you could be running low on cash by this point (depending on what you invested in). That is mainly because of four bad years early in the retirement. Assuming better timing, it would look completely different. Luckily for me I am not counting on the stock market or life insurance for my retirement.
Question on funding a policy. In the example you gave, she put all the money in over 5 years. My current policy has an annual premium with smaller chunks that I am paying on for many more years. Do some people fully fund it the first year then just leave the policy? I assume funding it early has the advantage of more years compounding.
Is one of the main goals of these policies to use it as a tax shelter?
Say for example, I dumped $100K into a policy, could I have it fully funded and then start drawing out year two? Like taking $9K as loans each year tax free and could that be sustained for 50 years? Or whatever the number, maybe it is $8K every year.
Most agents don't fully understand how their products work. There are two extremes in permanent insurance. If you simply want the death benefit, you are looking for the very least amount of premium that will guarantee coverage for life. This is very likely what you have. It is a minimally-funded policy that will accumulate the least amount of cash value that will carry it through the insured's life. Remember, the insurance company is literally buying term and investing the difference. The difference is the cash value. The beauty of that cash value, versus you doing yourself, is the tax treatment and the ability to leverage it. It is these minimally-funded policies that have the greatest fees and commissions. This is the product that people love to hate.
The polar opposite end of the spectrum is a policy designed for cash accumulation. It still meets the legal definition of life insurance, but the death benefit (and fees and commissions) are held to the legal minimum. Look at the difference between what I showed you here and your own policy. Mine will run off of its own interest crediting after only 5 years. The cash value exceeds the premium paid around year 5.
To answer your question...
The reason you wouldn't want to put $100,000 into the policy at one time is the Policy Issue Charge. You can see it on my table above. Unlike the "premium" charge, it is tied to the death benefit. Using that table as a guide, $100,000 of premium would double the death benefit and double the Policy Issue Charge. Cost of Insurance is a rounding error. There will be no Premium charge after the first year. However, that 2X Policy Issue Charge will hit the cash value every year through Year 10. It would be a serious drag on the cash value performance.
I would design it with $20,000 per year for 5 years just like this one. The DB would be 2/5ths of what I've shown and so would the Policy Issue Charge. In 5 years, you'll have all of your cash in the policy and it will be much more capable of supporting policy loans for income at that time, though it is still best to wait until the policy issue charges drop off after Year 10.
The table gives you the data to show what would happen with smaller premiums and premiums through Age 65, for example. If you hack off the last zero, everything changes proportionately. DB is 1/10th. CV is 1/10th. Premium charges would continue beyond year 5 to Age 65. The premium charge drops off at year 11. DB is kept "increasing" through all the premium paying years. The cash value will accumulate very rapidly to the point where it starts pressing the DB up and the policy will maintain a legal minimum amount of DB over the CV.
I wouldn't call it a "tax shelter", but I intend to keep as much of my wealth as possible in cash value. Utilizing the leverage strategy for real estate investing strategically reduces the taxable income from your investments. Life Insurance provides asset protection. An Irrevocable Life Insurance Trust can move wealth out of an estate and to the beneficiary bypassing estate taxes.
Another alternative with $100,000 would be to create a Modified Endowment Contract (MEC) on purpose. This would hold the DB and costs down, but would make any distributions (loan or withdrawal) taxable like an annuity contract. For people who are healthy, this is actually better than any annuity on the market.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
This is what a properly designed policy looks like. This was on a 46 year old female, non-smoker, preferred. I'm using an IUL chassis so that you can see the itemized expenses. This is the primary difference between Whole Life and Universal Life: one is a black box and the other is unbundled into its component parts. One of my Whole Life designs would look very similar, you just wouldn't see the itemized expenses.
Notes:
1. 6.38% is the interest crediting rate. This is well below IUL historical returns and consistent with current Mass Mutual and Penn Mutual dividends right now.
2. The Death benefit is reduced to absolute minimum right after last premium is made. Note the small difference between the cash value and the death benefit at this time. Its this gap that represents the risk to the insurance company. The cost of insurance represents the cost of a 1-year term to cover this gap.
3. The COI gets more expensive every year as the insured ages, but the net amount at risk gets smaller. Notice that the COI as a % of cash value remains constant. This totally blows a hole in the argument that rising insurance costs as you age will cause a UL to lapse.
4. Note that COI as a percentage of Cash Value varies around 0.25%. This is in line with the expense ratio of most index mutual funds. But this policy will provide about 3 times the after tax income at retirement. This policy could sustain an annual income stream of $48,000 tax-free to age 120. Not bad for only 5 premiums of $50K.
5. I have the illustration that this is based upon.
6. Every design looks just like this. The relative ratios of premium and cash value remain constant. Its the death benefit that changes from case to case.
7. This has an early cash value rider that eliminates the surrender charges. Surrender value = Accumulation Value.
Hope this helps everyone understand what an overfunded policy is supposed to look like.
So maybe I'm reading this chart wrong, but it looks like we pay an annual policy premium of 50,000 per year for 5 years at which time your accumulated value will be 247,691. Every year after that, the value of your policy goes up but we aren't paying any additional premiums. By year ten, the value of your policy is 305,485. This can't be correct, can it? What exactly am I missing?
@Matt Hangsleben Your question got asked in this week's bigger pockets podcast in the fire round (How to become a millionaire by 26 with Graham Stephan)! It just came out today. You got a shout out, very cool. 1 hour and 3 minute mark. :)
@Jonathan R. Cool! I’ll check it out. Thanks.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
This is what a properly designed policy looks like. This was on a 46 year old female, non-smoker, preferred. I'm using an IUL chassis so that you can see the itemized expenses. This is the primary difference between Whole Life and Universal Life: one is a black box and the other is unbundled into its component parts. One of my Whole Life designs would look very similar, you just wouldn't see the itemized expenses.
Notes:
1. 6.38% is the interest crediting rate. This is well below IUL historical returns and consistent with current Mass Mutual and Penn Mutual dividends right now.
2. The Death benefit is reduced to absolute minimum right after last premium is made. Note the small difference between the cash value and the death benefit at this time. Its this gap that represents the risk to the insurance company. The cost of insurance represents the cost of a 1-year term to cover this gap.
3. The COI gets more expensive every year as the insured ages, but the net amount at risk gets smaller. Notice that the COI as a % of cash value remains constant. This totally blows a hole in the argument that rising insurance costs as you age will cause a UL to lapse.
4. Note that COI as a percentage of Cash Value varies around 0.25%. This is in line with the expense ratio of most index mutual funds. But this policy will provide about 3 times the after tax income at retirement. This policy could sustain an annual income stream of $48,000 tax-free to age 120. Not bad for only 5 premiums of $50K.
5. I have the illustration that this is based upon.
6. Every design looks just like this. The relative ratios of premium and cash value remain constant. Its the death benefit that changes from case to case.
7. This has an early cash value rider that eliminates the surrender charges. Surrender value = Accumulation Value.
Hope this helps everyone understand what an overfunded policy is supposed to look like.
So maybe I'm reading this chart wrong, but it looks like we pay an annual policy premium of 50,000 per year for 5 years at which time your accumulated value will be 247,691. Every year after that, the value of your policy goes up but we aren't paying any additional premiums. By year ten, the value of your policy is 305,485. This can't be correct, can it? What exactly am I missing?
What you see is what you get. All the charges are shown. Obviously, in the real world the annual interest crediting will not be a constant 6.38%, so the cash value and the amount for the COI will differ. In the years after the premiums stop, the charges are being deducted from the cash accumulation to keep the policy funded. Years 6-10 are a little heavy because of the remaining Policy Issue Charge, but the COI after year 10 is a very low percentage of the cash value.
You can see both the death benefit and the cash accumulation growing in tandem. The COI covers the delta.
Contact me privately if I haven't answered your question.
I have been following your discussion and I have to say this is the best explanation of how to properly design use a life insurance policy that I have ever seen. It seem likes for a real estate investor, an approach like this gives you the opportunity to borrow money at a net rate that is better than you can typically get any other way.
I recently purchased my first rental property with no money down. I did so by necessity as I am cash broke! However, I do put a substantial amount of money into my 401K account every pay check. I have always been relying on having a very nice nest egg waiting for me when I retire, but like many of you, am starting to realize that I don't want to wait until I am 65 to enjoy it.
For the last 10 years I have been so focused on building up my 401K, but now for the 1st time I am really considering stopping all contributions to focus on real estate investing. I ran the calculations and found that my projected 401K value when I retire will be cut in half if I stop contributing now (age 36) and leave what I have in there.
I'm looking for advice! Have any of you taken the plunge yet, how has your experience been? Any recommendations??? Thank you!!!
Matt
The best money is free money so if you have a match of let's say 4% then continue to put in 4% in that example. Never overpay a 401K in my opinion. You have much better options.
The next best money is nontaxable money. The only way to achieve this either through a Roth IRA or an Indexed Universal Life Policy. IUL's in my opinion are extremely strong products because they offer so many benefits. It's an insurance policy first so your beneficiary is covered. Your gains never dip under zero, so you're guaranteed not to lose anything and lastly the interest earned is nontaxable. So, in 20 years (I wouldn't recommend taking anything out until at least after 10) or whatever let's say that you have 200K of interest saved up. You can borrower off that TAX FREE, no reporting to Uncle Sam. IUL's if used properly are great retirement tools.
The next is guaranteed money. This is where I like to put together an Annuity for my clients and just let the monies accumulate and let the rule of 72 take over. Annuities also have some cool tax credits, the older you get the less you pay in taxes.
After you have these down or at least 2 of them down RE is where you'll see money multiply quickly and steadily year after year. And if a crash happens or something crazy. You'll have your Annuity in place and an IUL around to help pick up the pieces.
Using these 4 strategies correctly will make you smile in the long run and get you out of the 9 to 5 sooner than later.
I hope this helps and have a good one.
All due respect to insurance agents and companies.. As an industry saying goes, “Annuities are sold, not bought.” If you’re unfamiliar with annuities — you give an insurance company your money and in return they pay you an income stream, usually for the rest of your life. In some annuities, if you die before you’ve received all of your money back, too bad for you. The insurance company keeps the money. Hey everyone needs to eat and feed their family but just look at the fine print.