Part 1 of 8, in response to the blog post “Why Whole Life Insurance Is a Bad Investment.”
In this series, we will dissect the commonly held misconceptions that exist around the idea that a properly structured whole life insurance policy can be used to create your own private family bank, aka the Infinite Banking process.
Reason #1: Whole Life Insurance is undiversified and therefore a bad investment
We continue to come across articles shared with us by clients that espouse why Whole Life Insurance is a such a bad investment. Many in the financial industry have this view and state as much. Even entertainment personalities like Dave Ramsey and Suzie Orman poo-poo whole life.
After the 2008 crash and subsequent “Great Recession,” many people should have figured out that many “investments” are undiversified. The entire stock market went down 40% or more. Wouldn’t the stock market in general be considered an undiversified investment? The entire housing market went down in the collapse, no area was spared. Again, any investment area that moves as one could be looked at as being undiversified.
During this time, anyone who had their money in one of the Life Insurance companies that we work with did not lose a single dime. As a matter of fact, they enjoyed a 6+% dividend for those years.
It’s important to keep in mind that life insurance companies are masters at managing risk. There are whole departments within insurance companies whose entire job is to calculate risk. These masters of risk assessment are called Actuaries.
An actuary is a business professional who analyzes the financial consequences of risk. Actuaries use mathematics, statistics, and financial theory to study uncertain future events, especially those of concern to insurance and pension programs.
Life insurance companies have their own investment portfolio that is also diversified. Insurance companies investments are inherently conservative, many of these investments are diversified in low risk investments like bonds (government, municipal, corporate), real estate holdings, secured loans to financial institutions and other investments. Life insurance themselves could be considered diversified.
The financial strength of life insurance companies is continually assessed by independent third-parties. Life insurances companies hold ratings from four independent agencies—A.M. Best, Fitch, Moody’s and Standard & Poor’s— who rate the financial strength of insurance companies. These rating companies are charged with understanding the financial strength and safety of an insurance company.
Life insurance companies are also regulated by each state. The National Association of Insurance Commissioners (NAIC) serves as a vehicle for individual state regulators to coordinate their activities and share resources. Established in 1871, the NAIC functions as an advisory body and service provider for state insurance departments. The fundamental reason for government regulation of insurance is to protect American consumers. State systems are accessible and accountable to the public and sensitive to local social and economic conditions. State regulation has proven that it effectively protects consumers and ensures that promises made by insurers are kept.
Using a properly structured Infinite Banking policy, clients can use their own private bank to fund their other investments for maximum gains. While Whole Life is not an investment, it is a safe place to park your money and one that enjoys many financial benefits.
We consider the Infinite Banking Concept to be a “Super” emergency fund. While folks like Dave Ramsey talk about a thousand dollar emergency fund, or perhaps having 3-6 months of expenses set aside, we have found that the larger the emergency fund the smaller the emergency. What’s wrong with an emergency fund with 1-2 years of expenses? You can accomplish this using Infinite Banking.
As they say “Cash is King,” and when you have the ability to use your bank to make purchases you can negotiate better deals. This can be done with automobiles, real estate and investment properties, and even businesses that are for sale.
Lastly, finance is 90% mental (or something like that). Basically, to get financially ahead you need to learn to live on less than you make. Then, after you do that, you put your money to work to help you earn even more money. Many people use “other people’s money.” This means going to a bank and borrowing. When you use other people’s money, you lose 100% control in the process. The bank makes the terms of the loans and if you miss even one payment you are subject to extra penalties, higher interest, dinged credit or even worse, repossession and foreclosure. When you are the bank, you make the terms. You have control and flexibility and you do not have to worry about repossession or foreclosure. If you are your own bank and are unable to make your car payment due to a job loss or some other financial reason, you can do that! Try that with your car note or your house payment financed through the typical lending institution.
In closing, someone who claims that life insurance is a bad investment is correct since life insurance in of itself is not actually an investment. Further to say that life insurance is not diversified is also wrong when compared to the numerous other places someone could put their money.
Get the book, Becoming Your Own Banker, and learn how you can create your own Private Reserve Account.
Next up “Reason #2: Whole Life returns are not guaranteed”