Life Insurance Does Not Qualify!
The biggest mistakes include losing sight of the long-term plan and getting distracted by things you might read or the content you consume. In our ever-expanding mobile world, the videos that pop up on your favorite social media sites are distracting to your long-term investment goals. My wife Jenn enjoys TikTok very much. I can’t get into it, but I digress. Lately, clients tell me they see videos pop up on LinkedIn and their Facebook reels about a scam called the Infinite Banking system. The Infinite Banking system talks about a tax-free fool-proof investment where you become your banker. They claim it’s the secrets of the wealthy, and only the rich do it, and you never pay taxes. Right.
I used to sell life insurance 20 years ago. That’s how I started in the business, and I understand the life insurance industry pretty well. Becoming your own banker or Infinite Banking is a way people sell people big life insurance policies disguised as something else. In theory, it can work if done properly because the cash value inside permanent life insurance is tax-favored. You can take the cash value out via loans and withdrawals. It’s technically tax-free when you do that.
The way these things are sold is such a scam because they’re pushing them onto the general public, and for most people, infinite banking doesn’t work. Look, I own cash value life insurance, personally. I have multiple policies-I own whole life. I own universal life and variable life. I own a bunch of term. I have a succession plan funded with insurance in my business, and I own policies personally and on my family members. I’m a big believer in it, but the way some of this stuff is being sold is criminal because they’re going after ordinary people who are normal, upper-middle-class, middle-class folks who would be better served by education on cash management, debt reduction, and maxing out retirement plans. Some of these videos have catchy phrases. It’s the shiny stuff we discussed in previous chapters. Well, Wes Watson says the great stuff doesn’t shine; it glows. Shine requires outside light but glow burns from within. When it comes to the “infinite banking” concept, AKA “become your own banker”, I’ve almost never seen this work out well for the client.
In the early 2000s, mortgage brokers were teaming up with insurance agents. They were doing seminars and trying to sell people a dream. They told people to refinance their houses because real estate was increasing in value. Everybody had all this equity, and the mortgage and insurance people said, “Refinance your home, take out all the equity, and then fund these insurance policies with it, and then you could borrow the money out tax-free, and then you can buy cars, boats and TVs with it. Then you pay it back into the policy and never pay taxes.” Great strategy, right? It was criminal.
First off, regarding taxes, it’s your own money, so you better not be paying taxes. That’s the first scam. Number two, the fees are outrageous. There’s something called the internal cost of insurance. Remember, these are life insurance policies with death benefits. The first-year premium goes right to the agent’s pocket who sold it. Then, about half of the money you put in will cover the death benefit, the internal cost of insurance, and then whatever’s left goes to the cash value that you have access to via loans and withdrawals.
The next big problem was that all the real estate eventually started to crash when the recession hit in 2008, and what goes up must come down. Now, people were losing their homes, and they needed the cash back. They needed their money back from the policy, so they often times lapsed the policies to get their money back. If you cancel one of these policies in the first ten years (10 is the minimum, and some are longer), there are substantial penalties. They’re called surrender charges and the mortgage, and real estate people never talked about them.
These people lost their houses, lost their policies, and paid substantial penalties to get their money back. The sad part was a lot of good people got hurt while the insurance and banking folks made big commissions. History doesn’t always repeat, but it rhymes. What’s happening right now in 2022 is people are talking about infinite banking again. We’ve already seen this movie before, and it sounds familiar. Real estate’s going up, the market’s been on fire, and everybody’s got equity in their home. Like, “Yeah, let’s do that.”