The design of high cash value, dividend paying whole life insurance policies, or Infinite Banking (IBC) policies, has two phases. The first phase consists of policy blending, heavy use of paid-up additions, and the typical 10/90 or 20/80 split between the premium going to the base whole life policy and the premium going to the paid-up additions rider. This first phase is quite consistent from case to case and the only variability might be in the premium split due to the total amount of premium (annually or monthly) to be paid, and design restrictions from the insurance company we are using.
I spend a lot of time motivating difficult financial topics by constructing “thought experiments.” In a thought experiment, you can only focus on one or maybe two moving parts, while holding everything else constant. This is the
way to isolate the impact of the factor you want to understand. However, it means the whole exercise is necessarily unrealistic
In his classic work Becoming Your Own Banker, Nelson Nash claims that the standard approach to life insurance has things backwards. Consumers have been taught to get their desired death benefit for as little outlay as possible.
Nowadays the average American has been taught to believe that a very responsible financial strategy is to plunk as much of his paycheck every month as possible into a “diversified” and “conservative” mix of stocks and, if he wants to really play it safe, to mix in some government bonds. Naturally the acme of savvy saving is supposed to be a tax-qualified vehicle such as a Roth IRA for the self-employed, a 401(k) for salaried employees, or a 403(b) for educators.
In the 20th century, households used actual savings accounts at the bank—which were distinct from checking accounts. Households also invested directly in bonds and life insurance.
One of the questions we more often have from our clients is: Should I pay for this expenditure with the cash I already have in my conventional bank account, or should I first deposit that cash as an unscheduled PUA contribution to my IBC policy and then use the cash from a policy loan to purchase the needed item? What they are really asking is if there are any special conditions or guidelines they should consider before deciding whether to use cash or a policy loan for their expenditure.
A lot of our clients are concerned and ask many questions about the guaranteed cash values in IBC policies. We want to make absolutely sure that you understand all the assumptions behind the guaranteed values in these policies.
Of course, the importance of insurer selection must
not be underestimated. Life insurance involves a