07 Nov 2009

Another Advantage of Mutual Whole Life?

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I still have to wrap up some other projects, but soon I plan on going full-steam into my Austrian exposition of Nelson Nash’s “Infinite Banking Concept,” which I’m writing with Carlos Lara. Part of our pitch is going to be that a whole life insurance policy (with a mutual company, not a stock company, and which is properly “loaded” for tax purposes) is an excellent vehicle to serve as your own personal bank not because it is the best “investment” on any individual criterion, but rather because it’s very good on all criteria.

For example, you can definitely find other investments that have a higher rate of return than what you’ll get from socking money into a whole life policy. However, if you use your policy the way Nelson Nash envisions–e.g. by financing your cars through it, and running your accounts receivable through various policies if you have a business–then when all is said and done, your internal rate of return is actually a lot better than what you’d think from just looking at the prospectus.

For a different example, another criterion of the dream investment would be one where you instant access to your money. So probably the ideal thing here is actual cash under your mattress. But whole life is very good in this regard, and in fact is arguably safer than even a checking account.

Why? Because the government can empty out your bank accounts. Just ask Roderick Long. He wrote in July on his blog:

Several months ago, the Alabama Department of Revenue decided I’d underpaid on state taxes from ten years earlier. (I wasn’t aware of having done so, but I don’t have those records any more and so can’t prove otherwise.) After they’d added on interest and late fees, the total due was about $12,000. I submitted a request form to pay it off in installments; they never said yes or no to the request form, but I kept sending in payments and they kept cashing them, which led me to be more sanguine than in retrospect I should have been.

Then suddenly today, without warning or announcement (either from the tax department or from my bank), the tax department completely cleared out my checking account, and my savings account, and my mother’s checking account (I guess because we’re joint on it), leaving me $8000 overdrawn to boot.

I found out the money’d been taken only by checking my balance online today – and I had to go to the bank in person to find out it was a tax levy (the online balance had no information about who’d withdrawn the money).

My college salary doesn’t start up again until September, and I have no relatives from whom to borrow, so here I am with no money (or actually, negative $8000) for food, rent, or bills for the rest of the summer.

I haven’t had a chance to contact either the tax department or a lawyer yet (having spent the afternoon waiting and waiting at my bank), but I’m not exactly optimistic about getting a swift and favourable resolution.

(You can click on the above link to get the latest developments.)

Now it is my understanding that the IRS and the courts cannot seize the cash value of your whole life insurance policies. Perhaps it’s a slight benefit, as in if you withdraw any money then they take it. But my understanding is that they technically can’t just grab it, the way they can take your checking account balance if they think you owe them money.

Can anyone confirm or deny this? As always, I would prefer it if commenters actually knew what they were talking about on something like this.

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