Consulting by RPM || Free Advice Blog

I’m Guessing Gary North Won’t Give Us a Blurb…

…on Carlos Lara and my forthcoming book marrying Austrian economics and Nelson Nash’s infinite banking concept. North exploded on the topic:

Whole life insurance is bought by economically ignorant people. The industry profits from buyers’ ignorance. It charges huge commissions, which are paid to salesmen. This is why corrupt salesmen over time cease to listen to their consciences about deceiving the ignorant….

A whole life policy is not indexed for price inflation. Your savings portion gets destroyed by inflation.

I call it a sucker’s product. You may want to call it something else.

Families need term life insurance. But insurance companies like the fat profits on whole life, so the salesmen are rewarded well for selling whole life policies.
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If you don’t want to spend money, read this article by Dave Ramsey. He gets to the heart of the matter.

Sadly, over 70% of the life insurance policies sold today are cash value policies. A cash value policy is an insurance product that packages insurance and savings together. Do not invest money in life insurance; the returns are horrible.

His conclusion is my conclusion: “Don’t do cash value insurance! Buy term and invest the difference.”

I regard anyone who sells whole life policies as morally corrupt. He knows they are losing propositions, but he will not sell term policies that would adequately protect widows and thier children in their time of terrible loss. The whole life policies are so very profitable. “Let other men’s widows do without. My widow will do just fine.”

The reason whole life policies have such high commissions (“loads”) is that companies know that the salesman’s time is very valuable. If he can get in the door to make a sales pitch, the company wants him to sell whole life policies. The company pays accordingly.
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A WOLF IN SHEEP’S CLOTHING

A month ago, one of these self-deluded sellers of deception joined this site. He wrote to me two days ago.

I just subscribed to your website to learn about your views on money. A close friend and client of mine recommended you to me. So I went by faith and paid the $14.95 for the first month. My main reason to join was to find out what you felt about life insurance. Once I read your thoughts and advice I instantly got offended. I am very familiar with Ludwig von Mises and Murry Rothbard’s works. I have studied “Human Action” intensely. I’m not an economist nor do I want to be. My profession is providing life insurance to clients. About 95% of the type of insurance I provide is whole life. What you said about whole life insurance is true, but it’s not all like that. I suggest that you do some research about what whole life can actually do for a person in their living years…called a living benefit.

He then referred me to websites of some really big-time deceivers. They re-package the lousy product in order to sell to ignorant people with even more money to waste.

The concept is called “infinite banking.” It’s also called “become your own banker.” It is really “Whole Life for Dummies With More Dollars Than Sense.”

Here’s the deal. You buy a high-commission policy. Then, after six years, the company lets you borrow against it. You pay the company interest — to “yourself,” the ads claim.

If you know what whole life insurance is, there is nothing new here. Any whole life policy lets you do this. Then what’s new? Packaging. They sell the same miserable policy to people with more money.

Go to a CPA. Ask him if you can borrow against any tax-deferred retirement plan. You can if you follow IRS guidelines. You can put in the money and borrow when you want it. You pay interest to your plan — not to an insurance company. You are your own banker.

Do you want to start your IRA with a super-high-commission mutual fund or a no-load fund? A no-load fund. Why? Because you can borrow more money from it. You don’t give up a lot of front-end money to a salesman.

This preposterously poor investment plan has been around for 30 years. A critique is provided by two sellers of universal life policies, who complain that the whole life salesmen tell people that the deal is available only to whole life buyers. This cuts the universal life salesmen out of the territory. They deeply resent it. Read their critique here. It’s aimed at insurance salesmen, not buyers. They are furious that the whole life agents are raking in the commission money from rich people berfore universal life salesmen get to them.
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This re-packaged hustle is what my subscriber wanted to show me, so that I would understand that whole life can be a very good deal for buyers. He wrote:

The reason I took the time to write you is not to argue about insurance. I want individuals like you who have a following to be speaking the truth about how people can use life insurance effectively. The Lord requires us to seek knowledge and understanding. I pray you take the time to look up the websites. It will benefit you and your life more than you thought possible. Also, give me a call if you would like to speak further about this subject. I’m always wanting to learn about the truth. I have found some great articles written by you. I think you’re doing a great job. Thanks for your time.

I do not like being lectured to by someone I regard as an immoral deceiver of the naive and trusting. When they invoke God’s name, this enrages me as few other things do. That this man thinks I want to hear his self-serving views on this high-commission product is simply astounding.

I have studied this subject for 35 years. Yet he wanted to straighten me out. The product is inherently deceptive. It offers high-priced death insurance under cover of savings — a savings product as poor as the death insurance portion.

I encouraged him to either quit selling the product or quit my site. I called him what I think he is: immoral.

He sent a letter back saying I was mean and that he would pray for me.

This is the second time I have gotten this response from a Christian seller of whole life policies. The first time was about 25 years ago at a Christian conference. Someone knew of my views on whole life insurance. He said I should talk with an insurance salesman in the room. I did. I told him exactly what I thought of his career choice. He said he would pray for me. As I walked away, I said to my companion: “He spells that p-r-e-y.”

Carlos and I are actually visiting with some life insurance executives next week, as part of the research for our book. Although we are not necessarily going to get bogged down in the technical details, I told Carlos that I wouldn’t be comfortable writing the book unless I understood exactly what happens when an owner borrows against his policy, etc.

A lot of people have been peppering me with questions about “becoming your own banker” through a whole life insurance policy, but I have had to defer my answers until I sit down and really try to write the relevant chapters. If it turns out that I can’t “make the numbers work,” then I told Carlos we are going to have to either abandon the project or be frank with the readers that we are discussing a strategy that is poor in some respects but advantageous in others. (In Nash’s book, he has several numerical examples where it looks like a no-brainer that you do great by investing your cash flow into a whole life policy, but it’s not always clear where his numbers are coming from, and what alternative options could have been available.)

At this point let me say three things:

(1) If you follow the link, you will see the gentle tone of North’s correspondent versus the smackdown North administered. I can’t speak for all proponents of whole life, of course, but Carlos and some of the people I have met through him are certainly sincere in their beliefs that they are freeing people from financial bondage by teaching them the ways of infinite banking. They could be idiots, of course, but the people I have in mind aren’t crooks.

(2) The people who are implementing Nash’s idea aren’t simply gullible folk with middle incomes. As North’s article reveals, the very wealthy are some of the prime demographic for the technique. And it’s not even heirs who don’t know finance; there are plenty of doctors and other professionals who (for example) set up third-party leasing companies to finance their office equipment with cash flowing through whole life policies. Say what you will, but when people take Nash’s idea this far, that should be a hint that maybe it’s not self-evidently stupid as Dave Ramsey suggests. You need to think about it more than just glancing at a table of internal rates of return.

(3) North mentions the ability of borrowing against other assets. For example, if Nash thinks it’s such a great idea to, say, borrow out of your whole life plan in order to buy your next car, and then “pay yourself back” with interest, then why not do the same thing borrowing against your IRA? I asked one of Nash’s devotees this very question, but in the context of paying cash for a car if you had the money in your savings account. He answered (paraphrasing), “Because with a savings account it’s a sinking fund. With whole life, the money you borrow is still in the policy, rolling over at interest.”

I didn’t understand how this could be possible, so he elaborated (again paraphrasing): “When you borrow from a whole life policy, there is a lien against the death benefit. So if you die before paying it back, they subtract what you still owe before giving you the payout. If you withdraw money from your savings account to buy the car with cash, then that money is simply gone.”

Now I am still undecided on whether there really is something significant here, or whether it is a “distinction without a difference” as they loved to say in debate. My point is that it is just possible that the quick rat-tat-tat disposal of the notion of whole life banking is wrong, and that Nelson Nash really did discover something amazing.

But I won’t know for sure until I start writing the chapters to convince the reader–because that’s when I will see if I can convince myself. In other words, I have heard the arguments from both sides, and I am going to have to sit down with Excel and do it myself, but only after we meet with the life insurance guys and I really understand what’s going on when they calculate the policy owner’s cash value, death benefit, and so on.

Stay tuned. And if we end up going forward with the book, don’t send it to Gary North!