As promised I have been on a mission these past several months to prove the worth, or not, of the Infinite Banking system or the Be Your Own Banker concept, whichever title you subscribe to. I ordered and read my 5th edition “Becoming Your Own Banker” book by “Bestselling Author R Nelson Nash. I’ve actually read it through several times.
Each time I read through it I come away with a little better understanding of the concept and I can honestly say that, for the right person, there appears to be some nice upsides. Having said that I think it’s important to shine a bright light on the subject and answer some questions and raise a few more. I have not been to a seminar on the subject but have run all fashion of illustrations using different companies (didn’t want to be biased), and I think one of the questions that needs to be raised is why Mr Nash is using assumptions in his book’s illustrations that are either assuming interest rates or dividends that don’t seem to be available anymore.
I pulled out an illustration from page 73 of his book that shows parents buying a whole life policy on a new born and putting $2000 a year into the whole life policy for 22 years. I wanted to see, since this came from a 2008 book and it was the 5th edition, how his illustrations stacked up against the reality of 2012. A little disclaimer for both of us. He does not claim that his illustrations are accurate in today’s financial climate. He admits that are based on slightly decaying assumptions. My disclaimer. I’m writing this on a weekend and just pulled up a reasonably good, but probably not the best, comparison. I’m using Minnesota Life whose current dividend is 5.5%, pretty average. We don’t know who he used or what the dividend was. In his whole life illustration he shows an assumed cash value (guaranteed interest plus assumed dividends) of $101,360 in year 22. In my Minnesota Life illustration it shows a total guaranteed cash value of $47,653, with a total assumed cash value of $62,234.
Mr Nash’s book was originally written in 2000 and it’s a no brainer to say that interest rates and dividend rates were substantially higher then and that both have steadily declined across the board. So, the question that I think needs to be answered is, given lower interest and dividends, is Infinite Banking or Becoming Your Own Banker still a viable use of your hard earned money. I obviously am running with two trains of thought here, a dangerous proposition at my age. First, can a person duplicate the Nash assumptions with a new whole policy today? I think we would both agree that the answer is no. Second, can a person duplicate any financial assumptions from 2000 today? Again I think we would agree that the answer is no.
So, if it made sense to become your own banker based on what whole life was doing in 2000 in comparison to the 2000 financial environment, does it make sense to become your own banker in 2012 in comparison to the 2012 financial environment? Logic tells me there is a very good chance that all things are kind of still equal. Since becoming your own banker is premised on establishing a pool of money so that you can borrow from yourself instead of from institutional banks, and paying yourself back at the then institutional bank rate, it makes sense that even though the policy doesn’t accrue cash quite as quickly, it’s offset by the lower cost of borrowing money. So, I guess I’m willing to say that in the context of getting out of the trap of borrowing from others dividend paying whole life insurance is a good vehicle as long as you can afford to over fund it. What I mean by over funding is that you don’t pay the minimum amount it takes to buy life insurance, but pay extra and if possible pay extra right up to the MEC limit. MEC rules in a nutshell spell out the maximum amount of money you can pour into a life insurance policy without causing yourself a huge tax problem.
So if you over fund a good dividend paying whole life policy (never use an indexed universal life) it can become a viable source for you to borrow cash from yourself and pay yourself back. Let me just throw out what I think is a very important component of this being viable for you. If the amount of money it takes to fund this policy in this manner stresses your budget, there is a high probability that it won’t work in the long run. And if you aren’t very fiscally disciplined when it comes to paying back money you borrow from yourself, it won’t work.
There is one more thing that I think needs to be cleared up if you’re looking at the 5th edition of Becoming Your Own Banker to see how it can work for you. The differences in financial climates between 2000 and 2012 make a $40,000 difference over a 22 year period in the examples shown above. The other eye catcher in Mr Nash’s illustrations are the bajillions of dollars cash value at, say, age 100. In his illustration after putting only $44,000 total dollars into the policy and then taking out $225,000 a year from age 70 through age 100, there is still a net cash value of over $8 million. In the 2012 Minnesota Life illustration without taking out $6.75 million over the same 30 years the policy has a guaranteed cash value of $336,000 at age 100 and an assumed cash value of $2.2 million. If you put the $6.75 million back into his illustration to equal things out that means the policy generated over $15 million from $44,000. My opinion? Not now. Probably not in 2000 and probably not again in the future.
Bottom line. I’m not saying that you won’t make a reasonable return on your investment, but I’m also going to be honest that you should be aware what is guaranteed. And, in the end, if you can’t live with that, tread carefully. If you have any questions or are interested in quotes, call or email me directly. Let’s talk.