Life Insurance is one of the single most important policies that Insurance For Texans can offer to you. I have had a front row seat to it's importance when my dad passed many years ago, and my mom had to make ends meet. Life Insurance is SO important that I carry multiple policies on myself. Life Insurance is also a powerful tool to transfer wealth because of some unique characteristics. It's also a complex tool because of the diverse offering of types of coverage along with optional benefits. Due to the diversity and complexity, it often used by some individuals in ways that you may not be able to dream up on your own. Permanent life insurance, which accrues a cash value, is often manipulated to create cash for other circumstances due to it's tax favored status. Some use it for retirement planning, some use it for estate planning, some use it for college planning of dependents, and others use it for regular bank like transactions such as lending. The last such use as your own personal bank is known as Infinite Banking.
Many wealthy people through time have used whole life insurance as a lynch pin of their portfolio of wealth. They saw it's ability to transfer estates tax free upon their passing along with the ability to shelter money inside the cash value fairly risk free. When the United States economy was in a mode of higher interest rates, the cash value of the policies would accumulate at phenomenal interests rates above five to seven percent. Rates we just don't see very often today quite frankly. As a result, these wealthy folks would use the permanent life insurance policies to accumulate wealth while also protecting their families future. When the cash value accumulated, the transfer of that inheritance could also transfer tax free in spite of the estate tax. It was, and still can be, a brilliant play.
Infinite Banking is a mechanism espoused by R Nelson Nash that took that initial idea a step further. He saw the cash value portion of Whole Life Insurance as a tool that could be leveraged for other purposes while the insured is still alive. Since whole life insurance is considered non-correlated asset that doesn't fluctuate with the market like other investment tools, the predictability of both the policy and cash accumulation is very advantageous. It has a 100% predictable pay out, assuming that you purchase that policy with a highly rated and stable company. As a result, Mr Nash espoused leveraging the cash value to fund activities through policy loans while the insured is alive and the cash value is continuing to accumulate.
Permanent Life Insurance's cash value has policy provisions where that value can be used in various ways. In Universal Life policies, you can actually use the cash value to pay premiums for you if you need. In both Whole Life and Universal Life, you will have provisions that will allow you to borrow against that cash value. The life insurance company does not care if you borrow the money to remodel your home, send you kids to college, or buy a new air conditioner. They are concerned with you repaying the money back plus the interest it would earn to make the accumulation of your policy remain predictable. There is no underwriting like there would be on a conventional loan. And as long as you are repaying the loan, no one bats an eyelash.
The folks espousing this theory, sell this concept to the policy holder as a massive benefit that can be accessed since the cash value is relatively liquid compared to hard assets like real estate. It also means that you are not dealing with a bank making a decision based on your credit worthiness. Oh, and you can pay yourself that interest instead to a bank. The idea is that it accumulates more wealth for the individual. And the wealth can then be leveraged in retirement using LIRP or in the passing of the estate when the time comes. This all sounds great! Where do I sign up?
The big key here is that it's not necessarily a scam. But we must be careful because there are pitfalls to anything that you can put money into to generate a return on investment. Let's take a look at some pitfalls here.
In the end, if you feel like something is to good to be true, it probably is. We always tell people to stop and think why is this person providing me this concept, idea, or tool? Is it in their best interest or is it in mine? What do they have to gain by giving me this idea?
The term fiduciary standard is thrown around a lot in the world of financial services. It refers to always putting the best interest of you, the client ahead of everything else when a recommendation is made or advice is given. The reality is that the commission structures on a lot of these products are very large. And the assets being pumped into them are large as well. That makes for sizable paydays for the advisers. Ask yourself a few questions before you pull the trigger.
If you'd like a second opinion on investing or any of topics of this nature, reach out to us. We are not licensed to make those recommendations for you, but we know people who are highly trained and always put the best interest of you long before everything else that is on the table. Our goal at Insurance For Texans is to make sure that you mitigate risk in the best manner that you can accomplish it. And that means working with highly skilled advisers who can help you.