Another IBC Hit Piece: “Policy Genius” Edition

The title of a July 15, 2022 article at Policygenius is (painfully) entitled “Infinite banking life insurance is the latest TikTok trend — is it also a scam?”

Who?

Policygenius describes itself as “the only insurance marketplace combining cutting-edge technology with the expertise of real licensed agents to help people get the coverage they need to protect their family, property, and finances with confidence.” They have “rigorous editorial standards” for articles that “are written and edited by a best-in-class editorial team, then thoroughly fact-checked by licensed agents and certified financial planners.”

In particular, their “educational content is based on empirical evidence and carefully sourced research.” They “always cite [their] sources and regularly update pages to reflect the latest data and insights.” Furthermore, “[w]hen needed, [their] experts look to trusted, qualified, independent individuals …to provide additional insight and clarification on a topic.” And of course, their “team regularly reviews sources so that they’re using the most up-to-date information.”

Of the nine folks who make up the “editorial leadership” of the organization, all are editors or journalists. One is licensed to sell insurance.

Home insurance, that is.

Setting the Stage

Before we get into the listicle part of the article, let’s address some of the preliminary comments.

“Tiktok videos touting a certain type of life insurance as a way to build wealth have gone viral.”

Furthermore:

The Corporate Finance Institute defines infinite banking as the use of whole life insurance policies that distribute dividends to build wealth.

Wealth is goods and services. The purpose of the Infinite Banking Concept (IBC) is only indirectly to build wealth. The purpose of the IBC, most directly, is to build capital. Capital is essentially the usable monetary value of property.

Second, whole life insurance “policies” do not “distribute dividends.” Mutual life insurance companies pay dividends if and when they are declared. Unless a policyowner changes his dividend election and instructs the life insurance company accordingly, these dividends are not distributed to the policy owner, either. Instead, and advisably, they are applied to the policy in the form of PUA premium, which, in turn, contributes to death benefit and cash value growth.

But maybe this is too quibbling. Let’s push ahead.

Whole is a type of permanent life insurance that does not expire and accumulates a cash value separate from the standard death benefit that insurers pay out to the beneficiaries after the policyholder dies.

Cash value is only “separate” from the death benefit on a whole life insurance policy insofar as it is a different number. But this sentence might give the reader the impression that cash value is “separate” and unrelated to the death benefit. This is not the case. The cash value of a dividend-paying whole life policy is what the death benefit is worth today. Therefore, it is literally the case that without death benefit, there would be no cash value. Cash value is a function of the death benefit.

This is not the case in other types of “permanent” insurance like universal life (I do not agree with the use of the term “permanent” when describing universal life, but that’s another story for another time). In these other types of “permanent” insurance products, there is a genuine sense in which the cash account value is in fact “separate” from the death benefit. This is why cash account value in universal life is not guaranteed, whereas in whole life the cash value is guaranteed.

Next!

The goal is to increase cash flow by borrowing against an existing policy as opposed to a traditional bank.

“Increasing cash flow” is not the goal of the IBC. Perhaps the author has watched too many of those TikTok videos where the financial entertainment types simply cannot help but indulge themselves in the click-funnel, click-bait marketing hysteria of our day.

The goal of the IBC is, as the title of the book that first explained it suggests, is Becoming Your Own Banker. That is, the idea is to finance the things you were going to finance anyway through the IBC method, rather than with conventional financing. You do not have to go and craftily devise new mailbox money, passive cash flow, side-hustle, solopreneur, or real estate investing types of alleged cash flow generation schemes to implement the IBC. All IBC examples in Nelson’s book consider purchases that the individual was going to make anyway.

Portraying IBC as something intended to help click-bait addicts become better cash-flow investors is therefore misleading. Now, can an individual investor utilize his policies to finance his investment activities? Of course. And in fact, Nelson argued that “capital attracts opportunities.” That is, the better capitalized you are, the more money you can get to, the more favorable the landscape of investment and entrepreneurial opportunity becomes.

One might go so far to say that in order to become extremely successful as a legitimate investor, it is not an option but a requirement to have access to capital — and the more of it, and the more favorable the quality of access to it, the better.

But this is not the same thing as the insinuation that IBC is only for unusual, independent investor types. That is the opposite of the truth.

Now we’re getting to the meat…

The concept, as Flocka and other infinite banking fanatics make it sound, is easy — you open a life insurance policy that generates money, and then take out a loan against your own money.

The use of blunt instrument-style insults like “fanatics” reveals more about the author than the folks she intends to caricature and diminish.

Life insurance policies do not generate money, unless, of course, we are talking about the death benefit, which, ultimately, will be paid to beneficiaries upon the passing of the insured. Even then, the death benefit is a future cash flow. It is not money today.

Money is the general medium of exchange. By doing IBC, you do not get more “money” in the same way that when you pay down a mortgage on a house, you do not get more “money.”

In both cases, what you get is more capital. Another word for capital is equity. IBC is a capitalization strategy. The idea is to build financial value that you can deploy in the future. This capital in a whole life policy is not “your money.” There isn’t any money there in the first place. It isn’t as though there is a chest somewhere at the insurance company with money equal to your cash value sitting inside. No. Cash value is just that: value. It is what the death benefit is worth today.

Would you say that the equity in your home today is “your money?” If you did, you would only mean it metaphorically. It is as if equity in real estate or life insurance is “your money,” but technically speaking, it is not. Try telling the mortgage lender that you have a right to “your money” (the equity in the home) and then watch as they chuckle and hand you a ream of application paperwork for you to fill out so that he can determine whether you can get to “your money.”

The sloppy use of economic terminology is materially misrepresentative, because it gives the impression that advocates for IBC portray cash value as though it were effectively the same thing as cash in hand or cash in the bank, which we do not. It also conceals other secondary and tertiary implications, like the fact that cash value grows everyday, guaranteed for the entire life of the insured, and that because of the lack of interruption, a special kind of growth pattern called compounding or non-linear or exponential growth manifests. The convenient use of “gosh-it-sure-sounds-close-enough” language is a common tactic that detractors use to blur distinctions and thereby make the job of tearing down an idea easier.

Let’s keep going.

The term [infinite banking] was coined by economist Nelson Nash in the late 1980s and popularized in his book “Becoming Your Own Banker.” According to Nash, you can use the cash value that is unique to whole life insurance policies — as opposed to other kinds of insurance, like term, that don’t have a cash value component — to act as collateral for policy loans.

I give the author credit for mentioning the name Nelson Nash. In doing so, she has done a better job of attribution than many of the financial entertainers on TikTok on other social media who seem allergic to publicly acknowledging where they got the truthful part of their half-baked marketing schemes. So good job Policygenius!

Otherwise, I just have one small criticism here.

Cash value is not the collateral on a policy loan. The collateral on a policy loan is the death benefit. With respect to policy loans, the cash value, which is what the death benefit is worth today, is how much of the death benefit you can collateralize.

We know that death benefit is the collateral on a policy loan because of the definition of collateral. Collateral is the thing that a lender seizes when a debt goes unpaid. The thing that the lender “seizes” when a policy loan goes unpaid is not the cash value, it’s (some of) the death benefit. If an individual insured passes away while a policy is in force, then the amount of policy loan indebtedness is subtracted from the death benefit. What’s left of the death benefit is paid to beneficiaries.

Short-hand discussion of “cash value collateralizing loans” is understandable, but I figure a technical distinction is important what with all of the allusions to expertise and rigor in Policygenius’s editorial policy.

Moving on…

Experts interviewed by Policygenius explained that taking out a permanent life insurance policy for the purpose of building wealth isn’t a one-size-fits-all solution to financial planning. In fact, it’s not an effective strategy for most people.

These are journalistic nonsense statements. First, we have a straw-man: no one has claimed that the IBC is “a one-size-fits-all solution to financial planning.” Then, we have both a wildly generalized and equally wildly firm conclusion regarding whether IBC is an “effective strategy.” Effective strategy for what?

Of course, there is no explanation. And how could there be? So far we have seen that the author of the piece does not understand the technical nature of the policy itself, so how could she know whether it is an effective product or what it would be effective for? Unfortunately, in this case, it looks like the author’s conviction for her conclusion outweighed her lack of understanding.

The Five “Genius” Insights

Next comes the “5 things you need to know about infinite banking life insurance.” Who knew there were only five?!

1. You’re not really taking a loan from yourself

There are a few different caveats to consider when it comes to the infinite banking concept. Although it sounds nice to take a loan from yourself, that’s not how whole life insurance policies work. You’re actually taking a loan from the insurance company, and you still have to pay it back with interest. If you don’t, you risk your cash value depleting even further or your policy lapsing.

The people who claim that a policy loan involves borrowing your own money are wrong. Of course, we can understand why the author wouldn’t know that, since she does not site any of the Nelson Nash Institute Authorized IBC Practitioners in the article. In any case, it isn’t a big reveal or a special secret that policy owners are not borrowing from themselves. In fact, the idea that policy owners do borrow money from themselves is one of the most common misconceptions about the IBC.

The last sentence is tricky.

She says that “if you don’t [pay the loan back with interest] you risk your cash value depleting even further or your policy lapsing.” This requires some unpacking.

First, we acknowledge that policy loans incur interest. This information is front and center in the short 92-page book that the author cites in the article itself. This is not a secret.

However, policy loan interest rate regimes are the most favorable interest rate regimes on the planet because a policy loan is the only credit transaction in the world where the lender is also the guarantor of the collateral. All else equal, the volume of interest due on these unstructured (policy) loans is less than that payable to a conventional lender. I discuss policy loans at length in Part 4 of my course Whole Life Insurance Mechanics.

Then she implies that policy loan balances cause cash value to decrease: if you don’t repay loans with interest “…you risk your cash value depleting even further…” (emphasis added).

Policy loans do not cause cash value to decrease in the first place; therefore, not repaying a policy loan with interest does not cause cash to deplete “even further.”

Again, the cash value is just what the death benefit is worth today. With respect to loans, cash value is how much of the death benefit you can collateralize on a loan. When a policy owner takes a loan, it is not as though the life insurance company takes some of the death benefit or the cash value and deposits it into your checking account. Death benefits and cash values do not decrease when you take a policy loan.

Life insurance companies often screw this up themselves. Their lawyers say that “policy loans reduce death benefits” all the time. If the blessed little litigators would grant us one degree of distinction, we could get to the truth of the matter. Policy loans only ever decrease the net death benefit (i.e. the death benefit net of the outstanding loan balance), and even then, the reduction in the net death benefit only lasts until the loan is repaid.

The language of “loans reduce death benefits” gives the impression either that loans won’t ever be repaid (which IBC explicitly recommends against) and/or that a loan mysteriously causes a permanent reduction in gross death benefit.

Neither of these are the case.

Lastly, can a life insurance policy lapse if the total policy loan balance exceeds the cash value? Yes. But as with the fact that policy loans incur interest, this is not a special hidden secret. In fact, the whole point with IBC is to generate cash value in excess of loan balances so that necessary capital is available to meet future needs.

2. You have to pay commissions and other fees

Some of the videos on infinite banking posted on TikTok use credit card debt as an example of how to leverage the cash value from your whole life insurance policy: The idea is that you might as well take a loan out from your life insurance policy to pay off credit card debt, because when you repay the loan, including interest, the whole amount will get routed back to your own investments.

But that’s not how taking a loan from your whole life insurance policy works. When you pay back the loan with interest, part of that interest goes to the insurance company itself. And before you even take out a loan, part of the premiums you pay go toward fees and commissions as opposed to your cash value. “When you dig into the actual costs, people don’t realize commission on this stuff [the whole life policies] is 50% to 70% of the premium — there’s just nothing here that is unique that you can’t do yourself without the cost,” says Rick Kahler, a certified financial planner in South Dakota, and founder of Kahler Financial Group.

The author is correct to point out that the claim “when you repay the [policy] loan, including interest, the whole amount will get routed back to your own investments” is wrong.

But remind me again who claimed that it does? Oh, was it the TikTok people?

Are those TikTok people the “trusted, qualified, independent individuals” that Policygenius seeks out “to provide additional insight and clarification on a topic” as their editorial policy states? Are the TikTokies the “third-party sources [that] are suitably vetted?”

Or maybe the reputable sources are only cited in support of arguments encouraging the purchase of term insurance, the product sold by the companies that Policygenuis partners with and from which Policygenius is paid. Maybe when Policygenius wants to caricature and diminish an opposing point of view, then TikTok is an acceptable source.

Then comes the ritual sacrament of all term promoters: blasting commissions for the sale of whole life insurance.

Whenever I hear this, I can’t help but think that this woke, anti-capitalist, seething vitriol toward income is a projection of the speaker’s own shame and embarrassment for willingly, and probably successfully, participating in what’s left of the free enterprise system in this country — a sort of Jungian confession, as it were.

Richard Kahler, the cited authority on the evil commissions statistic, charges his clients fees. Curiously, he does not disclose his rates on his website. I expect he only takes a small, reasonable salary for his basic needs and then donates the rest to charity.

Finally, it is not the case that “there’s just nothing here that is unique that you can’t do yourself without the cost.” To the contrary, what happens in dividend-paying whole life insurance is absolutely unique, and that is why it is the proper asset with which to become your own banker. It is the only financial asset that is completely creditor protected, the value of which rises every year without interruption (neither from taxes nor markets), against which a policy owner may borrow money to use for what he wants, when he wants, to repay if and when he wants, that also leaves a massive chunk of capital (again without tax) to the next generation — all in a fully private, contractual context where the individual is in total control.

Mr. Kahler, do your investment products do that?

3. You’re not really making extra money for keeping an overpriced policy

While receiving dividends from your insurance company by holding a cash value life insurance policy might sound appealing, “If you look at the definition of dividends, it’s a return of premium payment,” says Jose V. Sanchez, a certified financial planner in New Mexico who specializes in retirement wealth. “That means that if you and I own [a policy] through a dividend-paying company, you and I just paid more this year than what we should’ve, and they’re just returning it back to us as shareholders.”

Of all of the objections to IBC, I think this one is the most silly, and I mean silly as in self-defeating. Understand the argument here: dividends are just a return of premium so all you’re doing with whole life is getting back money you already paid anyway.

Watch me here.

It is absolutely the case that a policy-owner can receive dividends as a non-taxable return of premium up to the policy-owner’s cost basis. This means that I as a policy owner can receive everything back that I paid in premium without paying triggering tax.

Now, pray tell, why would it be the case the IRS would specify the level up to which one can receive dividends without paying tax (i.e. receive dividends as a “return of premium”)?

Obviously, the reason is because one might receive dividends in excess of the cost basis (i.e. more than was paid in!). That is, the whole reason the IRS regards dividends as non-taxable return of premium, for a time, is because a policy owner can eventually receive more in dividends than what he paid in premium. And while it is true that dividends are not guaranteed, Nelson always advocated working with companies who — while past performance is no guarantee of future results — have generated dividends for over 100 consecutive years.

So the idea that “all you’re doing” (dumb-dumb!) with whole life is getting money back that you paid in, is obviously wrong.

But it’s worse than that!

There is a subtle, implied assumption here that the alleged “extra money” you’d be making as a policy owner only comes from dividends!

First of all, as we’ve discussed, this isn’t about “making money;” it’s about building capital. But second, the dividend is merely one contributing factor to what we really do care about, which is cash value! There are, in fact, four distinct contributing factors to cash value growth, of which dividends are only one.

I explain the internal mechanics of dividend-paying whole life, including and leading up to cash value, in Part 2 of the aforementioned course.

4. You need to put a lot of money into your account before you can take a loan

Unless you’re like Waka Flocka and have $2 million or $3 million lying around to put into a whole life insurance policy at once, you can’t just instantly “become your own bank” by having one of these policies, as the concept of infinite banking suggests.

Before you get to a point where you can take out a loan against your own policy, you need to accumulate a significant cash value, which takes time. “The key thing about life insurance [is that] usually, for the first five to 10 years, the commission is paid out, so it’s very hard for a policy to start to gain any momentum in building value” before that time, Sanchez says.

Think of life insurance cash value as home equity, says Patrick Hanzel, a certified financial planner and Advanced Planning Manager at Policygenius. “Similar to equity building in a home as you make mortgage payments, your cash value (equity) in a whole life insurance policy starts at zero and grows over time,” Hanzel says. “Infinite banking is not a strategy to get rich quickly.”

This subtitle is not just wrong, it is the opposite of the truth.

A policy owner does not need to “put a lot of money into your account” (a life insurance professional might use the proper terminology: “pay a high premium to your policy”) in order to take a policy loan.

Policy loans are available as soon as cash value is generated. Cash value is generated as soon as an individual, with a brand new policy, pays what is called Paid-Up Additions (PUA) premium. A PUA premium can literally be paid on the very first day of a policy. A conservative estimate of the time from day one of the policy until when policy loan funds are in the policy-owners bank account, assuming early PUA payment, is 30 calendar days. Professional advisors who know what they’re doing can help you get that number down to single digits if it were absolutely necessary, but the insinuation that a policy owner must wait “five to 10 years” to take a loan is absurd.

The idea that it is “very hard for a policy to start to gain any momentum in building value” early on in the life of the policy is imprecise at best. What does he mean by “momentum?” So long as the full premium is paid year after year, the cash value in dividend-paying whole increases in value by a greater margin than it did the prior year. This is true from policy year one to policy year two and from policy year 51 to 52. This cash value growth dynamic will continue far into the later years of the insured’s life, very often well beyond natural mortality.

Now, does this imply that cash value gains later in the life of the policy are greater than they are in the beginning? Sure it does. But exactly what else would you prefer? Would you want your capital to grow less in the future, rather than more? What a curious suggestion! Is the same true of one’s income? Would you want your future increases in income to be of a greater margin or a lower margin than what they were in years past?

Obviously we want larger and larger income increases! In fact, the reason we want larger and larger income increases is because that means greater and greater capital. So of course we would want the value of our capital itself (inside of whole life insurance) to rise by greater and greater margins the further into the future we go.

Did I mention that those greater and greater gains occur tax-deferred, and that those tax-deferred gains are accessible tax-free?

Furthermore, while I find the equity-in-real-estate metaphor helpful for understanding cash value, as I’ve mentioned above, there are very important differences. Cash value does not grow at the slovenly, wretched pace that equity grows in real estate. And in fact, cash value in whole life insurance will exceed what the individual has paid in, very often these days, in 10 years or less. Does that ever happen in conventional residential real estate? The answer may be yes, but only after decades of appreciation and mortgage payments. Not to mention, there is nothing guaranteed about the value of real estate, nor does one have a right to access the equity.

It is objectively true that capital accumulated in whole life insurance is superior to capital accumulated in real estate.

Finally, I agree with Mr. Hanzel, IBC is not a get-rich-quick-scheme. But this, to me, is an advantage, not a disadvantage.

5. You’re paying for one of the most expensive policies on the market

Whole life insurance is five to 15 times more expensive than alternatives like term life insurance, which makes it prohibitive for most people, especially those who are young and early in their career.

To reap the rewards of a whole life policy, you’d be committing yourself to a monthly bill of around several hundred dollars for the next 10 to 15 years, if not longer. Why? Because if you stop making payments on your policy, it will lapse. This brings about a certain level of risk that other tax-favorable accounts don’t have.

When you think about funding other wealth accumulation vehicles, “for instance, with a Roth IRA [individual retirement account] you can fund it $6,000 this year and $6,000 next year. But if you lose your job or something goes sideways, you can choose not to fund it and your money will still accumulate,” Sanchez says. “With a permanent policy, you have to be in it for the long run. You have to have multiple streams of income that will give you the confidence that you won’t have income issues.” For many people, that’s a risky assumption to make.

This section is probably the most error-dense of the bunch.

What’s happening here is that the author has carefully narrowed the scope of the discussion to what we might call base-only whole life, or a whole life insurance policy whereby the policyowner wants to buy permanent death benefit and pay a premium for that permanent death benefit, and nothing else. Only in this regard might it be the case that the death benefit on whole life “is five to 15 times more expensive than alternatives like term life insurance…”

This is a classic bait-and-switch.

IBC is not talking about what I would call “conventional” or “needs-based” whole life insurance policy planning and purchasing.

It’s a bit like saying “well there’s these guys who are talking about building cash value and using it to become their own banker but don’t they know that permanent death benefit is more expensive than temporary death benefit? The non sequitur is bewildering.

Again, the purpose of IBC is capitalization, not the purchase of temporary death benefit at the lowest price.

Grace for Me, Law for Thee

Policygenius, which five minutes ago was criticizing income generation, then provides a term insurance quote generator after the presentation of these five, shall we say, troubled, points.

And you won’t believe this, but Policygenius gets “paid a commission by insurance companies for each sale.” Y’all, that’s a hyper-link right there. The language literally comes from the company’s own website.

What the “Geniuses” Do

The article ends, mercifully, with some advice as to how you should purchase insurance.

I’d hate to send you into a state of shock, but the proposal is the same as its always been: buy term and invest the difference. It’s a quick two-step plan!

- Look at your financial obligations. Do you have a spouse, children, or a mortgage? Most young families who may have a mortgage or student loans can get coverage using a product that is low-cost and high-value, Sanchez says. Term life insurance provides that option. It covers you for the time you need financial protection the most.

- Invest the difference you’d be paying in more expensive premiums into other tax-favorable accounts. You’ll have the peace of mind of knowing you can afford to maintain your separate insurance policy for as long as you need it to protect your family and other obligations.

There isn’t so much as an erring keystroke devoted to concern over the incredible costs involved in dependence on conventional bankers, not least of which is the huge number of dollars paid to lenders under conventional credit arrangements. I must always add the key explanatory factor: Annual Percentage Rate or APR is not the “interest rate” you think it is. To calculate the actual interest rate that normal people think of when they think of the term “interest rate,” you must calculate what I call the True Cost of Interest.

The True Cost of Interest is the amount of interest payments expressed as a percentage of the amount borrowed.

This is the same method as deployed by Nelson Nash in Becoming Your Own Banker. Read his book, or calculate the True Cost of Interest on one of your own conventional debts — or better, do both more than once — and then compare to the various APRs. You will be shocked. Unless you’ve already done this.

Then you’ll feel betrayed.

And never mind the business cycle! Never mind this decades-old phenomenon whereby assets held in market-linked accounts get smashed in the teeth every 5–10 years! How conventional finance writers can talk about long term financial planning without talking about the business cycle the dynamic, persistent effect on total capital (or even net worth) will always mystify me.

In brief, buy term and invest the difference is a deeply, conceptually flawed financial strategy, and in its best light, is only an encouragement to maximize your participation in government programs and expose your capital to risk (the chance of loss) for as long as possible.

Conclusion

It brings me great pleasure to see a comment that I agree with in the closing paragraphs of this article:

“Social media is providing more information and more opportunity to [access] this information. Infinite banking works at some level, just like every product out there works on some level,” Sanchez says. “The reality is that people who know this tool the best are the agents who sell it, because products change on a weekly and monthly basis.”

Yes, IBC does work on “some” level — a level much higher, infinitely higher, you might say — than the folks featured in this article might be aware of, but “some level” nonetheless.

Indeed, the “reality is that people who know this tool the best are the agents who sell it.” To which, we might add: “…as opposed to the financial product marketers peddling sales copy disguised as unbiased, independent journalism.”

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Ryan Griggs

Ryan Griggs

CEO, Griggs Capital Strategies. “Banks lend money that does not exist, and that is evil.” — R. Nelson Nash