21 Apr 2014

Term vs. Whole Life Insurance

Infinite Banking Concept 43 Comments

The latest installment in the videos for the Infinite Banking Institute:

43 Responses to “Term vs. Whole Life Insurance”

  1. Keshav Srinivasan says:

    Bob, I’ve asked this in past threads, but I haven’t got an answer: what if you have no bequest motive, i.e. no heirs and you don’t care about giving your money to charity after you’ve passed on. Then would whole life insurance still make sense?

    • Bob Murphy says:

      Well does the person want to accumulate wealth at all? Like he bulks up on assets, then starts draining them like crazy once he hits 75 and is pretty sure what his expenses will be?

      • Keshav Srinivasan says:

        Yes, I assume that’s what a person with no bequest motive would do. Once he gets sufficiently old and he doesn’t think there will be large unexpected expenses, he’ll be willing to spend all his savings.

        • Bob Murphy says:

          Well it’s true that one of the obvious advantages of doing IBC is that it allows tax-free transfer without putting it in a trust etc. So one of the usual advantages is taken away, if you’re going to try to time it so you end up with $0 on your deathbed.

          But even so, I think it still makes sense to do it, at least in a wide class of cases. The idea is that it offers a nice combination of safety, returns, etc. So that would still be true.

          • Keshav Srinivasan says:

            Well, what would be its advantages over keeping your money in a bank account in this case?

            • Somebody says:

              Higher interest
              Secured creditor
              Less money for banks

              • Keshav Srinivasan says:

                Somebody, why is it that you’d get a higher rate of return keeping the money in a whole life policy compared to a bank account (assuming you’re intending to plan things so that you get a $0 death benefit when you die)? What is the insurance company compensating you for with the higher interest rate?

  2. Gamble says:

    In lieu of income tax and other tax, individuals and small business should be able to fund their own insurance policy.

  3. Will says:

    Why is taking a loan out on a whole-life policy any better than simply taking out a loan with a 401k (or any other retirement account) as collateral?

    • Bob Murphy says:

      Will, there are limits on when you can borrow against tax-qualified plans. Except in hardship cases, in general you can’t do it; they want you to not have lien against that wealth because it’s paternalistically set up for your retirement, not for you to use before then.

      More generally, I talk about that aspect here. (Search the article for “collateral”.)

  4. Magus Janus says:

    Bob, what would you say is the best argument AGAINST whole life insurance?

    • Keshav Srinivasan says:

      I’d be interested in hearing Bob’s answer to this as well, because the way he sometimes talks about it, it sounds as if there are no disadvantages at all.

    • Bob Murphy says:

      Magus Janus,

      If you were pretty confident that the dollar would crash within the next year, then that would mute a lot of the benefits of setting up a whole life policy right now (as opposed to waiting for the crash and the dust to settle).

      But, I’m personally not so confident about the timing anymore, even though it wouldn’t surprise me at all if the dollar crashed next week. So that’s why I am funding my existing policy to the max. I have lots of bills to pay that are denominated in dollars etc., and for all I know we’ll be in this limbo for a while. Currency speculators obviously aren’t seeing the world the way I am.

      • Keshav Srinivasan says:

        “So that’s why I am funding my existing policy to the max.” What’s the maximum amount you’re allowed to put in?

        • Bob Murphy says:

          Oh it depends on the death benefit etc. I mean for a given policy, there are IRS rules about how much you can put it without transforming it into a “modified endowment contract” which loses a lot (but not all) of the favorable tax treatment.

    • Tel says:

      I would say any time you are reasonably confident of price inflation (as measured by the things YOU want to buy) you should keep away from a long-term dollar denominated investment.

      It doesn’t even require a dollar crash or hyper-inflation or some extreme scenario like that. Suppose you get 10% inflation for just 3 years, at any time during your investment… that’s knocked off one quarter of the value of your assets. Historically a 10% inflation scenario is unusual, but not unheard of.

  5. random guy says:


    I should have said higher return instead of interest because I was really thinking about the (non-guaranteed) dividends. Although, there is something of an interest rate built in to cash values which Bob wrote about and could probably link to.

    • Keshav Srinivasan says:

      OK, whatever you call it, why is it that the insurance company is willing to give you a higher return on your investment than a bank without any addsitional risk? Why wouldn’t they give you the same amount of money as a bank would? Fundamentally, what is the disadvantage relative to a bank that the insurance company is compensating you for?

      (And again, I’m asking about all this in the context of someone who has no bequest motive.)

      • Bob Murphy says:

        Keshav, on this score the logic is the same as why a bond pays a greater rate of return than a checking account. The bond issuer could default, and the checking account is FDIC insured.

        You get institutional investing and diversification by going through the insurance company and its portfolio, but strictly speaking every bond they hold could default.

        In contrast, if you think the government will remain solvent, then FDIC makes your checking account pretty safe.

        • Keshav Srinivasan says:

          Bob, then it seems to me that Somebody shouldn’t have listed “higher return” as one of the advantages of having a whole life policy as the home base for your money. Whether you have your money in a bank account or in a whole life policy, if you see a good investment opportunity, you can always take your money out of either savings vehicle and put into the investment opportunity.

          So in particular, if you had your money in a bank account, and you wanted to get a higher return in exchange for higher risk, then couldn’t you just invest in a bond fund rather than put your money into a whole life policy?

  6. somebody says:

    There’s no mutual insurance company without policy holders, and there are no stock holders. Instead of paying dividends to stock holders like banks, they pay dividends to policy holders, who own the company.

    • Keshav Srinivasan says:

      OK, but defense that IBC supporters usually make, when whole life policies are criticized for low rates of return compared to things like mutual funds, is to say that whole life policies are just meant to be a home base for your money, and that if you find a better investment opportunity elsewhere you can always take your money out with a policy loan and invest it wherever you like. The same is true of bank accounts.

      So if whole life policies have higher rates of return than a bank account in exchange for higher risk, that’s just like any other investment opportunity. You can always take money out of your bank account and put it in dividend-paying stocks if you like, or mutual funds or bonds if you want less risk. So I don’t see any clear advantage in keeping your money by default in a whole life policy than in a bank account.

      • somebody says:

        Taking out a policy loan and repaying yourself is nothing like withdrawing money from a savings account. It is a cash flow issue. When you take money out of a bank account, it’s gone. See ya. Out of here. POOF!

        When you use a policy loan and repay yourself, you are effectively paying for the good with someone else’s money, while you put your cash into your policy. So you end up with the same amount of cash as well as the new product or investment you purchased.

        Neat right?

        • Keshav Srinivasan says:

          Isn’t withdrawing money from a savings account and depositing it later analogous to taking a policy loan and repaying it later? In both cases you have no legal obligation to take the second step, right?

          • somebody says:

            No. For one, you lose the interest you would have earned on that money had you not withdrawn it. Secondly, it would be twice expensive to take money out of a savings account to pay for something and then pay it back later, as it would to take out a policy loan and then pay it back.

            • Bob Murphy says:

              Somebody just be careful, you need to account for the policy loan interest. I understand what you’re saying, but a newcomer might misunderstand and think it’s more powerful than it is.

              • Tel says:

                That brings up a good question. How does the policy loan interest compare with other things like bank account interest, mortgage interest or overdraft interest?

                Generally better? or worse?

              • Keshav Srinivasan says:

                Bob, I don’t remember you mentioning policy loan interest in your previous explanation of whole life insurance. So if you take out a policy loan, then your cash value and death benefit go down by more than the amount you take out? That’s a significant difference from a bank account.

            • Keshav Srinivasan says:

              “Secondly, it would be twice expensive to take money out of a savings account to pay for something and then pay it back later, as it would to take out a policy loan and then pay it back.” Why would it be twice as expensive? In both cases you’re taking money out, buying something with the money, and then at a later time putting the money back.

  7. somebody says:

    Also going to add there’s nothing preventing you from purchasing a whole life policy and then using policy loans to put money in a mutual fund. Then you end up with a mutual fund, a whole life policy and your money. Pretty brilliant stuff really.

    • Keshav Srinivasan says:

      “Then you end up with a mutual fund, a whole life policy and your money. Pretty brilliant stuff really.” Some of your comments make it sound as if whole life allows you to just instantly double your money. I don’t think that’s what you intend to say, but your language seems to be double counting things.

      • David Folger says:

        Long-time reader, first-time poster.

        So rates will vary a lot from one policy to the next. One of the lowest I’ve seen is on one of the IULs I deal with links the interest rate on the policy loan to the Moody’s Corporate Bond Rate, or roughly 4.5%. But I’ve also seen rates as high as 8%. Probably 5-6% is most common.

        So you might have a policy that pays 4% interest on cash value and charges 5% interest on the loan. This makes the net interest you pay on the money you borrow just 1%.

        But where it really gets neat is that the dividends paid on the policy can exceed that 1%, so that you actually on net earn interest on money you’ve already spent. That’s something you’re not going to get from a bank account. That’s really what’s key.

        • somebody says:

          “So you might have a policy that pays 4% interest on cash value and charges 5% interest on the loan. This makes the net interest you pay on the money you borrow just 1%.”

          David, I think this is only true if a policy’s cash value is equal to the policy loan right? If your loan is only sayyy half your cash value, 4% interest on the cash value is more than enough to pay for the interest on the policy loan is it not?

        • Keshav Srinivasan says:

          David, I don’t think it makes sense to count dividends as an unalloyed benefit compared to keeping your money a bank account. You’re getting those dividends in exchange for additional risk. If you like that sort of bargain, you can always withdraw money from your bank account and invest it in bonds or bond funds. That’s not a reason to keep your money in a whole life policy.

          • Somebody says:

            Keshav, your bank deposits would likely become stock shares before one of the major mutuals missed a dividend payment.

            • Keshav Srinivasan says:

              But it’s equally true that there’s almost no chance that a bond fund with AAA rated bonds will fail to give the promised return. And in any case, at least according to Bob the insurance company’s money is invested in bonds anyway. So it’s just one bond fund versus another.

      • Somebody says:

        Depends. You can actually more than double your money with a PUA, which will allow you to borrow up to about 20k right away, and your annual premium payments are about a fourth of that.

        Yea baby!

        • Keshav Srinivasan says:

          But how much would the PUA rider cost?

          • somebody says:

            It’s included in your annual premium payments.

            I’m adding that in all my posts, I was assuming you repaid your policy right away. Even then you should still pay back the interest rate you would have had to have paid had you borrowed from the bank.

  8. somebody says:

    Okay, Bob is right, I did not account for the loan interest.

    Sorry I missed his comment before.

  9. The ATeam says:


    There are probably three primary sources of excess return for a whole life policy vs. a bank savings account. The first is that you get access to the insurer’s investment management. Most of that is just bond/residential mortgage type assets that you could get more easily through a mutual fund. Part of it would be in types of assets that are harder for typical investors to get access to – private equities and bonds, commercial mortgages, etc. So, extra investment risk is part of the picture, but it may be risk you are simply unable to take through other channels.

    Second, the insurance policy is far less liquid than your checking account. Yes, it is simple to take a policy loan against your cash value and your contract may not even require you to make the interest payments (they just deduct it from your remaining cash value), but if you do not maintain a positive cash balance your contract will lapse with the previously untaxed earnings suddenly becoming taxable with extra tax penalties depending on your age.

    Most important to the higher return is the tax arbitrage. Assuming you play the game well and avoid your contract either lapsing or becoming a modified endowment contract, your cash value accumulates tax-free and you don’t have to pay taxes on any policy loans you take. Over a long time horizon, the comparison to a checking account will be similir to the difference between a Roth IRA and a taxable investment account – the taxes savings can be enormous. This is where the bulk of the net excess return is coming from. Given the fact that this tax arbirtrage is bound so tightly to an extremely long-term insurance contract, the product doesn’t really begin to make sense to me until you are putting enough away to fully utilize all of your tax-qualified options like 401k’s & IRAs.

  10. Matt M (Dude Where's My Freedom) says:


    If your recommendation is that we seek out one of the professionals certified with your institute, then what’s the benefit from reading the books and watching these videos? Is this concept so complicated that the books and videos still wouldn’t be enough to fully grasp it and we’d still need hired professional help? If so, why spend a lot of time and effort learning a concept if I’m going to have to pay someone to walk me through it anyway?

    I’m interested in learning more about this, but I probably won’t bother if the light at the end of the tunnel is “and now you go and pay an advisor to implement it for you.”

    • somebody says:

      The books/DVDS are mostly about getting you in the right mindset and having a basic understanding of why dividend paying whole life insurance is a superior option for the conservative portion of one’s portfolio. However, as far as understanding how to best implement the IBC, you need to either study it more deeply after grasping the general principles or get a certified advisor to assist you with maximizing the system’s potential.

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