“Buy Term Life Insurance and invest the rest!” That’s what the financial “experts” say, right?

That’s exactly what I did. Once I was married and immediately after our children were born, I shifted my focus to protecting my family.  

Upon qualifying for a policy, I passed my required physical and paid my monthly premiums. An 18-year term policy seemed right to me as that was the length of time it would take until our children were old enough to leave the nest and fend for themselves. My policy payment was set to monthly autopay and my head hit the pillow much easier at night.

Being a “buy the book guy” (as mentioned in Don’t Put All of Your Eggs into One Basket 12/31/22), I knew that this was the right decision and Whole Life Insurance was a high premium insurance product for suckers that most likely weren’t “investing the rest”.

Then, I took The Red Pill…

2022 was a year spent reevaluating my Financial Self.

Being a by-the-book automaton for 18 years bred confidence in my decisions that I was following the right path per the financial experts.

Constant market volatility caused me to pause and reevaluate. Where can I park money (along with traditional investment vehicles) where it can safely grow while earning a respectable return? There must be additional ways to allocate my resources and get more juice from the veritable squeeze.

I decided to go in search of more. More what? More options!

I revisited the “buy term, invest the rest” moniker to truly understand why Whole Life Insurance is for suckers.

The deeper down the rabbit hole I went, the more I found the insurance world “Wonderland” to be a vast world of financial exploration.

In fact, this strange new world is not new at all! Mutual insurance companies have been around since the 17th century.

Hang on, Alice; things are about to get interesting.

Term Life Insurance

According to www.guardianlife.com, at its most basic level, a term life policy is an agreement between the person who owns the policy (the owner) and an insurance company: The owner agrees to pay a premium for a specific term (usually between 10 and 30 years); in return, the insurance company promises to pay a specific death benefit in cash to someone (a beneficiary) upon the death of someone else (the insured). That benefit is usually paid income (unless the premiums are paid with pre-tax dollars)

Term Life Insurance Highlights

The length of coverage ranges around 10 to 30 years.

A health exam is required.

The cost to renew one’s policy after the initial term increases as the insured ages.

The costs of a term life insurance policy are typically 6–10 times less expensive than those of a whole life insurance policy.

According to bankrate.com, “99 percent of all term policies never pay a death benefit.”

This is a good thing. Most important is the fact that these people are not dying within their term. The article on bankrate.com also explains that many policyholders simply stop paying their premium, causing their policy to lapse.

Assuming I diligently paid my $30/month for 18 years: I would have paid $6,480 in total with nothing to show for it besides the missed opportunity cost of what I could have used that money for.

So why would I pay significantly more for a Whole Life Insurance policy?

Whole Life Insurance

According to www.guardianlife.com, Whole life insurance is a type of permanent life insurance that helps protect your loved ones in the future and your finances now. Whole life insurance offer two primary benefits: a guaranteed death benefit paid to your beneficiaries when you pass away, as long as you continue to pay the premium, and a cash value that can be borrowed from during your lifetime.

Whole Life Insurance Highlights

The length of coverage is permanent.

Note: one does not have to pay premiums forever. The length of time one pays premiums will result in differing policy results.

Your policy accumulates cash value, which the policy holder may access (more on this below)

Your fees remain fixed

It’s tax-advantaged

You can earn dividends

Major mutual companies have been paying dividends that credit additional death benefits and value for over 150 years. They’ve consistently done so, even during tough economic times.

Whole Life Historical Dividend Interest Rate: 20 Year History

Why should I pay significantly higher premiums for a Whole Life Policy when I won’t even be around to appreciate the death benefit?

This is the fun part. Your whole-life policy is essentially a vehicle that one can utilize to turbocharge their savings.

Yes, you are paying a premium for a whole-life Life Policy. And yes, those premiums are significantly higher than the term policy, which would provide you with tangible coverage to protect your family.

That higher premium unlocks one’s ability to accumulate significant dividends with a guaranteed, tax-free return on your savings. One may use this accumulation of high cash value like the way that one deposits and withdraws money into their savings account at a bank. This concept is called Infinite Banking.

Infinite Banking

According to infinitebanking.org, The Infinite Banking Concept (or IBC) is the process by which one becomes their own banker, as taught by the late Nelson Nash. In his definitive book on the subject, Becoming Your Own Banker, Nash explains how whole life insurance policies uniquely function as dividend paying assets through accrued equity. As Nash famously taught, the equity, or cash value(s) specific to whole life insurance policies, serve as collateral for all policy loans. So long as premiums are current, the policyholder simply calls the insurance company and requests a loan against their equity.

Not all Whole Life Insurance Policies are created equal

To take full advantage of the “Infinite Banking Concept” described above by Nelson Nash, one must have a properly structured policy.

Check out this video from Nash Anderson at www.alphacrusaders.com which describes the difference between a “Traditionally” designed Whole Life Policy vs. a High Cash Value Whole Life Insurance Policy.

Here is an example using simple round numbers to explain the concept:

Policy Example:  $500k paid over 10-Year Premium High Cash Value Whole Life Policy from a Mutual Insurance Company (more on the specifics below)

There are two places that your money can go in these types of policies

 1.     Base Premiums: the payment a policy owner agrees to pay for an insurance policy. This can be paid annually, semi-annually, quarterly, or monthly.

In this example, the annual premium would be $5,000. This is the minimum payment one would have to make each year for 10 years to keep this policy active.

 2.     Paid-Up Addition Rider: The “Rider” is a provision that can be purchased (typically baked into your premium) to provide further benefits beyond those included in the original policy. This (PUA) is the switch that flips your policy into a “cash dump”, building immediate cash value which compounds from day 1!

The Paid-Up Additions Rider allows one to continue to “overfund” one’s policy to a specific limit annually. In this example, the PUA allows the policy holder the option to overfund their policy with an additional $45,000 annually for 10 years.

 Overfunding the policy: the rider above allows one to stash additional money into a policy, up to a specified limit. This limit is called a “MEC” limit.  

The “MEC” limit is set by the IRS which has a relationship to your age & total amount of life insurance, and if you stay under this limit, the IRS does NOT treat this as an investment. If we go over this limit, we trigger unfavorable tax consequences. The policies can be designed to have any MEC limit, and the secret sauce comes from setting it just right and with high efficiencies to minimize fees and expenses. Your policy custodian can help you set up parameters to prevent you from “MEC-ing Out”

Back to our example; the ensured can put an additional $45,000 into the policy before it “MECs-out” if they choose. Here’s our current breakdown:

·      $5,000 that we put into our base premium (10% of my money) - required

·      $45,000 that we put into PUAs (90% of my money) - this PUA is optional

This additional payment of $45,000 has a high crediting rate to cash value and will now accumulate excess dividends at a minimum guaranteed rate and continue to snowball over time.

One may typically be able to access 80–90% of this cash value based on the individual's age, health, insurance company, and product selection.

 Policy Loan: Immediately after overfunding one’s policy, the insured may now borrow against the overall cash value.

·      In our example, that amount is roughly 84% of $50,000, which would allow you to take $42,000 as a loan.

Based on the product described in this example; after 10 years of paying a premium and overfunding, the insured is no longer required to pay the premium and loses the ability to overfund. This is called a reduced paid-up option. 

Reduced Paid-Up Option: The death benefit has been purchased and the individual remains insured. One still has all the policy benefits with the requirement or ability to make additional payments into the policy (i.e., additional PUAs).

The cash value continues to grow for the lifetime of the policyholder. The dividends credited to cash value & death benefit grow tax-free if you do not trigger a taxable event (refer back to “MEC-ing out).

As one accumulates cash value, one may use their whole life insurance policy as a bank. The cash value is now an asset to utilize, like your savings account, based on your discretion.

The best part: when used wisely, your cash value can accumulate in two places at once! Check out how below…

Example #2 (very simple, hypothetical numbers):

 In time, a policy accumulates $200K of cash value

Policy holder takes a $100k loan against the cash value of the policy.

There are two ways to borrow from one’s policy: either utilizing the policy as collateral through an “Insurance Backed Line of Credit” (IBLOC) or by a loan directly from your policy (more on this below).

The $100k loan is invested into a vehicle making 8% return, and the simple interest paid on that loan is 3%. We now have a 5% arbitrage, meaning extra money/leftover that goes into your pocket!

MEANWHILE: the initial balance of the policy ($200K) continues to earn a dividend at the guaranteed rate (typically 4-6% refer to the 20-year historical table above)

You just squeezed an additional 5% return ($5k annually on $100k), all while your OVERALL $200k CASH balance continues to grow safely in the policy.

These earnings are tax free and snowball over time. 

How Do I Get Started? 

First, identify if this is right for you. I recognize that there may be a broad range of fine individuals reading this blog. Each of you must evaluate your own personal finance strategy as it pertains to you and your goals. 

1. Time is on your side; the sooner one starts, the longer the power of compounding dividends may work its magic.

2. Find a broker (trained in designing “infinite banking concept” and/or high cash value policies) who can write for several different mutual insurance companies. Ask that broker to design and present options from several different mutual insurance companies.

a. The ability to sell a whole life policy is entirely different from being able to design a high-cash-value policy like the one described above.

i. Keep in mind: the lower the base premium, the less commission is paid to the broker. It also means, the more your money is working for YOU.

b. Confident Referral: My guy, Nash Anderson (featured in the video above and peer editor of this post) at https://www.alphacrusaders.com/ was and continues to be a phenomenal asset to me for all things insurance-related. I would highly recommend that you contact him as one of your brokers that you interview.

3. Don’t be as concerned with “Direct vs. Non-Direct Recognition” policies. This has to do with how to access your cash value via a policy loan and where the loan comes from. Find the best company, with the plan and flexibility that suit your situation.

a. Non-Direct Recognition: one may borrow money directly from within their policy, and the overall value continues to grow, even while money is loaned out at the same dividend rate.

b.     Direct Recognition: if one takes a policy loan, the money that is loaned out receives a different dividend rate on loaned funds than on funds that are not loans.

        i.     Direct Recognition can be favorable (higher dividend than normal) or unfavorable (lower than normal). In most policies, the dividend impact is unfavorable. A way of mitigating this is by opening an “Insurance Backed Line of Credit” (IBLOC) which is through a third-party bank and uses your insurance policy as collateral for the loan.

c.     Navigating direct vs. non-direct recognition is a topic widely debated online. One is not necessarily better than the other. You must decide which policy fits your needs.

4.     Add the Paid-Up Additions Rider: make sure your policy has the option to overfund the cash value, ideally up to 10x the amount of base premium (Ex. $5k to $45k, or $10k, to $90k—10% going to base premium, 90% going to PUAs)

5.     Borrow: if you need to or if it fits in your financial strategy.

6.     Pay Yourself Back: remember, YOU are the bank. Though you have the flexibility to borrow, you still have the responsibility to repay.

What happens if I have an outstanding loan and “graduate”?

Graduate is an insurance term for: kick-the-bucket, expire, bite the dust, burn out like a shooting star, die…

Example: you have an $800k death benefit, but $300k outstanding in loans when you "graduate.”

Your beneficiaries will receive the difference between the death benefit and your outstanding loan. For this example, it would be $500k (Math: $800k - $300k = $500k)

How am I utilizing my policy?

Remember the 529 college savings conundrum from “Don’t Put All of Your Eggs into One Basket”? I’m utilizing our policies as a supplemental savings vehicle to pay for my children’s education if they choose to go that route someday.

I’m considering starting smaller policies for my children (they are young, healthy and inexpensive to insure) to accumulate cash value for them to utilize in the future for:

-College Tuition

-1st Home Down Payment

-Wedding Costs

-Start a Business

-Start a blog?!?

Passive Real Estate Investments (further elaboration on Passive REI coming soon to the “Enough About It” blog): I utilize my policy as a vault or savings account to store earnings from passive real estate investments. I then borrow against the policy to participate in new investments.

Generational Wealth

When I do “graduate” (hopefully in a very long time from now), my policy may provide my beneficiaries with the financial resources to unlock opportunities. Financial opportunities such as: education, business investing, passive income generation or donating to their favorite charitable cause.

I do not look at my Whole Life Insurance policy as a “Retirement Account.”.

I have other vehicles for that. It is a savings account on steroids that offers me the same protections that my Term Policy provided but with additional tools.

My life Insurance policy truly is a Swiss Army knife with several tools for me to take advantage of in my financial journey. Maybe this makes me a sucker too, but the numbers don’t lie.

I generally think of my whole life policy as a safe, liquid, and tax-free area to position money, as long as I utilize it appropriately.

·       Safe, boring & stable returns throughout hard times. Not a gut checking stock market ride.

·       Liquid: You can access the cash value

·       Tax-free: uses after tax dollars to fund tax-deferred growth, which can be indefinite as long as we access appropriately, and finally… death benefit paid income tax free (as long as you are under the estate tax threshold, currently 25.84M for married couples)

A properly structured Whole Life Insurance policy provides me with exactly what I was looking for in the beginning: OPTIONS! 

https://www.alphacrusaders.com/

https://www.guardianlife.com/life-insurance/how-term-life-works

https://infinitebanking.org/what-is-infinite-banking/

https://blog.massmutual.com/post/mec-rules

https://www.dfs.ny.gov/consumers/life_insurance/glossary_terms

https://www.investopedia.com/terms/p/paidup-additional-insurance.asp

https://themoneyadvantage.com/direct-vs-non-direct-recognition/

https://www.nasdaq.com/articles/infinite-banking%3A-what-is-it-and-how-does-it-work

https://www.bankrate.com/insurance/life-insurance/term-life-insurance/

www.massmutual.com