Revealing the Secrets of Life Insurance: Why It's Not an Investment or Tax Free

Are you tired of the traditional banking system? Maybe you're looking for a way to secure your financial future. No, no, no, I am not suggesting that you buy a lot of lottery tickets, but it's a safe bet that you're familiar with the concept of something called infinite banking. Now either way, this concept, infinite banking, it promises better control of your finances. I'm not so sure about that. Does it really give you better flexibility over your money?

Well, before you jump in, let's go beneath the surface and uncover the hidden truth behind infinite banking, AKA whole life insurance. Stay tuned.

Welcome back to our channel. I'm Phil Clark, wealth advisor and founder of OmniStar Financial Group. I'm on a mission to educate our listeners on a concept that gained great popularity many decades ago, and like many concepts, this one seems to fade after a while, but it's usually resurrected by those who sell it. And the people that sell it are life insurance agents.

I can almost stop here and say buyer beware, and I would have said enough. But all life insurance salespeople, they're not bad. Some of these products and the way they're sold, they are bad, and I want to make sure that you have what you need to avoid getting into something that might not be so easy to get out of.

And you might be asking, what is infinite banking? Well, you'll see as we go through the show exactly what it is, but in short, it's using life insurance to accumulate cash value, all with this idea of tax-free distribution. We're going to talk about that in greater detail, so hang in there.

Now, this concept requires the use of whole life insurance, so a whole life insurance policy must be purchased in order to achieve this so-called infinite banking. However, that is the most expensive kind of life insurance on the planet. Ostensibly, it may seem like a great way to accumulate wealth, but the fees and charges associated with setting up and maintaining these large life policies, whole life policies that is, that's anything but efficient. Keep in mind that these costs can significantly eat into your potential returns and even the cash value.

While you're sinking large sums of money into these contracts, all of those contributions are after tax. That means you would have to earn approximately a hundred and fifty thousand dollars to contribute a hundred thousand. That in itself tells you right away that more investigation is necessary before you dive in to one of these arrangements.

Whole life policies are issued by mutual insurance companies, and they are inherently expensive. In fact, when you compare these to term insurance, the cost difference is shocking. A five hundred thousand dollar whole life policy could cost you, say, thirty or forty thousand dollars a year, depending on your age, and a term insurance policy for 20 years might only cost a thousand dollars per year.

These policies are sold as a great retirement vehicle, a wealth accumulation tool, a family bank is another other term, and then of course the infinite bank. Now, this infinite bank concept was brought about by an economist many, many decades ago, and of course people that follow his work will tell you this is the greatest thing since sliced bread. I'm here to debunk that.

Seasoned agents, life insurance agents, they will tell you about using this concept in such a way to create great wealth in a bank, if you will. They do this by suggesting or convincing you to overfund this kind of policy, and then dividends paid by the insurance company, that helps grow your cash value. They will then promise you tax-free access to your money via loans, and of course there's no risk. You've heard the old saying: if it's too good to be true, it probably is.

Now, another drawback of infinite banking is the lack of transparency. And what do I mean by that? These things are complicated, and the complexity of that system, it makes it difficult for individuals to fully grasp all of the intricacies and potential risks that are involved. Without a complete understanding, you may unknowingly be putting your hard-earned money at great risk.

For example, you overpay for this kind of life insurance when you compare it to term, and some of that money actually creates the cash value. The insurance company then pays you a dividend that also helps the cash value grow. Now, if everyone buying these whole life policies suddenly switched to term, the insurance company could never afford to pay these so-called dividends that can be very large: five, six, seven percent. Overfunding these expensive policies creates the dividend, sort of a shell game. In other words, you're paying an abundance of premium, way over the normal cost for life insurance, only to get some of that back as a so-called dividend.

This would be the perfect segue to performance of these insurance policies. In other words, the issuing insurance company, they must be able to provide above-average dividends, that is, a return of your overfunding that we just talked about. Any instability or failure to meet its obligations, that means that your cash value could quickly fall behind the illustrated projections.

Now, with all due respect to life insurance, I am not opposed to it. I like life insurance and I believe it is necessary, but I don't believe in trying to fund insurance policies to create retirement. So with all due respect to life insurance cash value policies, they're not the end of the world. However, the argument for buying term and investing the difference, meaning the difference between what it would cost you to pay for one of these whole life contracts with overfunding, I think that should be considered before getting into something that is virtually impossible to undo.

If you need life insurance, buy term and invest the difference. If you want true tax-free withdrawals, look to a Roth IRA, and there's many ways to get lots of money into that vehicle, which is tax-free, without all of the high cost of unnecessary mortality rates or insurance premium.

Keep something in mind. Most people will say buying the life insurance makes more sense because I can borrow against my own money. Why would you ever want to borrow against your own money? After all, you're going to be paying interest back to the insurance company. And of course the insurance salesman will say, but you don't have to pay it back; when you die, it'll be paid back through your death benefit. What that means, folks, is that your death benefit will be reduced to pay all of the loan plus interest. Well, you were borrowing your own money. Who in the world's ever heard of paying an insurance company for borrowing your own money? That makes no sense whatsoever.

Be careful with these contracts and with this concept. It sounds great when well-trained salespeople have your attention, but you need to stay vigilant. In fact, I'm urging you to stay vigilant and avoid being talked into something that's anything but a bank, and it is certainly not infinite.

If you fall for this decades-old sales pitch, you may be missing out on other potentially lucrative investment options. Diversification, we know that works. Buying multiple asset classes, that gives you a much greater chance of developing real wealth. Diversifying your investments, that is the key to mitigating risk and maximizing performance. And by the way, life insurance was never intended to be an investment. It's designed to pay a benefit when you die.

So while infinite banking may promise financial freedom, it is important that you consider these disadvantages: high costs, lack of transparency, reliance on insurance to create your wealth, something designed to be paid when you die, and the potential of missing opportunities. All of these are factors that you should take into account. If you need help navigating this quite complicated landscape, contact one of our fee-based advisors to help you learn more.

I hope this edition of We're Talking Money has inspired you to think long and hard before buying whole life insurance as an investment. Thanks for watching, and don't forget to subscribe to our channel for more insights into personal finance and investment strategies. I'll see you next time on We're Talking Money.

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