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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to how to retire on time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today on Amazon, or you can grab a free copy by going to www.howtoretireontime.com. My name is Mike Decker. I'm the author of the book, How to Retire On Time, but I'm also a licensed financial adviser, insurance agent, and tax professional. When it comes to finance, we can pretty much cover it all.
Mike:Now that said, please remember this is just a show, as in not financial advice. So if you want financial advice, you can always request analysis from our team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Franson. David, thank you for being here.
David:Yeah. Happy to be here as always.
Mike:Yeah. David's gonna read your questions, and I am going to do my best to answer them. You can always submit your questions by texting them to (913) 363-1234. Again, that number, (913) 363-1234, or you can email them to heyMike@howtoretireontime.com. Let's begin.
David:Hey, Mike. Can you explain the concept of infinite banking, and tell me if it is a good strategy or not?
Mike:Okay. So the first thing you need to understand about the world of finance is if they call something that isn't that thing, that thing, it's a red flag.
David:Okay.
Mike:Okay. So What do you mean by that? Infinite banking is the idea that you can use a whole life insurance policy as a bank. You're not a bank, the insurance company's not a bank, and your life insurance policy is not a bank. So go into it with skepticism.
Mike:Okay. Okay? Here's the idea. Now this has been around for a very long time, let me just explain what it is. Please don't listen to this and say, I'm gonna be my own bank.
Mike:For context, I've never met a regulator or a compliance consultant ever say, yeah, that's a good idea. Okay, but it's out there.
David:Okay.
Mike:So let's address it. Keep in mind, if you think you've hacked the system, you haven't, you just don't know the detriments. Infinite banking, here's how it works in theory. You use a whole life policy. Whole life policy is basically it's a life insurance policy that you put cash value in there, and the cash value is supposed to sustain the death benefit over a long term period of time.
Mike:So you put some money in there, and eventually you funded it enough that you're gonna maintain this death benefit for life. Unlike term life insurance, where it goes away when the term is done, whole life is permanent. It's supposed to kind of stay longer term period of time. Well, the idea of infinite banking is, well, let's over fund the policy, so the cash value stays in there for a longer period of time. And if we overfund the policy with a lower death benefit, then maybe the cost of insurance isn't that expensive, and so the money would grow tax free, which is true when you put money into a policy, this is after tax funds, so you can't put your IRA funds into it without taxation and all But after tax funds, so you put it into the policy, it would in theory grow tax free, and then you don't actually take income out, you borrow against the policy, okay?
Mike:And then when you die, the death benefit pays back the loan and gives the rest of the beneficiaries.
David:I see.
Mike:Here's why they think it's like infinite banking. So what does a bank do? Takes your checkings and savings accounts and says, alright, if you need money, it's here if you need it. But most people don't drain their accounts all at once. We keep our emergency funds and banks and things like that, our checking, know, that's just kind of where money flows through.
Mike:What does the bank do with that money? They lend it out at a competitive rate, and they're trying to make positive arbitrage on the money. That's a fancy word there, arbitrage. Yeah, arbitrage. So let's use real estate as an example.
Mike:Okay? So if you get a mortgage on a property, let's say your mortgage is $2,000, and you rent the property out for $3,000 a month.
David:Okay.
Mike:You are making a thousand dollars positive arbitrage, so you're making money on something you don't own. The bank owns the property. I see. Right? Because you took a mortgage out, but you're making money on something you don't fully own yet.
David:Okay, that makes sense.
Mike:So the idea is kind of the same with this quote unquote infinite banking ideas, that you can put money into a policy, borrow against it, and because you're borrowing against it, let's say you have a hundred thousand dollars into a policy, you borrow $10,000 in that situation, your loan on that $10,000 might be 3 percent, but your policy might be growing at 5%. So there's a 2% positive arbitrage. You're making money on money you spent. Yeah. That's the whole idea behind it, and why they call it infinite banking, quote unquote.
Mike:Now, that said, there's a couple of things you gotta be aware of. Okay? Infinite banking, this whole concept, it's not gonna get you rich. It's a cool idea, it's a cool concept, it's been around for a long time, but if your whole life policy, which is kind of a fixed ish rate, it might be growing at like 4%, maybe 5%. Steady Eddie, very, very boring.
Mike:And if you buy a whole life policy through a mutual insurance company, so it's mutually owned, the policy owners own it. So think of like Mass Mutual or Nationwide kind of a situation. In those situations, then you might get credit on the policy because if the company has a surplus, their policy owners can get a credit. Okay. Depends on the policy, depends on how you structure it, depends on a lot of different things, But the idea is, Oh, you get this credit from a mutually fund company, so you get your take, and you get a little bit off the top from the company's profits.
Mike:So it's a cool idea. But you're still getting like, I don't know, 6% at best, if the company's very profitable and run well. In the bad years, you wouldn't get that extra percentage or whatever it could be, and it's not even guaranteed. So, I mean, David, would you would you like to put all of your money in something that's gonna earn around four or 5% when the stock market the S and P has historically done around 10%.
David:Yeah, and in that context, then no. I mean, why would I take less for what? I mean, I want more.
Mike:Yeah. So it's an interesting concept
David:that
Mike:some people might want to do, but it's not competitive.
David:Right, right.
Mike:So, I mean, it's fun to say, I'm not paying as much in taxes, or I'm avoiding taxes or whatever, you're not avoiding taxes, you're using a life insurance policy at a lower growth rate to avoid paying taxes in the future. When if you just grew the asset, and the markets were able to grow at a reasonable rate, you would have more money net of tax otherwise.
David:Okay.
Mike:But people like to feel smart. They like to feel like they cheated the system, they like to feel like they found these shortcuts, and this is all based on the idea of how whole life policies work, it's based around how line seventy seven zero two of the tax code says life insurance policy isn't It's not subject to taxes, it grows tax free if it's funded correctly. It's like saying that, well, hey, they could change the tax code on us, but a contract, there's always excuses to sell the policy. Sure. And that assumes that you've been set up the policy correctly.
Mike:So with infinite banking, if you increase the death benefit, you're probably gonna increase the commission, and increase the cost of insurance. Oh. Which means the whole thing kind of falls apart and becomes uncompetitive. It's very common that I'll see people saying, Hey, I heard a podcast, or Hey, I heard this guy talking about, this is what the wealthy do. This is how they avoid taxes.
Mike:I'll tell you right now, it's not.
David:You know, it's a nice title.
Mike:You could believe what you wanna believe. Yeah. And then they'll put all their money in there, or a lot of their money, which is in my opinion, not suitable. They're trying to cheat the system. Yeah.
Mike:You can't cheat the system, there's no such thing as a perfect investment product or strategy. Uh-huh. But wait, there's more.
David:Okay. Alright.
Mike:Okay. So along the way, the permanent life insurance industry started changing a little bit more towards indexed universal life. Index universal life insurance is indexed in that you have upside potential, not guaranteed growth upside potential, but no downside risk. When I say no downside risk, if the markets tank, you don't go backwards, but you're still going backwards from fees. In that situation, you might not get that growth that you need every year.
Mike:If you borrow too much from the policy, at some point, the policy might get stressed, and you might have to actually pay into the policy to keep it alive. There are risks that people don't talk about with this whole concept, but infinite bacon in its true form is through whole life insurance. It is not a competitive growth vehicle, it is something that you can do as a compliment to an overall strategy, if you want to pay for the death benefit. If you want maybe a little cash on the side, but if you want a little cash on the side, I'd say maybe you wanna look at index universal life and fund it, and just use it differently. Different policies, so you've got all these different companies, you've got Mass Mutual, you've got Lafayette, you've got Nationwide.
Mike:I mean, tons of companies that are out there that do all the ons, Pac Life, they all have these life insurance policies, okay? Yeah. They build them for different purposes. So if you're an executive looking for a high death benefit, with the lowest amount of premiums going into a policy for estate planning purposes, or key man insurance, whatever it is, you're going to pick a different type of policy than you would if you want cash growth, because they're not all built the same. But you have to know this stuff getting into it.
Mike:Life insurance is just a bunch of smoke and mirrors. It's incredibly deceptive, and the problem is, I don't think it's deceptive on purpose. Sure. I think a lot of agents just don't really dive into the details as much as they could. Now that's not to say all.
Mike:There are some very smart insurance agents out there.
David:Sure. Okay.
Mike:But I've just seen many times that people wanted x, and they were given a policy that really suits the why scenario.
David:Yeah. It seems like it's very complicated insurance can be. And so maybe that's one of the benefits of talking to an agent.
Mike:Well, an independent agent that does their own internal research. Basically, they feel like they've got a chip on their shoulder Yeah. Yeah. Talk to them. Okay.
Mike:Which if you can't tell, I've got a chip on my shoulder. Right. Let me show you a quick story just to prove the point. Okay. So my daughter was recently born.
Mike:Very exciting situation. Sure. Okay? In the hospital, my wife needs a cream just to help with the birthing process. That's all I'll say.
Mike:Don't wanna dive too deep into the personal medical needs, but it was a simple, simple request. Now we had done our research. We've got friends that are doctors, and so we knew the one we wanted. They couldn't offer it to us. So what we did is we called the doctor, explained the situation, we had a previous relationship, and we got the prescription, but I had to then leave the hospital, walk across the street to another pharmacy, pick up the prescription, and then come back.
Mike:And you know what was really interesting? When they saw the cream that we had got from this other pharmacy, they said, Where'd you get that?
David:Yeah.
Mike:Almost like they were angry at us. And I said, Oh, we got it from the pharmacy across the street. They said, Oh, okay, good. I said, Well, why was that an issue? Yeah.
Mike:I said, We're legally not able to make that prescription, which is why we don't mention it. We don't recommend it. We can't talk about it. So if a nurse, one of our nurses got you that, it would have been an issue for us. And then I asked, Well, is it good?
Mike:They said, oh yeah, it's the best. We just can't talk about it.
David:Because of some kind of contract or something?
Mike:It's because of how that compound is made. They didn't have the legal rights regulations or whatever. I don't know the medical industry, but they didn't have the I's dotted T's crossed or the licensing whatever to make that compound. So they recommend a different one that's not as good, but it does the job. I don't like not as good.
Mike:I don't like adequate. I want the thing that needs to be there. Yeah. And so, I mean, gosh, yeah, when I whenever I get a policy, or whatever I'm doing, not infinite banking for people, we don't really do infinite banking for our clients, because it doesn't make sense from a cash growth standpoint. If you want a death benefit, that's fine.
Mike:If you want cash value and life insurance as a complement to your portfolio, that's fine. But I always reverse engineer as best I can the illustrations. I try to find out why is it costing so much, and how can we lower the fees? Admittedly that lowers my commission, I don't care. What is right for the client, and how do we make the money really go further more efficiently?
Mike:How does the index work? All these things matter. Mhmm. And if you're not having someone do the due diligence, challenging the story, challenging the sales pitch of whatever overarching influence that is being held, be skeptical. And when the answer is always one company or always this situation, run for the hills.
Mike:Life insurance is complicated. Let me say one last thing too about infinite banking. Okay, please do. It's on the term leverage. So leverage is a debt term.
Mike:Leverage means more risk.
David:Uh-huh.
Mike:So there are some people that have taken infinite banking, the concept, which again, I am not recommending, please don't listen to this, and say, well, Mike said, remember, it's not financial advice here, but they'll take it and they'll over fund it for two years. So let's say they put 50,000 in for the first year, fifty thousand in for the second year, they need to have at least five years of funding to qualify for all the insurance benefits according to line 7,702 of the tax code. They have to fund it equal payments for a certain period of time. So then in the third year, they'll borrow against the policy. Maybe they'll borrow 30,000 for the policy, put 20,000 in, and they'll do that in year three, four, and five.
Mike:Well, if now you've got a lot of the cash value you've taken out, so is that there's a high loan on the policy, not as much of a difference between the loan and then the cash value. If the markets don't cooperate for a couple of years, you're paying out of pocket, or you're getting a huge tax bill. There's no other way around it. So you're taking additional risk. You've got to be aware of these things.
Mike:You're not manipulating an insurance company. You're not manipulating accounts. They don't have a secret market to where they're making more money than the stock market the world used to. So again, if it seems too good to be true, it probably is. Infinite banking is a wonderful story and concept that a lot of people have bought into, again, for the concept, the idea, it feels good to feel like I'm winning over Wall Street, when the reality is your net of returns after fees, after all that stuff, isn't that competitive, which is okay.
Mike:Maybe it's a good bond fund alternative at best. But be careful with these quote unquote sophisticated strategies that the wealthy do. Yeah. They don't. Okay.
David:Is there ever a good time where would be like advantageous to borrow from your whole life policy?
Mike:Whole life policies in my mind are appropriate if you just want to put a little bit of cash value in something for a death benefit, and that's kind of
David:it. Okay.
Mike:Very boring, very steady Eddie, you don't want any fluctuation, you want the most boring option possible.
David:Okay.
Mike:If you want a death benefit, I would actually explore index universal life, but don't borrow from the policy, don't overextend the policy. You wanna leave enough cash in there, or the death benefit purposes, for the legacy purposes, or for the emergency purpose. So like for a younger person that's in their thirties, forties, or fifties, if they fund a life insurance policy, and they lose their job, maybe they borrow from their policy just as income until they get the next job, that's floating them through the unemployment period of time. Or maybe a retiree has funded a policy long enough that the markets crash, and they just take income from this principal protected source for a year or two, while they allow their other accounts to recover.
David:I see.
Mike:I mean, there are ways you can do it, just don't ask a life insurance policy to be everything, and don't expect that your life insurance policy is gonna make you rich. Yeah. It's not. It is a middle of the road at best way to grow assets. Yeah, there's some tax benefits, but it's extremely complicated, and you are paying the insurance company every step of the way.
Mike:So you have to know what you're paying for, and you have to want what you're paying for. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcasts, just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility.
Mike:This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to www.yourwealthanalysis.com today to learn more and get started.