06 Jun 2013

My History With the Infinite Banking Concept (IBC)

Infinite Banking Concept, Shameless Self-Promotion 57 Comments

[The following article is adapted from the May 2013 issue of the Lara-Murphy Report.]

My History With IBC

Robert P. Murphy, PhD

May 2013

In this article, I will summarize Nelson Nash’s Infinite Banking Concept (IBC) for the novice, but I will do so in the context of my own experience in learning about it. I’m making the article autobiographical because part of the story involves the newly launched IBC Practitioner’s Program, and I can’t fully explain the rationale of the program without describing the situation that I (and the other founders) perceived beforehand.

Related to this is the fact that, going forward, I will be talking more about the economics of life insurance on my personal blog and YouTube channel. This may seem strange to some of my long-time followers (who have come to expect my musings on libertarian political theory or a critique of the latest Paul Krugman blog post), and therefore I’d like to give them the whole background in one self-contained piece.

Thus this article serves several purposes. First, I hope it clarifies for Austrian / libertarian readers why I became so interested in the economics of life insurance. Yet I also hope it further explains to people already in the IBC community why I think the IBC Practitioner’s Program is such an important component in bringing this message to a wider audience. Finally, it will hopefully prove useful as a general introduction to IBC for any reader, told in the style of “one guy’s journey.”

Before jumping in, I need to add one last caveat: I am not a registered financial advisor, and the information I offer in this article is not intended as a formal recommendation for any reader to change his or her financial situation. Obviously the reader should check with other experts before taking any action. I am merely telling my own history with Nelson Nash’s Infinite Banking Concept.

Meeting My (Future) Co-Author, and Discovering IBC

In the summer of 2008 I was contacted by Carlos Lara, who told me he was currently reading my Study Guide to Murray Rothbard’s giant economics text, and he realized from the author bio that we both lived in Nashville. We began meeting for lunch to discuss the unfolding financial crisis and other such weighty matters. At an early stage in these meetings, Carlos—whose consulting business focused on setting up trusts for businesses and households—explained that in addition to being a big fan of Austrian economics, he was also an avid proponent of Nelson Nash’s Infinite Banking Concept (IBC). Carlos lent me a copy of Nash’s underground bestseller, Becoming Your Own Banker, and asked me to evaluate it.[1]

The basic idea of BYOB [Becoming Your Own Banker] is that the typical American household is flushing away boatloads of money in interest expenses to outside financiers. If people could become disciplined and save up before making major purchases—so that they were relying on their own accumulated capital rather than what others had saved—they would be able to finally start getting ahead.

However, Nash wasn’t preaching a simple “get out of debt” philosophy. Instead, he was okay with gross borrowing in order to finance major purchases, but it had to be done under special conditions such that really you weren’t borrowing on net. For various reasons (some of which I’ll sketch out, later in this article), Nash argued that it made a lot of sense to accumulate a stockpile of wealth inside one or more high-premium, dividend-paying, whole life insurance policies. (!!)

Now for the “becoming your own banker” part: Whenever a person needed to buy a new car, send a kid to college, pay for a wedding, go on a cruise, fix the furnace, etc., he wouldn’t borrow from a conventional lender, and he wouldn’t even draw down “cash” sitting in a bank CD or other type of “savings account.” Rather, the person would get a policy loan from the insurance company, using his (well-funded) life insurance policy as the collateral. Then, instead of making periodic “car payments” (or whatever the big-ticket item was) to the conventional lender, the person would direct the same cashflow to the insurance company. Nash had several numerical illustrations to show that this strategy would make a person a heck of a lot wealthier over time, compared to other ways that the average American household might run its affairs.

I must confess—and I’ve said this several times in front of Nelson; he’s okay with it—that at first I couldn’t make heads or tails of BYOB. I’d be reading along, thinking, “This guy is really wise, I just love his worldview.” Nelson would make very profound statements about the human condition, the weaknesses and temptations we all face, and he was very skeptical of commercial bankers and—most of all—government programs. Further, Nelson was very well-read in the great Austrian and libertarian works, and heaped praise on the Foundation for Economic Education (FEE) as well as the Mises Institute—two places for which I had done a lot of work. So there were a lot of things pushing me to tell Carlos that, in my opinion, BYOB was a great book.

But then I’d keep reading and come across a statement that sounded nuts to me. What the heck was this guy Nash saying? Was he making some elementary error at Step 1 in his analysis? Could I just toss this slender book aside, and not have to waste any more of my time trying to figure it out?

Part of the problem was that I knew absolutely nothing about whole life insurance; I thought all life insurance was term insurance, where you make premium payments during the contractually specified slice of time, and the insurance company sends you a check if you die during that period. (My joke at the time was that I had always been baffled at the scene in It’s a Wonderful Life when Jimmy Stewart’s character tries to bargain with the greedy old man, using his life insurance policy. That seemed as nonsensical to me as someone trying to raise money by pulling out his fire insurance policy.) So, when Nelson in BYOB showed various tables talking about the dividends paid out on an insurance policy, and how you could use them to buy more “paid up insurance” and boost your “cash value” and death benefit to higher levels, I didn’t really understand what was even going on, let alone could I determine if his numbers seemed plausible.

As an aside, let me remark that my ignorance at that time is really a profound statement on how much things changed in the financial sector over the 20th century. Here I was, with a PhD in economics from a top-15 program in the world, I had done a dissertation on capital and interest theory, and I had even worked for a financial firm, helping with research papers for clients and calibrating the computer model that ranked stocks according to various criteria our chief economist (and head of the firm) would tell me to plug in. Yet I didn’t know what permanent life insurance was, even though an economist like Ludwig von Mises—about whose work I had written a Study Guide—casually mentions in several places in his writings that the average household saved via life insurance.[2] To people of my age and younger, we grew up being taught that “saving for retirement” was basically the same thing as “buying into IRS-approved mutual funds with large exposure to Wall Street equities, where you’re not allowed to touch your money for decades.” In hindsight, it is stunning that I was so naïve, since my career was based on being suspicious of all these shenanigans!

A Brief Introduction to Whole Life Insurance

In case the reader is also unsure of how whole life works, let me explain very briefly: In a whole life insurance policy, the coverage never expires. So long as you keep making the (same) premium payment, your coverage remains in force (your “whole life”). Eventually, the insurance company will send the death benefit check, either when you die, or when the policy officially matures (which on newer policies might happen at age 121). Because the insurance company knows that it will eventually have to pay out on a whole life policy (whereas it probably won’t pay out on the typical term policy), the insurance company must use a portion of the incoming premium payments to begin building up assets held on behalf of the whole life policyholder.

With each passing year, the implicit liability to the insurance company from your outstanding whole life policy grows larger and larger. (You are getting closer to death, or to age 121.) Thus, it would be worth more and more to the insurance company, if you were to eliminate that possibility of a big payout. This is why you can choose to surrender your policy at any time, and receive a cash surrender value lump sum payment from the insurance company. There are guaranteed cash surrender values at every point in your contract, specified at the outset. In practice your actual cash surrender values will probably be higher (assuming you tell the company to use dividends to expand your policy), but the crucial point is that you have a guaranteed scale of rising values over time, showing how much you can get if you surrender at various years into the policy.

Finally, the whole life contract spells out the guaranteed interest rate (or the rule for how the rate will be determined) at which you can take out a loan from the insurance company, with the cash surrender value serving as collateral. Unlike other types of collateralized loans—such as a home equity loan—the insurance company doesn’t ask any questions when you apply for such a “policy loan.” The reason is straightforward: The insurance company itself administers and guarantees the value of the collateral, so the insurance company doesn’t care when, if ever, you make payments on the loan.

In contrast, if you go to your local bank and try to take out a home equity loan, they are going to ask your sources of income, what you intend to do with the loan, and so forth. Why the difference? The value of the collateral (your house) is uncertain, and it would be a pain for the bank to foreclose on you if you default. The commercial bank would very much prefer not to find itself in a position of seizing your collateral. In contrast, the market value of the collateral on your life insurance policy loan can’t go down (the way the real estate market can crash), because the insurance company itself guarantees it. And “foreclosing” is a piece of cake: If you still have an outstanding policy loan when you die, the life insurance company just subtracts the balance from the death benefit check on its way out the door.

Translating Frameworks

Anyway, back to the story: Because this new acquaintance Carlos seemed like a pretty sharp, no-nonsense guy, who lived in a wealthy neighborhood, advised very wealthy clients on financial matters, and gave the most intuitive PowerPoint presentation on fractional reserve banking that I had ever seen, I kept giving this odd book BYOB additional chances. Carlos thought so highly of this guy Nelson Nash and his IBC philosophy, that I didn’t want to prematurely dismiss it.

Eventually it started clicking for me. What happened is that in order to feel comfortable with IBC, I had to reinvent the wheel, and reach Nelson’s conclusions through my own chain of logic. In other words, I had to run Nelson’s ideas through a “wind tunnel” of my own educational background, even though one of Nelson’s main themes is that we need to stop thinking that way, since the conventional framework could be very misleading and was pushing people into erroneous decisions all the time. But, we have to work with what we know and trust, and I couldn’t fully embrace IBC until I had broken it down and understood it with the conventional tools of analysis that I had from my economics background.

The “Rates of Return” Trap, and Other Objections

Let me give some examples of what I mean. Nelson often stresses that IBC “isn’t about rates of return.” At first, I thought he was basically admitting that the critics were right, and that whole life insurance was a “terrible investment” because of its abysmal internal rate of return.

But of course, that’s not at all what Nelson is saying. His point is that you aren’t “investing in life insurance,” rather you are setting up a very conservative financing system over which you have much tighter control, compared to any other readily-available option. If you spot a great investment opportunity that will yield (you think) 20% in the first year, then great! Go ahead and borrow against your whole life policy, and acquire the investment. IBC simply describes a headquarters or “home base” for your wealth, not a final destination (or prison!) the way 401(k)s are currently designed.

Indeed, some of the most powerful portions of his book show how both the average person but also a business owner, can end up wealthier at a future date by using IBC instead of conventional lenders. Obviously, if you end up with a higher net worth at age 65, using the same out-of-pocket cashflows, then you must have earned a higher “internal rate of return” with IBC than the alternatives Nelson considered. So to say “this isn’t about interest rates” wasn’t to reject standard accounting; I could still come in, using conventional financial analysis, and make sense of what Nelson was recommending. It’s just that it was such an unusual idea, that at first I didn’t even know how to apply the equipment in my toolbox.

Let me give another example. Dave Ramsey is a radio talk show host who (admirably) counsels people on how to get out from their crushing debt load, through obvious but crucial things like making out a budget, communicating with one’s spouse on financial affairs, etc. Ramsey is very entertaining and I can certainly understand why his show is so popular. However, Ramsey absolutely has it out for whole life (and other types of permanent life insurance) policies, advocating instead that people “buy term and invest the difference.” For example, in a post from his website, Ramsey implies that you won’t have any cash value for the first three years of a new policy. He goes on to explicitly say that the rate of return on your money is much higher in mutual funds, that you won’t need life insurance after 20 years if you follow his plan, and that the insurance company keeps your cash values when you die, giving your beneficiary only the death benefit.[3]

Every one of these (typical) objections is either misleading or downright false, at least when it comes to Nelson Nash’s IBC approach of using whole life policies. First, if you set up the policy properly with a “Paid Up Additions (PUA) rider,” then right off the bat, a portion of your periodic payment is buying a chunk of fully paid-up life insurance. Thus, your cash value begins rising immediately, and you can begin borrowing against your policy right away (if you need to).

As far as comparing rates of return, again the problem is that Ramsey is viewing permanent life insurance as an investment, rather than a cashflow management strategy. Yet even if we use the standard tools of financial analysis, it is a non sequitur to point out that a mutual fund is expected to have a higher 30-year (say) average annualized rate of return, compared to the internal rate of return on an insurance policy’s projected cash value growth. Such a bald statement ignores the difference in risk between the two strategies. (Whole life insurance policies have guaranteed minimum rates of return. Do equity-based mutual funds have that?) Ramsey could just as easily “prove” that nobody should ever buy a corporate bond, because stock issued from the same company will always have a higher expected return.

In a similar vein, Ramsey is engaged in simple hand-waving when he says you can just buy a 20-year term life policy, because you can “self-insure” when it expires. Fine, but you still need to account for the implicit option value in a whole life policy, which allows you to have coverage in force for your whole life at the same, original premium. There are ways to account for the fair market value of an in-force life insurance policy of a particular death benefit, and your portfolio would take a big hit when that asset suddenly expires if you use the “buy term and invest the difference” approach.

By making these comments, I’m not “proving” that more life insurance is always the best thing to buy, from a conventional “asset class” allocation perspective; otherwise we would have the absurd result that everybody should put every last dollar of his wealth into life insurance policies, with nobody owning stocks, bonds, real estate, or precious metals. (Obviously somebody has to own a share of corporate stock or a piece of real estate, and that ownership must be voluntary. So their prices adjust to make it attractive for someone to acquire and hold.) All I’m making is the modest point that in Ramsey’s critique of whole life and related insurance policies—when he compares them very unfavorably with “buy term and invest the difference in mutual funds”—he isn’t even attempting to set up an apples-to-apples comparison of the two strategies. He’s pulling one set of statistics—internal rates of return—out of context and trumpeting them as if they’re decisive, when the actual situation is much more nuanced.

Finally, the oft-repeated objection that the sneaky insurance companies “keep your cash value” when you die, completely misconstrues what the cash surrender value on a whole life policy is. Intuitively, the cash surrender value is closely related to how much of a liability your policy represents to the insurance company; the textbook definition (where we are abstracting away from some real-world complications) of the cash value is: the actuarially expected, present discounted value of the future death benefit payment minus the future premium payments. (In a world with no overhead expenses and perfect competition among insurance companies, when the policy is first signed, the expected flow of premium payments would exactly equal the expected death benefit payment—accounting for mortality risk and the time-value of money—and so the formula for the cash value would be $0 at the start.) The cash value goes up over time, because with each year you are (actuarially) that much closer to death, while there are fewer premium payments for you to make.

Thus, the cash surrender value is something like the equity you build in a house, as you pay down the mortgage. In the whole life case, the “mortgage” is your stream of contractually specified premium payments, and the “house” is the death benefit payment (either when you die, or when the policy matures at age 121, let’s say). With each “mortgage” payment, the insurance company’s lien against your “house” shrinks, which is why your “equity” in the policy grows.

In that light, of course you don’t get your cash value on top of the death benefit, when you die. The cash value was simply the on-the-spot (correctly discounted) anticipation value of the looming and uncertain future death benefit, netting out the premium payments you’ll have to make in the meantime, which is a big lump sum payment that might not come in for decades. If you take out a whole life policy at age 20, and then happen to get hit by a bus at age 41, that helps your estate; your grieving spouse isn’t going to get merely the “cash value,” but instead is going to get the full (i.e. non-discounted) death benefit, much earlier than expected. In this case, you made out like a bandit with your whole life insurance policy, earning a far higher “internal rate of return” on your premium dollars, compared to Ramsey’s strategy (in which you would have dropped your life insurance coverage the year before).

Now it’s true, if you are doing a sophisticated comparison of “buy term and invest the difference” versus “put everything into a big whole life policy,” then you need to worry about the complication that the cash value is simply a derivative asset based on the underlying life insurance; it’s not a separate entity like it is in the mutual fund. But my point is, there’s nothing sinister going on here; it makes no sense at all to complain that the insurance company “keeps the cash value” after mailing out a death benefit check.

One final way to see it, going back to the mortgage analogy: With each passing month, you pay down more and more of your principal. Your CPA tells you how much equity you’re building up in your house. Then after 30 years, you finally make the last payment; the house is yours, free and clear! You go down to your local bank, get the deed, and then ask for a $300,000 check as well. The teller is shocked, but you explain, “My CPA says I now have the full $300,000 in equity in my house. So where is it? I sure hope you guys aren’t planning on keeping my equity from me. I want the house and my equity value.” Dave Ramsey and others are making a similarly confused point when they warn their fans that the insurance companies “keep your cash value” when you die.

The IBC Think Tank

Returning to the narrative: I became further reassured that this whole thing wasn’t crazy when I first attended the “IBC Think Tank” in Birmingham. (This would have been in February 2010.) Because of Carlos’ efforts on my behalf, Nelson Nash and David Stearns (who ran the day-to-day operations of IBC) had asked me to be the after-dinner speaker on the first night of the two-day conference. Because I really wanted to get to the bottom of this IBC stuff, I made the 3-hour drive down to Birmingham the day before I was scheduled to speak. This allowed me to sit in on part of a Nelson Nash seminar (which catered to regular people who wanted to use IBC for their household finances), and also ensured that I could attend all of the sessions of the Think Tank itself (which catered to financial professionals who were using IBC with their clients).

At the Think Tank, I saw a CPA give a presentation explaining the proper way to document interest income and deductions, so that the IRS wouldn’t object. (This reassured me that the whole thing wasn’t some big tax evasion scheme.) Another presenter pointed out that, when you figure in the favorable tax treatment on whole life policies (if they meet certain requirements which I won’t discuss in this article), their “awful” internal rates of return actually become pretty decent, considering the guarantees in the product and the ease with which you can access the money. Furthermore, several other of the presenters were insurance producers who had plenty of anecdotes of how they had shown clients ways to improve their cashflow management by incorporating IBC. It’s not so much that they proved IBC was the best possible technique imaginable; it just happened to be a heck of a lot better than what their clients had been doing before.

Writing How Privatized Banking Really Works

I had seen enough to be convinced to get my own (starter) policy, to learn more about how IBC worked. In this same time frame, Carlos kept telling me that the Austrian economists saw the problem with our financial system—the fiat money central bank, and the fractional reserve commercial banking system that it controlled and nurtured. The Austrians preached, correctly, that the only genuine solution would be a total reform of government policy, to return money and banking to the private sector.

Yet even though the other Austrians and I were touring the country, speaking out on these topics, our solution—educating the masses until the government had to change course—seemed like a hopeless pursuit to too many people. In the meantime, Carlos explained, Nelson Nash and his IBC disciples were allowing households to secede one by one from the corrupt system. In other words, if you “became your own banker” the way Nelson recommended, then you were effectively privatizing banking in your own life.

This insight hit me so hard that I physically recoiled. That was the hook that would allow Carlos and me to try to “introduce” these two camps to each other, who were each doing the Lord’s work (some quite literally, in their understanding of it) in their own respective fashions. You had the academic Austrians writing articles and preaching to large crowds that there would be a day of reckoning from Bernanke’s mad money printing, and recommending bank runs to bring the fat cats down a notch. On the other hand, you had the IBC community meeting with individual households, showing them how to shield themselves from the commercial bankers and Wall Street, yet many of them didn’t tie it in to the broader macro framework.

Showing the complementary goals of these two groups is what Carlos and I tried to do in our book How Privatized Banking Really Works.[4] Most of the book is spent explaining how money and banking work in a genuinely free society, and contrasts it with the corrupted institutions in our actual world. Then we introduce the basics of IBC, and stress that when you take out a policy loan, the insurance company cannot create the money “out of thin air” the way a commercial bank does. Thus, the more households who practice IBC, the less demand for commercial bank loans and the harder it is for them to inflate. Furthermore, fewer people will be taken down when the stock market crashes again.

In researching our book, Carlos and I read a lot, of course, but we also traveled to insurance company home offices to interview their key personnel. We began learning more and more about the life insurance industry. In particular I began focusing on the actuarial side of things, because that dovetailed so well with my background. The more we learned about whole life policy design, the more “obvious” Nelson’s IBC approach seemed.

The Night of Clarity

Carlos and I released our new book in the summer of 2010 at the “Night of Clarity,” a Friday/Saturday event held in downtown Nashville. We assembled an all-star team of Austrian lecturers for the Friday session, including Nelson Nash, Paul Cleveland, Richard Ebeling, and Tom Woods. This was basically the diagnosis of “the problem,” telling everyone why the financial crisis had occurred, and what the Austrians had to say about a long-term fix.

Then on the following Saturday, we held a workshop on IBC. Here we presented “the solution” at least for the individual household, which could be implemented right away without relying on protests in DC or any type of political activism. Here was this old, conservative, boring financial product—a dividend-paying whole life insurance policy—that seemed remarkably designed to aid us in our current environment.

That particular event was very well received, with great presentations given all around. In addition—for those who don’t know—Nashville is a wonderful travel destination, with a lively downtown, especially if you are a music fan. This year we are thrilled to announce that at our Night of Clarity (August 23-24) we will once again have Tom Woods and Nelson Nash, but we will also feature FEE president Larry Reed and our headliner is Dr. Ron Paul. Check out http://NightOfClarity.com for the details.

The IBC Practitioner’s Program

At this point, Carlos and I were well poised to “evangelize” the IBC message to Americans, especially those with a prior interest in Austrian economics. However, there was one snag: Not just any insurance agent can properly set up an IBC policy the way Nelson Nash intends. There are various subtleties (Can IBC work with Universal Life or other products? With what company? How should the premiums be structured?) involved, which lie outside the scope of this introductory article. Suffice it to say, a person can’t simply hand BYOB to a random insurance agent and say, “Give me one of these.”

This was a problem, because if Carlos and I were successful, then people would obviously want someone to help them look at their own household or business situation, and figure out how to apply Nelson’s ideas. If we got such an email, asking for advice, and we happened to know an IBC veteran in the same city, then we could connect the person. But in general that would begin to get cumbersome, and outside of the group of long-time fans of IBC whom Nelson and David Stearns knew personally, Carlos and I couldn’t really be sure of where to steer interested people.

To give an even better illustration of the awkward situation: Carlos and I would go on the road, giving our presentations to audiences that insurance producers would assemble. Obviously, the producers were bringing us in to show the crowd that the use of life insurance they had been discussing, made sense—why, here were an independent businessman and economist saying it works, and who practice IBC personally! But the problem was, what if a stranger emailed Carlos and me, asking us to fly out and give a presentation? The person could say he knew all about Nelson’s ideas, but for all we knew he might be setting people up with something other than a whole life policy (which Nelson does not recommend). We wanted to spread the good word, but we also didn’t want to be naïve, and we certainly didn’t want people getting set up with an insurance policy that didn’t do what was described in BYOB.

In collaboration with Nelson Nash and David Stearns, we hit upon a solution: The IBC Practitioner’s Program. This is a training program run by the Infinite Banking Institute (IBI). The course is designed for financial professionals—including not just insurance producers but also CPAs, tax attorneys, accountants, and financial planners—who are thinking of incorporating IBC into their practices. Before even beginning the program, a new student must sign a contract saying (among other things) that if a client requests a Nelson Nash/IBC policy, or if a client comes specifically from the IBI website, then the student will only facilitate setting up that client with a dividend-paying, whole life policy—exactly what Nelson Nash recommends.

To create the Program, the four of us engaged in a lot of research. (Carlos and I made more road trips to home offices, developed relationships with actuaries, and read insurance textbooks.) We all developed a large Course Manual and accompanying video series with more than 15 hours of lectures, which covers such topics as: (a) the basics of Austrian business cycle theory, (b) the actuarial basis of whole life policies, (c) a line by line explanation of the illustrations in BYOB, (d) the basics of implementing IBC, and finally (e) also stressed the correct way to explain certain concepts to a newcomer, to ensure that there is no confusion about “borrowing from yourself” and other roadblocks.

At the end of the course, the student must pass an online, proctored exam administered by a third-party site. The exam is designed to be fairly straightforward for someone who has read the Course Manual and watched the videos, but to be nearly impossible for someone who just tries to wing it without any real knowledge of IBC. Upon passing, the student becomes an authorized IBC Practitioner, can call him or herself such in promotional materials, and can (if desired) be listed at the IBC Practitioner Finder at the IBI website.[5]

Among other benefits, the IBC Practitioner’s Program now clears the way for me to focus on studying the economics of life insurance, and clarifying its nature to the public through blog posts and YouTube videos. Before, it would have been impossible for me to control who was using my material to sell to clients. But now, I can always include the advice that if any reader or viewer is interested in these ideas, that there are authorized IBC Practitioners listed (by state) at this website: https://www.infinitebanking.org/finder/.

Of course, it’s entirely possible that someone who’s not listed at the IBI site is a perfectly reputable person, and is an expert in the philosophy of Nelson Nash. More generally, there may be insurance agents who have a difference of opinion with Nash’s approach, and recommend to their clients that they do things differently. But from my perspective, I am comfortable explaining how whole life insurance policies work, since that’s what I’ve spent the last several years studying. Further, it reassures me to know that the people who have graduated from the IBC Practitioner’s Program have demonstrated that they possess a solid foundation in Austrian economics, the economics of life insurance, and IBC; and that they have contractually agreed to set up the relevant clients with the type of policy that Nelson intends.

Conclusion

This article is admittedly long, but I thought it important to explain my history with IBC in one self-contained piece. Now people will understand why I am so interested in the economics of life insurance, and why I’m sensitive to what seem ill-informed critiques of whole life. The more I study it, the more I believe that Nelson Nash’s Infinite Banking Concept makes sense, and that a properly designed whole life insurance policy can be an important component in the financial arrangement of the simple household or large business.


[1] Nash’s book, and many other materials related to IBC, are available at: https://www.infinitebanking.org/store/.

[2] See: http://consultingbyrpm.com/blog/2012/08/life-insurance-the-forgotten-savings-vehicle.html.

[3] See: http://www.daveramsey.com/article/the-truth-about-life-insurance/.

[4] See: http://consultingbyrpm.com/how-privatized-banking-really-works.

[5] See: https://www.infinitebanking.org/finder/.

57 Responses to “My History With the Infinite Banking Concept (IBC)”

  1. Lan_59 says:

    Great article! I wonder if you have ever talked with Peter Schiff about this subject, it sounds like something he could get one of his EuroPac entities working on….

  2. Transformer says:

    Does sound like an interesting concept. One disadvantage with whole, life insurance v 401(k) is that employers will often do a 401(k) contribution match, but I’ve never heard of anything similar for life insurance.

    Also if you just want to use the policy to save , but don’t need the insurance piece (perhaps you have no heirs) are you paying partially for something you don’t need ?

    • Michael Sparks says:

      Employers can use this type of policy as a match for both retirement and savings. An employer can add money to an individuals account which is also a tax deduction for the employer.

      So yes it can work like a 401K but without all the red tape.

  3. A Country Farmer says:

    Hey Bob, I recently bought the DVD on this that you mentioned on your blog and was intrigued but I hit the exact issue you brought up: okay, now how do I actually find the right policy. I live in San Diego and it looks like there are a few IBC practitioners in L.A., but it would be nice if I could register with the IBC site and if it told me when new IBC practitioners were added to within X miles of my location, because I’d prefer someone local (BTW, if you know someone in SD, send an email to my private email!).

    I look forward to your future posts on this, particularly in dealing with common objections like one of the comments above about matching funds to 401(k), etc.

    • Bob Murphy says:

      Let me ask…

    • Bob Murphy says:

      Hey Country Farmer,

      You’re right, we don’t have anybody near San Diego, not even someone going through the program as far as I know. I think the only thing to do is check in, in a few months. We have a lot of people who are going to sign up when they can, it’s just a big commitment on their end.

    • Tom O'Connell says:

      Hey Country Farmer,

      I’m in NJ but am licensed in CA, have done work with other clients in CA and am trained & certified by IBC. If you don’t mind working over skype or the such, I’d be happy to help you.

  4. Keshav Srinivasan says:

    Bob, maybe this is a stupid question, but does it make sense to get a whole life policy if you have no bequest motive, i.e. you have no heirs and you don’t care about giving your money to charity after you’ve passed on?

    • Lee Terry says:

      Keshav, if you have no heirs and don’t leave what you have to charity, then the state and federal gov. will end up with what you have. It’s only my opp. but haven’t they wasted enough of your hard earned money already?

  5. Keshav Srinivasan says:

    Bob, another question I had is, could a whole life policy be designed so that, instead of only paying out if you reach 121 years, we set the age to be (say) 20 years older than the age you buy the policy at? Then would it still be a good investment vehicle?

    • Lee Terry says:

      Keshav, that would be called “an annuity.”

  6. John says:

    I didn’t really pay attention to this until now because I’m working to raise money to renovate houses and I hate going around asking for people to put in money. My business partner and myself have been using our own capital to buy houses and pay our contractor and his team to renovate them. We have way more profitable project opportunities that we could pursue with more cash but neither one of us particularly wants to go the bank financing route. Borrowing against a life insurance policy as a way of raising money to grow the business is a pretty interesting option. I’m going to do a lot more research.

  7. Reginald M. Myers says:

    This chart, from the Visible Policy (great site by the way) illustrates 4 lines demonstrating the actual performance of the site author’s whole life policy. The solid green line is the cash value of the policy. The thin line is the total of the premiums paid into the policy. The reddish orange dashed line is the effect of inflation on out of pocket dollars, or the real total of the premiums paid into the policy. The blue dotted line is the total cash value of an investor who bought a cheap term policy, and then invested the difference between the whole life insurance and term life insurance into a good bond fund. The left axis is in dollars, the bottom indicates the policy holder’s age.

  8. Tel says:

    Could you cover the question of how inflation and Capital Gains Tax will effect the two option of whole life insurance, vs “invest the difference” and self-insure after 20 years? Needless to say, all savers are punished by inflation and CGT, but are they punished equally?

    I think that inflation hits life insurance harder, because your benefit is long term and not inflation adjusted and you can’t easily change that. I guess if circumstances change you can just go for the cash surrender and invest that instead but maintaining an investment portfolio from the start is more adaptable to changing circumstance.

    Then again, CGT probably hits hard on people who buy stocks, etc.

    • HAP says:

      Tel:

      They will all be hit by inflation, so throw that part out. And yes, if you use historical averages for BTID, then you would come out ahead not doing BYOB if everything moved in a straight line with investing (which it does not so you are always gambling to a degree), even with the capital gains. But there is one tiny advantage that WL insurance has (it is actually a big advantage):

      If you take out loans against your policy, loaned money is tax-free. You take out loans you never plan to pay back. Now you can’t be so aggressive with the loans that the policy collapses, because you will have created a major tax fiasco, but that is where you will want to compare returns, 30-40 years down the road on an after-tax basis.

      BTW, I do have one of these policies but this is #4 in the pipeline of investments, IMHO.

    • Uri says:

      Two points on inflation and whole life policies:

      1. While it is true that inflation will hit the policy holder as her beneficiaries’ future gain will be nominally the same but realistically smaller, and as a derivative the policy’s surrender value (cash value) values less, so are the fixed annual premiums.

      2. A way to mitigate that is to really think about the policy as a cash management tool and take policy loans to invest in inflation-proof vehicles. For example, take a loan from your policy to pay the down payment on an investment real estate asset. The rest will be in a fixed rate mortgage. Your rent should pay for expenses, mortgage payments, and policy interest, and then something is left for you as cash flow (and you also get other tax benefits as deprivation, but lets put tat aside). With inflation you benefit on your fixed debt both mortgage and the policy loan. The rent you are charging, however, is adjusted to inflation. So true, your fixed policy worth less due to inflation, but you “converted” parts of it to a fixed debt that serves your other inflation-proof investments.

      Hope that helps.

  9. RPLong says:

    Interesting, but highly dependent on the size of the dividend. But you succeeded in making me more curious.

    • RPLong says:

      In answer to my own question, here is one website’s estimate of current life insurance dividend rates:
      http://www.prlog.org/11815309-current-dividend-rates-for-mutual-life-insurance-companies.html

      Not unattractive at all, if true.

      • Transformer says:

        Indeed. Those rates are much higher than I expected if I am interpreting them correctly as the annual rate of return. I wonder what they invest in to generate those kind of returns? It would have to be high-yield corporate bonds or something equivalent – but that would put their capital at some risk.

        • ATeamRules says:

          Part of the high dividend rates are due to the nature of the portfolio backing the product. They would hold fixed income investments with long maturities, so although a 5 year period of low interest rates exerts drag on the portfolio yield, older assets in the portfolio still generate income at higher rates. Most of the assets would use book value accounting, so this would translate into a higher portoflio yield today.

          Mutual companies also tend to invest a meaningful portion (say 5- 20%) of their whole life assets in non-liquid assets like private equities, which can boost the portfolio yield when things go well.

          The dividends also reflect the insurer’s mortality gains, not just the earnings on the policy reserves. The premiums on the policy are guaranteed level for life, but there is substantial uncertaintay about mortality rates 10, 20, 50 years out. So the premiums are set using conservative mortality assumptions. As good mortality experience emerges, the overage is refunded to the policyholders through the dividend.

          This last is likely a substantial component of the total dividend yield and makes it an exercise in futility to try to separate out the cost of insurance from the investment return. In the US, at least, it is illegal to sell level premium whole life insurance policies without a cash value, so there is no comparable “pure” insurance policy to compare against.

      • Uri says:

        And if you add to it the tax benefits it’s even better.

  10. Joe Esty says:

    Interesting concept, to be sure. But it still doesn’t address the scourge of any financial plan: lack of discipline and high time preference. In addition, commissions and fees appear to be an issue if something goes amiss financially in the first couple years. With the “buy-term-and-invest-the-rest” strategy at least you have the option of not investing, where with whole life you’d have to surrender the policy.

  11. JP Koning says:

    Like RPLong, you made me more curious.

    The phrase “cashflow management” is interesting. It sounds like these policies are low yielding but quite liquid since you can easily borrow on them, whereas other forms of investment pay a higher rates of return but are illiquid.

  12. John says:

    Quick question. Can you get better results with a lump sum purchase of whole life insurance? Say you were willing to plop down around 100K.

    • Uri says:

      I think it is not about “better results” as it is about accelerating the process. But the short answer is “yes.” A word of caution, though. If you fund your policy too quickly, i.e. too much money in relation to your insurance amount over too a short time period, the IRS will no longer allow the tax benefits these policies enjoy. This is the MEC requirement that was briefly mentioned. Your agent should know how to calculate the maximum premiums allowed, if that’s your strategy.

  13. Keshav Srinivasan says:

    Bob, can you also explain how dividends work in a whole life policy?

  14. Tel says:

    This is a bit of an aside, but worth chasing up and might be another factor in the comparison with life insurance as a savings vehicle. It looks like banks are getting the political and legal muscle together to be able to “pull a Cyprus” when it suits them.

    http://barnabyisright.com/2013/06/04/growing-political-deception-growing-on-bank-deposits-theft/

  15. Seymour says:

    Hey Bob! MMTers really don’t like you for some reason no matter how nice and respectful you have been towards people like Warren Mosler.

    http://www.youtube.com/watch?v=wQI-PyrpskU

    Many of the comments are just insults rather than a constructive critique. It’s a shame. A lot of them do seem to be knowledgeable about economics but they spend a lot of time writing generic anti-neoliberal/neoclassical and anti-globalization talking points.

  16. RG says:

    Are there IBC approved whole life policies/companies that do not utilize treasury bonds as an investment vehicle?

  17. Robert Zuniga says:

    Thanks for sharing your journey!

    I initially found out about Nelson Nash’s “Becoming Your Own Banker – Unlock the Infinite Banking Concept” from an entrepreneur who, like me, was trying to solve our debt problems (financing/refinancing issues)….

    This book provides the answer, and better yet, insures that we can be set up not to be reliant on commercial banking for our life’s needs and wants.

    Again, thanks for the insight….

    -Robert Zuniga

    P.S.
    Here’s my review of Nelson’s book as well as Lara’s and yours…
    life impacting information……if you do the work and implement….

    http://www.youtube.com/watch?v=zWFdYuxrLX4

  18. Warren says:

    Hi Robert, Greetings from Australia. Thank you for your succinct and informative article confirming the IBC. Ever since Robert Kiyosaki’s ‘Rich Dad Poor Dad’ book, I have been looking for a vehicle to become ‘the banker’, although most of my looking has been around R/E investments. To think the insurance industry might provide the answer means I’ll have to eat a lot of humble pie considering what I’ve thought of them in the past! Now the challenge is to find out if there is any Australian insurance company/broker who can provide such a WL policy. Wondering if you happen to have any leads I can chase up? Much Appreciated.

    • Larry says:

      Hi warren I too am from NSW Australia, would luv to catch up to discuss ideas so good to finally see some Aussies in these chats mostly everything is overseas stuff, my email is mortell72@hot mail.com

  19. Andy says:

    I recently have been reading Nelson Nash “Becoming Your Own Banker” book. I’ve read it over a few times, and I get the concept, but something Nash says on page 42 that seems to be contradicting the strategy everywhere else I read.

    He talks about method E for financing a car using the IBC. He states, and I quote

    “After seven years of capitalization, this person withdraws dividends in the amount required to pay cash for the car. This process does not involve policy loans”.

    Now how can it NOT involve “policy loans”? Everywhere else I read, the concept involves taking out loans on the policy and paying the insurance policy back with interest, which is countered by the dividends earned, thus lowering the overall interest paid. Correct?

    Pardon me if I sound naive, I’m just trying to understand what Nelson is saying. These withdrawals have to involve policy loans whether they are paid back or not. Correct? Of course the strategy does not work if a person does not pay themselves back.

    But how does a person withdraw dividends and bypass taking out a loan with interest from the policy?

    Thank you for any thoughts on this

    • Bob Murphy says:

      Pardon me if I sound naive, I’m just trying to understand what Nelson is saying. These withdrawals have to involve policy loans whether they are paid back or not. Correct? Of course the strategy does not work if a person does not pay themselves back.

      But how does a person withdraw dividends and bypass taking out a loan with interest from the policy?

      Thank you for any thoughts on this

      Andy,

      Nelson isn’t saying that’s the ideal thing to do, he’s just explaining what he has that guy doing in that scenario. The guy isn’t taking out policy loans; he is earning enough in dividends to buy the car with them.

      But you’re right, generally speaking the IBC concept involves taking out policy loans and then paying them off.

  20. william says:

    The Kahler Financial Group, Inc is laughing about b.y.o.b. They are saying it is a scam and telling people if it sounds to be true then run for Obama plan, or something like it. Many agree to this Financial Group. I know for years I have been using my 401k the same way b.y.o.b. does. I take out a loan….I pay it back with interest. I am now retired so I can not enter any more money to my account. But this way I do over time has saw my account grow.

  21. robert castiglione says:

    The insurance banking concept is not good for anyone to use.

    Let me summarize the reasons why the life insurance banking concepts is not efficient or effective and has too much risk for the potential small gains.

    • Life insurance loan interest is no longer income tax deductible. The tax law changed and took that big benefit away. Years ago all policy loan interest was income tax deductible.

    • Today the fixed loan rates on policies are 8%. There is a big difference between the 5% tax deductible rates not long ago. Some companies are using a fluctuating non- guaranteed variable loan rate but that is even more dangerous since the policyholder cannot control with certainty the ultimate outcome.

    • The life insurance companies are paying lower dividends to policyholders if loans are taken from the policy. Years ago, every policyholder received the same dividends whether loans were taken or not.

    • Unlike in the past, the IRS passed MEC rules on life insurance policies to help prevent consumers from over-funding their policies with high cash values and low death benefits. If the MEC standards are not met, the policy becomes income taxable for all withdrawals.

    • The mortality age tables have been revised upward to ages 100 and 120. This has had a dramatic effect on the level of premium payments, timing of cash values, and dividend levels to the disadvantage of consumers.

    • Estate planning laws and taxation have changed making life insurance banking concepts less effective and efficient.

    Unfortunately, advocates insurance banking are totally misrepresenting how “banking” actually works.
    Therefore, I will summarize those misrepresentations that you will find in almost any thing you read on it.

    1. The term “over-funding” is not explained properly to consumers. It means over-payment of premiums. Over-funding sounds less negative. Every input into a life insurance policy is a premium and increases the cost basis of the policy.
    2. Life insurance dividends are not earnings. They are a return of premium payments that the life insurance company no longer needs to provide benefits to the policyholders. Dividends are not taxed because it is a return of your post tax premium payments.
    3. Cash values is also another term loosely thrown around. The proper name is Cash Surrender Value (CSV). CSV is only accessible by surrendering the policy. There is no other way to access your cash values if the policy is in force.
    4. When you take a policy loan, you are not borrowing your cash values. You are borrowing money from the life insurance company and owe them the repayments and the loan interest.
    5. Cash values are not used as collateral for your policy loans. The policy loan provision inside the contract states that the “policy itself” is the contractual “sole security” for the loan and not your cash value. .
    6. A policy loan is not income tax free as is cited by almost ever “banking” agent or advocate. All policies loans that go unpaid will become taxable when you surrender or lapse the policy. If the loan interest on those loans were paid by dividends or by additional loans, the IRS will tax those payments and add penalty interest as well.
    7. When you pay the loan principal and interest back to the policy, you are not paying yourself back. You will not get one dime of that principal or loan interest. So the words “paying yourself back” is a mere fabrication.
    8. All unpaid loans at the time of your death are not forgiven. The unpaid loan balance plus the loan interest will be subtracted from the death benefits to your beneficiaries.
    9. When you borrow from the life insurance company, the interest cost of the loan is the gross interest rate you pay to the life insurance company. The earnings on your cash values is irrelevant and has no bearing on the cost of the loan to you. For example, if you borrowed at 6% interest and your cash values went up by 5%, that loan does not cost you only 1%. It costs you 6% because you would have received the 5% earnings even if you did not borrow.

    Let me now verbalize what the insurance banking concept actually is:
    You take out a life insurance policy.
    You pay more premiums than is necessary.
    You use after tax dollars to pay for all the over-payment of premiums.
    You get less death benefit coverage for your family.
    You get more cash values in the policy but you do not own them.
    You request a loan from the life insurance company.
    The life insurance company will only loan you money up to the cash values to protect against defaults.
    The life insurance company lends you money at a non-deductible interest rate.
    The life insurance company can change the loan rate at any time.
    You then pay back the loans to the life insurance company with more after tax dollars.
    None of the loan payments or interest payments are paid to you, it all goes to the insurance company.
    The insurance company reserves the right, in the future, to pay you less dividends if you take any loans.
    The life insurance company has a contractual right to not lend you any money for up to 6 months
    When you die, the life insurance company keeps all of the cash values.
    When you die, the life insurance company subtracts the unpaid loans from the death benefit proceeds.

    If the above were not bad enough, your agent wants to pay another premium. He disguises it as paying interest to yourself equal to what you would have paid to an outside lender. That over-payment is not interest being paid top yourself. It is another premium payment buying a small policy called PUA which has cash value and a death benefit. The only way to get any living value is to take a loan from the company again paying interest. And around and around you go.

    If you or your agent errs just a little bit to cause the policy to become a MEC, all of your loans and withdrawals would become income taxable. Or, the IRS may decide at any time to tax life insurance loans.

    A policyholder does not control the loan interest rate, the annual dividends, the policy’s earnings credit rate, the tax laws, the insurance regulations, the timing of the loan, and of course the unknown changes that may occur in their own life that could disrupt this long term concept.

    So why does any want to buy a policy and use the insurance banking concept other than because they were misrepresented, misled, and were the victim of slick marketing? The answer is, no other reason.
    The only safe financial plan is one that is balanced and diversified. One should take advantage of every strategy and financial product while working to eliminate the disadvantages of such financial decisions. It is too easy to get high returns on your money, tax deductions, maintain control, avoid risks, and be flexible to meet the changes in the tax laws and regulations that are certain to come down the pike.

    I see no advantage in using only one strategy and having all of your eggs in that one basket while relying upon loans and interest payments. If you look carefully at all of the marketing of the insurance banking concept, you will see the errors, misrepresentations misleading statements, false comparisons, the use of averages rather than real data, and of course phony testimonials and hype.

    • Bruce Wehner says:

      Bob,

      What do you suggest a person do instead?

  22. robert castiglione says:

    Mr. Bob Murphy:

    Since you are PHD and an economist, and now fully understand IBC, it would be valuable for all consumers to have someone like you to explain IBC and how it works in an accurate manner. Reading the available literature on IBC or BOY is filled with bias, mathematical errors, opinions, false comparisons, and the like. We need a real analysis done by an intellectual such as yourself with no hoopla and razzmatazz.

    Let me give you the areas from your article that we need disclosed and presented with evidence:

    1. You read Nelson Nash’s Becoming Your Own Banker, and evaluated it.

    I agree with that philosophy but IBC is saying that paying cash is bad. Do you agree that people should not use cash for purchases and always borrow money using loans with gross rates versus net rates?

    2. In Nash’s book, his comparative analysis was flawed and filled with mathematical errors. He did not equalize the input costs for the other choices of leasing, bank loans, or cash savings. If a person uses the same input costs (capitalization) in each of the other choices, then IBC losses every time. Being an economist, you must know that any comparison must equalize costs for verifying results. How do you condone all of the errors that are in Nash’s book and still think that the idea is valid if to date it has been economically unproven?

    3. A life insurance company is a lender of money and charge more for collateral policy loans than most other lending institutions do for their collateral lending. It is fair to compare collateral and non-collateral borrowing?

    Shouldn’t it be made clear to readers in order not to mislead them that IBC is comparing apples and oranges? Life insurance companies do not lend money without you having a policy and collateral in it. Other lending institutions do lend money even if you have no collateral with them.

    The only fair comparison is to give the same amount of collateral to the other financing choices. Do you agree that you must be fair to all choices before drawing an economic conclusion? If every other financing choice were given the same overfunding amount to equalize costs, then every other choice would have had superior results to Nash’s IBC concept.

    4. You state, “Was he (Nash) making some elementary error at Step 1 in his analysis? Could I just toss this slender book aside, and not have to waste any more of my time trying to figure it out?

    You were correct, Nash made a very elementary mathematical error right from the start and it carries through to all of the other calculations and conclusions.

    5. You state, “Part of the problem was that I knew absolutely nothing about whole life insurance. So, when Nelson in BYOB showed various tables talking about the dividends paid out on an insurance policy, and how you could use them to buy more “paid up insurance” and boost your “cash value” and death benefit to higher levels, I didn’t really understand what was even going on, let alone could I determine if his numbers seemed plausible.

    You are a brilliant man, a PHD, scholar, and successful. Yet you could not figure Nash out. How can the average agent or consumer figure it out? IBC itself states that most agents can’t figure it out either. They are all vulnerable. They want to believe it is true so they accept it as true.

    6. You state, “You can take out a loan from the insurance company, with the cash surrender value serving as collateral. Unlike other types of collateralized loans—such as a home equity loan—the insurance company doesn’t ask any questions when you apply for such a “policy loan.”

    You used a home equity loan to compare to the life insurance loan. That is an unfair comparison.
    The home is not secure collateral. They take risks. That is why there are all of those questions they ask. A bank savings account as collateral would be secure and no questions asked. A margin account with stocks is secure and require no questions asked. You must be fair and not compare apples and oranges.

    7. You made a statement that “the market value of the collateral on your life insurance policy loan can’t go down.”

    This is a false statement. The collateral of a life insurance policy can go down. Policies do lapse every day. If the cash values are going down because on non-payment of premium or for paying off the loan interest, the life insurance company will terminate the policy and keep the cash value.
    Not only that, but the IRS will come knocking on your door for back taxes and penalties.

    You must be careful in how you explain things to the consumer. They interpret your words in the most favorable light.

    8. Nelson’s point is that you aren’t “investing in life insurance,” rather you are setting up a very conservative financing system over which you have much tighter control, compared to any other readily-available option.

    What are those tight control? My knowledge about life insurance tells me that the policyholder does not have very much control at all. He does not control the most important aspect, the loan interest rate. It is variable rate and can run high as it did in the 1970’s. He does not control the dividends. They are not guaranteed. He does not control when he can get access to his money. The contract gives the insurance company up to 6 months to delay the loan. He does not control the MEC laws. He does not control the taxation of life insurance loans. He does not control the dividend recognition which can change at any time. He cannot use his cash values without surrendering the policy. He cannot control his own personal circumstances that may prevent him from making premium payments or loan payments. It seems to me that it is largely in the control of the life insurance company and not the policyholder. So what controls do the policyholders have?

    9. You state, “Obviously, if you end up with a higher net worth at age 65, using the same out-of-pocket cash flows, then you must have earned a higher “internal rate of return” with IBC than the alternatives Nelson considered. “

    Do you agree that Nelson’s comparatives were in error? That he did not equalize costs. He also did not equalize the amount of cars or the timing of the cars. If Nelson did everything according to proper economic analysis, it appears that IBC would lose every time. If that is so, people are going to lose money with IBC no matter what. But they could lose more money with other worse financial decisions. Do you agree with the statement that IBC is only better than other worse alternatives?

    10. You say, “the oft-repeated objection that the sneaky insurance companies “keep your cash value” when you die, completely misconstrues what the cash surrender value on a whole life policy is.”

    It is a fair and important criticism of IBC. We all agree that the life insurance company keeps the cash value when you die. No issue there. The issue with IBC is that it attempts to build up the cash values while it lowers the death benefit. It tries to keep the difference as close to the NMEC limit as possible. That means that the life insurance company is always at less risk with IBC that with any other life insurance strategy.

    That narrow gap difference is then minimized even further by the policy loans which are not collateralized by the cash values but by the death benefit. The accumulating loans at retirement will be deducted from the death benefit and not the cash value.

    If I buy an underfunded whole life policy for the same death benefits as an IBC policy, and I take all of the overfunded dollar difference and make a deposit into some savings vehicle, when I die, I get the death benefit from the W.L. policy and the side fund account used for financing.

    Thus overfunding is not as good as underfunding a life insurance policy. Herein lies the key to everyone’s financial well-being. IBC loses because it is in violation of all of the sound and safe economic principles of finance such as efficiency of money, effectiveness of benefits, control over costs, diversification of assets, flexibility to meet change, avoid fees and charges, tax deductions and tax savings, high death benefits, low risk, and simplicity and understanding.

    • Bob Murphy says:

      Hi Mr. Castiglione,

      You have raised many important issues. Can I ask two things though before I begin to respond?

      (1) Are you the same Robert Castiglione who founded LEAP, or is the name just a coincidence? (Doesn’t affect my answers, of course, just want to know if you’re the same guy.)

      (2) I’m guessing that you’re not typing your objections into my blog comments from scratch, that instead you are copying and pasting from a master file somewhere. Do you have these objections to IBC hosted at a blog or something? I.e. if I want to respond, I’d rather do so “officially” by citing your “official” position on IBC, rather than referring to a person entering comments in my blog.

      Thanks,
      Bob Murphy

  23. Mark says:

    Sounds to me as if someone (Mr. LEAP) is threatened that someone else has an idea or concept that may be just as good or even better than his. I wouldn’t hold much water in his argument. Everyone is entitled to their opinion. But opinion is not fact. LEAP too is about buying whole life insurance. Mr. LEAP is arguing that his system is the only way…all others do not stack up. Ok, he’s entitled to that opinion. I’m guessing more people are opting for the IBC way and that’s a big concern to LEAP. However, that’s capitalism. Competition is good. Its great for the consumer. Anyone who has looked into LEAP will know its MUCH more confusing than IBC anyways.

  24. Robert Castiglione says:

    Mr. Bob Murphy:

    Yes, I am the founder and creator of LEAP – Lifetime Economic Acceleration Process. I too am a graduate of New York University in Economics. LEAP was started by me in 1970 and became incorporated in 1980. Since that time, our members have sold over one trillion dollars of life insurance throughout America and Canada. Millions of people have been served with LEAP practices and procedures.

    Over 20 of the top and largest life insurance companies have awarded LEAP as their sales and training system. We are endorsed and approved as a compliant system under the rules and regulations of the life insurance industry. Our record of making millionaires out of life insurance agents is historic. The reason is that LEAP helps make millionaires out of their clients. The top producers from many companies are mostly LEAP life insurance agents.

    I was invited and have spoken at major industry conferences including the MDRT and GAMA. LEAP is a sponsor of GAMA, LIMRA, and FINRA. LEAP purchased the copyright rights and printed the revival of Dr. Solomon Huebner’s book called “The Economics of Life Insurance” the most important book ever written in the life insurance industry.

    I personally was awarded the Hall of Fame Award from my career life insurance company for outstanding achievement and a leader in life production, lives, and persistency. I could go on and on about my 44 year career and accomplishments as you have done in this blog. I am still today a consultant to many life insurance companies, agencies, and agents. I am retired from LEAP and have no financial responsibilities or income from that company. I also sit on two company boards unrelated to the life insurance industry.

    I did not mention LEAP in my post. Your readers would not have known me if you did not ask me to reveal my credentials. I wanted to addresses the issues on the same level as you. We both have economics backgrounds and educated from the same School of Business and Finance at evaluate. Readers want the truth. Agents need to know that what they are selling will not financial harm their clients some day. Consumers want to know what life insurance policy to buy and how to use the policy to their best advantage. We have a responsibility to be unbiased and use critical thinking that this subject.

    What an opportunity for agents and consumers to witness experts debating the merits of BYOB with real facts and illustrations, and perhaps for the first time. Let’s not hide behind closed doors. Let’s not do this in private. Let’s do it out in the open and in public to air out the truth. My position is that BYOB is a losing financial strategy of high cost, high risk, and dangerous to its policyholders. You have stated your position and have endorsed BYOB. Therefore, you must have some evidence or facts that can prove your position.

    And yes, my responses were from scratch, no notes, and not much time. The reason is that I know this subject cold. I invented it back in 1978. Many years later, Mr. Nelson Nash used my work to write his book. He thanked several of my LEAP best students in writing in the acknowledgement section of his first book. He stated that without their help he could not have written his book. As far as Pamela Yellen is concerned, she is a marketing executive with no financial background. She openly admits that she got the idea for her work from Nash. their books and advertising have errors and misrepresentations. If anyone ever did the math correctly using the same models in their books, BYOB and BOY would lose to all of the other methods of financing.

    My post still stands waiting for your response. As a social scientists, we are under the same moral code to present facts and support them with some basis of evidence and proof. I am ready to follow that code.

  25. Ryan says:

    Were the comments by Mr. Castiglione ever addressed anywhere? I have been trying to research these ideas on my own and it’s hard to know who is telling the truth. I currently have a policy that I pay almost $700 a month for and have almost decided that when the surrender value is equal to premiums I have paid into the policy, I will cancel the policy. I was interested in this idea of being your own banker but if you have to pay loans back with interest and then add interest back on top of that, I don’t see how just saving up until you have cash wouldn’t be better. Mr. Castiglione’s comments about making clients into millionaires while underfunding a policy have my attention because right now I am burdened by these high premiums and wondering what the benefit will ever be. I think Mr. Castiglione’s comments need to be addressed if they haven’t yet. I am no cheerleader for him and just now read of his LEAP program. I’m just a guy searching for the best avenue to spend my money.

  26. Robert Castiglione says:

    A reply to Mark’s post

    Mark states, “Sounds to me as if someone (Mr. LEAP) is threatened that someone else has an idea or concept that may be just as good or even better than his.”

    My Response: There was no mention, comparison, or explanation of LEAP in my posts, nor will there be.
    Your opinion is incorrect as well as speculative. My questions and issues are directly related to the veracity of BYOB and other life insurance banking systems.

    Mark states: “I wouldn’t hold much water in his argument.”

    My Response: My credentials were reported in my post above. Mark, what are your credentials? If you are too ask readers not to accept my arguments, then you should be able to provide your ability and credibility for making such a request.

    Mark states: “Everyone is entitled to their opinion. But opinion is not fact.”

    My Response:The top major life insurance companies in America do not allow their agents to sell BYOB. Their actuaries, legal staff, and compliance departments agree with my concerns that there are major problems, risks, and dangers with BYOB. Even the life insurance companies being used by BYOB agents have reported receiving more consumer COMPLAINTS than with all other sales systems combined.

    Mark states: LEAP too is about buying whole life insurance. Mr. LEAP is arguing that his system is the only way…all others do not stack up. Ok, he’s entitled to that opinion.

    My Response; LEAP is not being evaluated or compared here. Nor will it be. I have no intention to promote LEAP. I am responding to Bob Murphy, not as the inventor of LEAP, but as a human being concerned about ethical practices, honest disclosures, false marketing and advertising issues; and above all else the well being of consumers’ financial lives.

    Mark states: “I’m guessing more people are opting for the IBC way and that’s a big concern to LEAP. However, that’s capitalism. Competition is good. Its great for the consumer.”

    My Response: You are correct that you are just guessing. The readers and consumers will judge where my interests lie from my posts. My interest is not with LEAP, but with the readers and consumers.

    Mark states: “Anyone who has looked into LEAP will know its MUCH more confusing than IBC anyway”

    My Response: Getting an education is always more confusing than being uneducated. The complexity of the financial world is real. The world of finance and how to succeed in it cannot be boiled down to one life insurance policy and taking loans from it. To disparage all other financial products and financial markets is naïve.

    Mark, as an agent for BYOB, you should be providing evidence and factual information rather than fluff. Readers don’t want hype, fluff, or attacks on other contributors. They want to know right from wrong and why?

  27. Robert Castiglione says:

    We have never met but I want to say thank you for your open mindedness and intelligent approach to thinking about BYOB.

    Yes, you are correct, the truth is often hard to find these days especially when anyone can publish anything on the internet. It does not matter whether the information is true or not, it can be published – freedom of speech

    You mention that you have a policy that you pay $700 a month and you have almost made the decision to cash surrender the policy when the total premiums and cash values are equal. I would like to respond to your decision. It would be a big mistake to surrender the policy at that time.

    Life insurance is like finding a few pieces of gold along a path. Then you following the pieces for a long while not finding very much and barely paying your way. After some more time looking for more pieces, you eventually come upon the mother lode of gold. If you cash surrender your policy, you will be losing the opportunity of claiming your mother lode that awaits you. The mother lode does not lie in the area where the cash values or policy loans are found.

    BYOB agents tell you that you can (1) access your cash value, (2) by taking policy loans from yourself, (3) that the loans are tax free, (4) when you pay loan interest you are paying it to yourself, (5) when you pay the principal of the loan you pay it back to yourself, (6) and then you can use the same money over and over again. Isn’t that a wonderful story? There is only one problem with that story. None of it is true.

    Be your own banker concept is nothing more than a marketing scheme. It is not an intelligent financial strategy to use. The most valuable and important parts of any whole life policy are the tax free death benefits and the tax free dividends. It is not the cash values for you never get them unless you surrender the policy and lose the mother lode.

    Cash values are only created by premium payments. Premium payments are made with after tax dollars. That means cash values are expensive dollars because you paid taxes to acquire them. Whenever you overfund premiums you are overfunding taxes to the IRS. There is a large opportunity cost on tax for those overfunded premiums. That means that you did not just lose the tax dollars but you also lost the opportunity of earnings on those tax dollars as well.

    To borrow money to get supposedly at the cash values and have to pay interest with not tax deductible dollars, is again a disadvantage. But the worrisome part can be the variable interest rate which could compound the problems. If you pay back the loan, again it is with after tax dollars. If you do not pay it back, then it will 100% taken from your tax free death benefit. Either case, it is not good.

    The best life insurance strategy has always been using a standard whole life policy with a larger death benefit than the one used by BYOB. Avoid PUA riders for all they do is build cash values and prevent you from having diversified assets for income tax efficiency, liquidity, collateral loans, market growth, and more death and disability benefits.

    If you need individual help, I would be more than happy to answer your questions of line. I do not sell insurance nor will I charge you a fee. I offer this to you as a courtesy.

    • Ryan says:

      Thank you for the response. Initially I purchased my life insurance policy because a friend who was a new agent sold me on it as a way to make lots of money eventually.

      My thoughts were that I would eventually just surrender the policy once I had as much cash in it as I wanted. I was naive and not told at the time that all of the gains made would be taxed.

      I later became interested in the banking on yourself concept, mainly because of the idea that you are paying yourself back when you take a loan out and that you can pay it back whenever you want.

      Reading your comments I’m starting to believe that the true value is in the death benefit. That brings up the other debate of whether to use term or whole life insurance for those purposes. I think it’s fairly settled fact that term life insurance has far cheaper premiums so I’d be interested in why whole would be the better purchase.

      That is very kind of you to make the offer and I would actually like to speak with you about my current policy. Just let me know how you wish for me to contact you.

      • Bruce Wehner says:

        Ryan,

        I am a licensed insurance agent and though I believe Mr. Castiglione has some valid points I believe there is a danger to only looking at life insurance in a vacuum. If you are looking for a death benefit to be paid in the future then term insurance is not the answer from a probability view. A small percent get paid out. That is not to say that they have no value. If you are looking to compare whole life insurance as a place to store money and also get a guaranteed death benefit with littler risk than other savings vehicles than that is a place to store money. If you are looking for a place to invest your money rather than save and utilize your money than whole life would only be a starting place. Mr. Castiglione states that dividends are not guaranteed and that is correct, however if you look at their payouts compared to other savings places or for that manner other investment places there are insurance companies that have paid dividends every year of their existence for over 100 years and yes the loan interest rates are variable however if you chart the times the interest rates go up compared to the dividend rate increase you will see an interesting comparison that when loan interest rates go up dividends also go up.

        I would compare this to a savings vehicle rather than an investment vehicle and I would also compare it to money that you can utilize rather than money that you would place into prison such as 401K or IRA accounts where you cannot touch them without penalty. Google how much people took out of tax deferred accounts over the last 6 years and paid penalties for early withdraws.

        I hope I opened your eyes to the fact that you cannot get your financial education only from blogs on the internet. You must have someone with experience look at your individual situation along with your wants and needs.

        I tell all my clients that if there was only the one correct way to do things a computer programer could make a program and you would place the information into it and it would spit out the results. (by the way this is what many financial advisers attempt to do with charts and graphs on historical rates of return, talk about no guarantees!)

        There is no right answer, that is why you need, in my opinion different buckets of money to allow for as much flexibility as possible because life always throws you curve balls.

        Thanks for reading and good luck

  28. Ryan says:

    I may have missed this being advertised somewhere on the site, but I found the response I asked about. Starting on page 9 in the link, Mr. Murphy addresses the accusations.

    https://s3.amazonaws.com/IBC-LMRs/lmr_06_2014_web2.pdf

  29. Bob Murphy says:

    Mr. Castiglione,

    I definitely want to have an open debate with you on these matters, or if “debate” is too strong a word, an exchange of perspectives. The point would be to educate the public since this is admittedly nuanced and technical stuff at times.

    However, I don’t want to go back and forth in the comments of a year-old blog post. Can you email me so we can agree on something more appropriate? My email is rpm@ConsultingByRPM.com thanks

  30. Robert Castiglione says:

    Ryan:

    Thank you for posting the article “Defending IBC from Bob Castiglione” by Bob Murphy .

    All of my claims are 100% accurate. Mr. Murphy had to agreed with almost all of them in one way or other. But expectedly, he had to save face by twisting the words or the meanings of my criticisms out of context and without complete explanation. I can accept anyone trying to make the best out of a bad situation. Mr. Murphy is not a life insurance expert, he is an economist and perhaps a very good one at that, so we can allow him some room and time to absorb my criticisms of IBC as being truthful and accurate.

    It is unfair to me, the readers, and life insurance agents to only have a biased one sided article. Thus far, Murphy is unwilling, and I hope not afraid, to have an intellectual conversation with me to assess the veracity of IBC. I hope he changes his mind for the benefit of all consumers, readers, and those life insurance agents who really do care about the financial well being of their clients.

    All of my research over the last several year proves IBC to be a losing financial strategy and one that comes with very high risks and dangers. I support whole life insurance and have done so for over 45 years. I teach and train whole life insurance and financial positioning. I am no longer with LEAP and my only interest is truth in advertising and education about whole life insurance.

    All books, advertisements, and internet sites that do marketing for IBC, BOY, or other names for it contain numerous mathematical errors, hype, innuendo, false stories, poor comparison, outdated illustrations, bashing of all other financial services, misrepresentations, and misleading statements. I do not believe for a minute that Mr. Murphy endorses such poor quality work for public consumption. We should be focused on providing consumers with financial well being and not just rooting for life insurance sales at the expense of the consumer. .

    Let me now address and make comments on the criticisms Mr..Murphy addressed.

    #1. Mr. Murphy claims that I have a false impression of how a properly designed life insurance policy works.
    Wrong, I am well versed in the subject and can design an IBC policy myself. I am not challenging the IBC
    design, I am challenging the results of the IBC design.

    #2. Mr. Murphy states that I simply assert things about IBC that just aren’t true. again he is wrong.
    Every criticism I wrote about IBC is factual and true. Mr. Murphy does an excellent job distracting readers from the statement by interjecting his own interpretation of the statement or sidetracks you with unrelated or irrelevant comments. As I said Mr. Murphy tries to make the best of a bad situation. He has endorsed IBC. I allow him a little wiggle room.

    #3. To be fair, Mr. Murphy does mention that I make good points as we.
    He agrees that the advertising to the public is inaccurate and flagrantly untrue. But Murphy criticizes me for mentioning this, but then reminds the IBC practitioners why they must be more precise and transparent in explaining how the IBC system works.

    #4. Mr. Murphy sites what Nelson Nash stresses, “IBC is not a get rich quick scheme.” And I agree. I just go somewhat further and show that it is a losing scheme. I do not say that lightly without evidence and proof. Mr. Nash’s book is riddled with mathematical errors, false comparisons, and claims that are not true, far from it.

    #5. In the same vein, Mr. Murphy criticizes me for mentioning that the IBC numbers and stories do not work, but in the same sentence reminds IBC agents not to exaggerate claims or use analogies that mislead consumers.

    #6. Mr. Murphy states that I claim too much.
    I state that the IBC concept is not good for anyone to use. The reason is that it is a failed concept with significant risks and dangers. Mr. Murphy makes an irrelevant statement to support his criticism of me by saying, “especially when he advocates the purchase of large whole life insurance policies.” It is not whole life that is at issue. It is a great product. IBC states that it “turns whole life policies upside down.” It is that fact that makes IBC a losing strategy not whole life itself.
    #7. Mr. Murphy seems to think that my criticisms are just bluffs. I want to assure him that they are not. My reputation is not based on bluffing, it is based at finding out the truth and letting people know what that truth is. Financial truth can only be measured by accurate and scientific data. I have that data.

    #8. Mr. Murphy advocates term life insurance for young people. Term life insurance is not the answer. I am not an advocate of buy term and invest the difference. I am an advocate of buy traditional whole life, underfunded, and customized to meet individual circumstances by using the flexibility of whole life options.
    #9. I simply stated that life insurance loan interest was no longer income tax deductible while years ago all policy loan interest was deductible no matter how or what it use was. Mr. Murphy knows that this is true. I was providing information that compared loan interest to years ago. Mr. Murphy wiggle here a little by coming up with use of loan interest for investment use and business use. We all know that for business use life insurance loan interest might be deductible but not entirely only to the extent of the income produced by the investment or business. There are many hoops to climb through and some CPAS say it is not deductible at all. It is a matter of interpretation What the IRS will say in an audit counts, not what anyone else says. It is best not to test the IRS and put yourself in harm’s way.
    #10. I stated that years ago the loan interest rate was a fixed 5% tax deductible loan rate. Then I mentioned that today’s fixed rate was at 8%. Of course I meant to say a HIGH OF 8%. I THOUGHT IT WOULD BE OBVIOUS TO ALL THAT THERE ARE HUNDREDS OF LIFE INSURANCE COMPANIES AND THOUDANDS OF POLICIES TO CHOOSE FROM ALL WITH DIFERENT LOANRATES AND OTHER FEATURES.
    Mr. Murphy states, ”This demonstration should prove to the reader that Castiglione’s confident assertions are UNFOUNDED… and when he makes demonstrably false statements such as the above, it should leave the reader skeptical of his other accusations about IBC.” Mr. Murphy knows that I know there are thousands of other policies all with different features. I teach that stuff. If a stated a “high of 8%,” he could not say a word. This is called the “rule of the poison pen or the pen is mightier than the sword.”
    #11. I stated that companies are paying lower dividends to policyholders if loans are taken from the policy. Years ago, every policyholder received the same dividends whether loans were taken or not.” Mr. Murphy repeats his poison pen approach by taking a true statement and making it seem suspect. The purpose of my statement was to point out that times change rules and regulations and that nothing can be considered completely safe. What I stated is true. If I used the word “some” instead of “the” to start the sentence, then Mr. Murphy could have said nothing. This is nothing more than being picky and minutia, not disqualifications of my criticisms. I am in no way “trying to extrapolate from some carriers to the entire insurance sector” as Mr. Murphy claims.
    So I will add the two little words “high” and “some” to my statements from now on to satisfy Mr. Murphy. Yet he sits back and allows IBC agents and authors to lie and cheat the public by making false and outrageous claims. I do not see the fairness in that.
    #12. The statements made by Mr. Murphy about my comment regarding the MEC rules is another poison pen approach. My statement is exactly true and accurate as it stands. All I sated was that the IRS passed MEC rules to prevent consumers from overfunding their policies with high cash values and lower death benefits. If the MEC standards are not met, the policy becomes income taxable on withdrawals. That statement stand on its own two feet and is accurate.
    Mr. Murphy goes out to left field by claiming that my statement was the exact opposite of the actual history of the law. He is wrong again. I never mentioned rich people or hapless households as he did. Mine was a blanket statement that is true. Rich people are consumers too. My stamen applies to them and everyone. The MEC rule is now a tax rule and it has direct impact on IBC sales. Every life insurance agent and every IBC policyholder must be extremely careful not to cross the MEC line.
    #13. Mr. Murphy states that life insurance policies have “tax advantages”. “For example, a policy loan is not on a non MEC policy is not taxable income, so long as the policy is kept in force.” To be clear to readers, he should add, that if the policy is surrendered for any reason, intentionally or unintentionally, the loans become income taxable as ordinary income all due and owing. Also, depending on how the loan interest was paid, there could be serious tax consequences and penalties. So the tax advantage of taking loans from policies is not to be stated as “tax free” for they are not tax free. They are tax deferred if you surrender the policy. Too many IBC agents use the words tax free without any qualifiers.
    #14. Mr. Murphy in one section of the article states that my desire for accurate uses of wording to describe the workings of a policy as being petty. It seems as though Mr. Murphy is endorsing inaccuracy. Petty or not, words need to be used properly when describing a life insurance policy and how it works. It would only be petty id there were no financial consequence for consumers by any misuse. But unfortunately, most of the words I criticize do have an impact on the financial costs to consumers.
    Mr. Murphy is wrong to conclude that the cash value is the sole security for the policy loans. As I stated, the policy contract does not sate anywhere that the cash values are the collateral for the loan. Mr. Murphy calls that petty. But it is the most important aspect of how life insurance works that he does not seem to grasp. If the cash values were the actual collateral for the policy loans, as Mr. Murphy claims, then the policy would say so in black and white print in the contract. But it does say that. It says that the entire policy is the sole security for the loans not the cash value. Why?
    It is because if the cash values were the collateral, when the policy holder dies the loan would be forgiven since there was cash value collateral securing the loan. But that is not what happens. The life insurance company owns all of the cash value and keeps it. The outstanding loans are taken from the death benefit in addition to the company keeping all of the cash values. Life insurance companies are smart. They know how to use the correct wording in their contracts.
    #15. Mr. Murphy poison pen was active again in the next set of statements. He states:” It is extremely misleading when people like Dave Ramsey and now Bob Castiglione claim that IBC strips you of your cash values upon death whereas alternate strategies let you keep your side fund.”
    Throwing me in with Dave Ramsey is a joke. Dave Ramsey and I are as far apart as any two financial advisors can be. Not only that, I do not mind the life insurance company keeping my cash values. My whole life policies are underfunded so I have higher tax free death benefits than IBC, lower cash values than IBC, higher tax free dividends than IBC, all without worries of loans, MEC, changes in rules and regulations, etc. etc.
    The issue I have is that if you lower your death benefit and raise your cash values as IBC does, I think you are swimming in the wrong direction. At death, you want more death benefits, less cash value, and no loans. That is ideal and as perfect as it can be.
    For living benefits, IBC loses also. To have all of that overfunded cash value is dangerous. How do you get it out? It is taxable if you withdraw above basis. It is taxable if you take loans and then surrender or lapse. If you don’t surrender, loans are deducted from the death benefit so that is a double loss that you paid loan interest to have.
    The risk of variable interest life insurance loan rates going up is very real in the coming inflationary times. Loan interest is quick to move because it is based on an index. Dividends are slow to move because they are dependent on long term financial commitments.
    The taxation of policy loans is also very real. Insurance and annuities have gone through many changes over the years. If the IRS changes the taxation on loans coming out of insurance to being currently income taxed, and they might, that would be a terrible cost to all IBC policyholders.
    Is it possible that loan interest could go higher, dividend stay flat, and loans get taxed? Yes it is possible. I am one that believes that all three will happen. But that is not my reason for my position. I am a teacher of financial positioning. One should never have all their eggs in one basket or be in a situation that might fall apart due to no fault of your own. Defense is as important as offense.
    #16. Finally, Mr. Murphy makes no sense in his discussion of the Proper Comparison. He is wrong on every aspect that IBC is wealthier in the end. .
    Mr. Nelson Nash did not properly set up the comparison for any of the other alternatives including the C/D capitalization that Mr. Murphy claims was correct. I am surprised that Mr. Murphy made this error.
    When you lease a car, you have a payment a car.
    When you take a car loan, you have a payment and a car.
    When you save for a car, you have to wait until you have enough money to buy a car.
    When you capitalize a CD, and make payments to it, you wait to buy a car, you have no car.
    When you purchase an IBC policy as Mr. Nash shows in his illustration, you make premiums payments and wait to have a car.
    The fallacy that Nash falls into here is that the person does not have a car in the last three scenarios and has a car in the first two scenarios.
    This person has to have a car in all scenarios to equalize the scenarios for verifiable measurements. That means that the same out of pocket cost must appear in all scenarios, the person should have a car in all scenarios, and the same number of cars throughout the testing period. The only variable should be the purchasing or financing method used.
    When equalizing the timing of the cars, the number of cars, the out of pocket costs, the results show that IBC losses every time. Even leasing is better than IBC.
    In conclusion. Mr. Murphy did not disprove any of my criticisms. In fact the article helps me support my case. I will use his article to help verify the accuracy of my claims and the inaccuracies of IBC.

    • Richie says:

      Did you not see Dr. Murphy’s comment? Good grief.

  31. Ryan says:

    Mr. Castiglione,
    Excuse my ignorance as I am admittedly still naive about life insurance. When you mention underfunding a policy, does that mean you simply pay the premiums and avoid putting dividends back into the policy?

    I’m interested in the living benefits of the policy since the premiums I pay are very high compared to my salary. Am I reading correctly that an underfunded policy allows you to take out certain amounts of your cash value(not as a loan) without it being taxed? Say I take $20,000 from my cash value, does that decrease my death benefit by $20,000 as well? Do you advise against taking out a portion of your cash value for any circumstance?

    If you want, you may email me at ryanb_6@msn.com

  32. Robert Castiglione says:

    Ryan:

    Why is your premium very high compared to your salary? Are you capable of savings money any where else other than your policy? Do you have 401(k) or Roth IRA being funded? Do you have other savings or investments outside the policy?

    Why are you interested in the living benefits of a life insurance policy? and what do you mean by the living benefits?

    Is your life insurance policy one that was designed by an IBC or BOY agent or do you have a plain vanilla type policy?

    Underfunding means a permanent dividend paying whole life insurance plan designed to have lower premiums than IBC, higher death benefits, higher dividends and lower cash values. No loans are anticipated or desired but are available if needed only as a safety net. Large retirement income is the result, with peace of mind, no loan risk, no income tax risk on loans, no loan interest rate increase worries, and no lost opportunity costs.

    Human nature being what it is prevents IBC plan designs from being predictable. Any failure to pay a premium, to pay loan interest, to pay back loans, or borrow too much too soon, can disrupt the design and send it crashing down. With all of the uncertainties about the future, there is no way to know when an IBC policy will fall apart. The most dangerous time to own an IBC policy is when you retiree and use loans as a retirement income source income. Keep in mind the fact over the past 20 years, there have been more IBC policy owner complaints to life insurance companies than all of the other policies sales procedures combined. IBC has so many moving parts, complexities, lack of control, outside economic issues, tax regulations, consumer behavior, and unknowns that make IBC a danger to anyone buying such a plan.

    In a recent case I cam across, a person was told to get out of the stock market in early 2009 after the market went down. An IBC agent told her to cash in the investment fund for it was too risky and dump the proceeds into an IBC policy. .As of today, the IBC policy is has still not reached a profit and the investment would have earned her over $160,000 more than the IBC values thus far. She is sick about it.

  33. Ryan says:

    I make around $40,000 a year. 10% of that goes to my 457 account before taxes. So that’s around $4,000 with that account. My life insurance policy as far as I know is just a basic whole life policy that I pay about $690 a month for which takes my total between the life insurance policy and my 457 account to around $12,300. I will pay over $10,000 in taxes which puts us at $23,000. After all the payments throughout the year that I have to make are made, I’ve spent around $30,000. I know that leaves me a decent chunk to put away and I openly admit that I pay to eat out way too much :) but much of that money goes to doing things that I enjoy like vacationing with the family and certain things with the significant other.

    Outside of those two accounts, I basically keep around $5,000 in savings. No judging but I currently pay no mortgage and live with my parents, partially because I haven’t been able to save as much as I’ve wanted due to my life insurance policy. Even if I had saved for a down payment by now, I would would be struggling to pay a mortgage while I have the insurance policy.

    This brings us to why I am interested in the living benefits if any exist. I initially got the policy thinking that I could just wait until I accumulated a large cash value and then just surrender my policy with a lot more money than I put in. I was never told that the gains on this money was taxed. By living benefits, I mean how can the policy help me now and not just when I die… Or how could it help me in retirement. I guess that’s what IBC is claiming to do. I have been confused about what you have meant by it being a retirement income but I think now I am understand you to mean that the dividends are the income. When my policy was introduced to me, I was told that I could keep the dividends but I would want to put them back into the policy to make the cash grow bigger and faster. I believe 2013 was the first year that I actually received a dividend and it was just added back to the policy as far as I know. Would you consider my premium payment to be lower than one from an IBC plan?

    I know I am ignorant about all of these things so bear with me. I was sold on the policy by a friend at 23 and at 27 I am just now starting to look into all of this. I think around the 10 year mark of my policy the dividends are supposedly supposed to be able to cover the entire premium to where I would pay no premium. I just fear that I can’t continue to pay $700 a month until that time. It is true that I could be saving better though.

  34. Robert Castiglione says:

    Ryan:

    Thank you for sharing your information.
    Since you are young and single at this time, the role of whole life insurance takes on a different purpose than for other policyholders. The death benefit was not the primary reason as stated in your post. As your life continues on (and especially as others become dependent on you) the death benefit can play a more significant role.

    For now, the most important benefit is neither the death benefit nor the cash value of your policy. It is the Disability Waiver of Premium benefit. Make sure you have this benefit as part of your policy. If you don’t, call you agent friend and have it activated.

    If you are seriously or permanently disabled due to an accident or an illness for at least six months, the life insurance company pays the full premium for as long as you are disabled. The premiums payments will be tax free, without loan or recourse, until you are well again. The disability waiver of premium benefit assures no disruption to your death benefit while continuing to build the cash surrender value and dividends.

    Your policy is now into its four or fifth year which means it is entering its positive cash flow years. This gives you many choices regarding the policy’s living design and features. Those choices are (1) The amount of premium payment, (2) how to use your dividends, (3) how much death benefit you want, and (4) use of cash surrender value. You can design the policy to fit your individual circumstances, needs, wants and desires. These design choices will be discussed further below.

    Your 457 plan is a wonderful tool to own. Payments to your plan are pretax and grow income tax deferred. There are no age limits or penalties for withdrawal. No loans to take to get your money. Unlike whole life insurance annual premiums, single premium PUA rider, level premium PUA rider, term life insurance rider, loan interest, and loan principal payments are all paid with after tax dollars. This gives you an immediate 25% negative lost opportunity tax cost. In your case that will cost you over one million dollars at retirement as compared to the same dollars flowing into your 457 plan.

    Although taxes are deferred in your 457 plan, there are tax strategies that can be used to avoid paying or at least significantly reduce the amount of income taxes at retirement. The traditional IRA and 401(k) have the same capabilities to not paying income taxes on withdrawals using tax strategies. Your 457 plan gives you tremendous flexibility, pre-tax savings, tax deferral, and instant liquidity without penalty or loans.

    If you read most of the IBC literature and listen to any IBC agents speak about IBC, you will see or hear them trying to discourage 457, IRA and 401(k) plans. They want you to believe, even though it is not true, that your have to pay high income taxes on these plans. IBC also wants you to believe that borrowing money from an IBC life insurance policy is “tax free” and guaranteed without risk, neither of which is true.

    IBC literature and agents confuse people by overstating the disadvantages and underpaying the advantages of every other financial strategy such as 457, IRA, 401(k), 529, mutual fund, mortgages, bank loans, stocks, pensions, Social Security, and bonds. IBC uses what I call the “Worse, Bad, Good” marketing concept. It works like this, if you want to make a bad product look good, compare it too only worse products and hide or never mention the good products. It is a powerful marketing concept to the unsuspecting public.

    In my opinion, based on facts, IBC is more like a “living loss” than a “living benefit.” There are short term losses to IBC such as the after tax payments, lowering the death benefit, term life insurance costs, loan interest costs, loan principal payment costs, MEC risks, and the temptation to borrow more than you should. However, the most dangerous risks and losses happen at retirement. You have the potential to lose four ways:

    (1) If you cash surrender the policy you will pay ordinary marginal rate income taxes and not capital gains tax. That usually results in a net loss due to the effects of income taxes and inflation.

    (2) If you die, the death benefit is largely your own money because you overfunded with extra premiums after taxes dollars. The cash value gets closer to the death benefit at the maturity of the policy. They eventually come together in actuarial fashion.

    (3) If you borrow money from your policy for retirement income purposes, the loan accumulates higher and higher. The loan interest rate paid climbs too. You must pay loan interest with after tax out of pocket dollars. Can you imagine what would happen if loan interest rates rise, dividends decline, and policy loans are income taxable? These issues are the stuff that makes for the perfect storm brewing for IBC policyholders.

    (4) Then there is the “honest banker” fiasco of IBC. They want you to believe that paying more loan interest than the life insurance company requires is an advantage. These extra loan payments are again made with after tax dollars, therefore they increase the cost basis of the policy. These overpayments disguised as additional loan interest are nothing more than additional premiums payments buying more life insurance death benefits and cash values. That would be okay if cash surrender value was really a capital asset of yours and could grow in an unlimited fashion. But that is not the case. The cash value will equal the death benefit, and when you die, you only get one of those values.

    Here are some options you have now:
    • You can increase your 457 plan percentage of salary.
    • You can lower life insurance premiums to fit your budget and make room for 457 plan.
    • You can use your dividends tax free instead of tax deferred.
    • You can have the death benefit stay level or even lower it a little for improved cash flow.
    • You can take the 25% tax savings to invest with no risk of loss compared to the tax loss.
    • You can add a disability waiver feature if you do not have one.
    I hope this helps you understand your options better and see why IBC is a risky and losing strategy to follow.

  35. Ryan says:

    Robert

    Thank you! This has been very helpful. I just looked and I could have had over $800 in 2014 in tax free dividends, but currently that are being put back into my policy. I will crunch the numbers and consider whether to contribute more to the 457 plan and possibly decrease my premiums for my whole life policy.

  36. Bob Murphy says:

    Hi everyone,

    I have to close the comments on this post. Long-time readers know that I am very open to criticism, even harsh criticism (see: LK and Philippe). But I am not going to allow Mr. Castiglione to distort what I wrote, which he is now doing (in a comment that I deleted).

    I’ll leave his earlier remarks up, in the interest of openness. I I have already written a response to some of his initial claims.