Friday, December 11, 2009


I'm Guessing Gary North Won't Give Us a Blurb...

...on Carlos Lara and my forthcoming book marrying Austrian economics and Nelson Nash's infinite banking concept. North exploded on the topic:
Whole life insurance is bought by economically ignorant people. The industry profits from buyers' ignorance. It charges huge commissions, which are paid to salesmen. This is why corrupt salesmen over time cease to listen to their consciences about deceiving the ignorant....

A whole life policy is not indexed for price inflation. Your savings portion gets destroyed by inflation.

I call it a sucker's product. You may want to call it something else.

Families need term life insurance. But insurance companies like the fat profits on whole life, so the salesmen are rewarded well for selling whole life policies.
If you don't want to spend money, read this article by Dave Ramsey. He gets to the heart of the matter.
Sadly, over 70% of the life insurance policies sold today are cash value policies. A cash value policy is an insurance product that packages insurance and savings together. Do not invest money in life insurance; the returns are horrible.

His conclusion is my conclusion: "Don't do cash value insurance! Buy term and invest the difference."

I regard anyone who sells whole life policies as morally corrupt. He knows they are losing propositions, but he will not sell term policies that would adequately protect widows and thier children in their time of terrible loss. The whole life policies are so very profitable. "Let other men's widows do without. My widow will do just fine."

The reason whole life policies have such high commissions ("loads") is that companies know that the salesman's time is very valuable. If he can get in the door to make a sales pitch, the company wants him to sell whole life policies. The company pays accordingly.

A month ago, one of these self-deluded sellers of deception joined this site. He wrote to me two days ago.
I just subscribed to your website to learn about your views on money. A close friend and client of mine recommended you to me. So I went by faith and paid the $14.95 for the first month. My main reason to join was to find out what you felt about life insurance. Once I read your thoughts and advice I instantly got offended. I am very familiar with Ludwig von Mises and Murry Rothbard's works. I have studied "Human Action" intensely. I'm not an economist nor do I want to be. My profession is providing life insurance to clients. About 95% of the type of insurance I provide is whole life. What you said about whole life insurance is true, but it's not all like that. I suggest that you do some research about what whole life can actually do for a person in their living years…called a living benefit.

He then referred me to websites of some really big-time deceivers. They re-package the lousy product in order to sell to ignorant people with even more money to waste.

The concept is called "infinite banking." It's also called "become your own banker." It is really "Whole Life for Dummies With More Dollars Than Sense."

Here's the deal. You buy a high-commission policy. Then, after six years, the company lets you borrow against it. You pay the company interest -- to "yourself," the ads claim.

If you know what whole life insurance is, there is nothing new here. Any whole life policy lets you do this. Then what's new? Packaging. They sell the same miserable policy to people with more money.

Go to a CPA. Ask him if you can borrow against any tax-deferred retirement plan. You can if you follow IRS guidelines. You can put in the money and borrow when you want it. You pay interest to your plan -- not to an insurance company. You are your own banker.

Do you want to start your IRA with a super-high-commission mutual fund or a no-load fund? A no-load fund. Why? Because you can borrow more money from it. You don't give up a lot of front-end money to a salesman.

This preposterously poor investment plan has been around for 30 years. A critique is provided by two sellers of universal life policies, who complain that the whole life salesmen tell people that the deal is available only to whole life buyers. This cuts the universal life salesmen out of the territory. They deeply resent it. Read their critique here. It's aimed at insurance salesmen, not buyers. They are furious that the whole life agents are raking in the commission money from rich people berfore universal life salesmen get to them.
This re-packaged hustle is what my subscriber wanted to show me, so that I would understand that whole life can be a very good deal for buyers. He wrote:

The reason I took the time to write you is not to argue about insurance. I want individuals like you who have a following to be speaking the truth about how people can use life insurance effectively. The Lord requires us to seek knowledge and understanding. I pray you take the time to look up the websites. It will benefit you and your life more than you thought possible. Also, give me a call if you would like to speak further about this subject. I'm always wanting to learn about the truth. I have found some great articles written by you. I think you're doing a great job. Thanks for your time.

I do not like being lectured to by someone I regard as an immoral deceiver of the naive and trusting. When they invoke God's name, this enrages me as few other things do. That this man thinks I want to hear his self-serving views on this high-commission product is simply astounding.

I have studied this subject for 35 years. Yet he wanted to straighten me out. The product is inherently deceptive. It offers high-priced death insurance under cover of savings -- a savings product as poor as the death insurance portion.

I encouraged him to either quit selling the product or quit my site. I called him what I think he is: immoral.

He sent a letter back saying I was mean and that he would pray for me.

This is the second time I have gotten this response from a Christian seller of whole life policies. The first time was about 25 years ago at a Christian conference. Someone knew of my views on whole life insurance. He said I should talk with an insurance salesman in the room. I did. I told him exactly what I thought of his career choice. He said he would pray for me. As I walked away, I said to my companion: "He spells that p-r-e-y."
Carlos and I are actually visiting with some life insurance executives next week, as part of the research for our book. Although we are not necessarily going to get bogged down in the technical details, I told Carlos that I wouldn't be comfortable writing the book unless I understood exactly what happens when an owner borrows against his policy, etc.

A lot of people have been peppering me with questions about "becoming your own banker" through a whole life insurance policy, but I have had to defer my answers until I sit down and really try to write the relevant chapters. If it turns out that I can't "make the numbers work," then I told Carlos we are going to have to either abandon the project or be frank with the readers that we are discussing a strategy that is poor in some respects but advantageous in others. (In Nash's book, he has several numerical examples where it looks like a no-brainer that you do great by investing your cash flow into a whole life policy, but it's not always clear where his numbers are coming from, and what alternative options could have been available.)

At this point let me say three things:

(1) If you follow the link, you will see the gentle tone of North's correspondent versus the smackdown North administered. I can't speak for all proponents of whole life, of course, but Carlos and some of the people I have met through him are certainly sincere in their beliefs that they are freeing people from financial bondage by teaching them the ways of infinite banking. They could be idiots, of course, but the people I have in mind aren't crooks.

(2) The people who are implementing Nash's idea aren't simply gullible folk with middle incomes. As North's article reveals, the very wealthy are some of the prime demographic for the technique. And it's not even heirs who don't know finance; there are plenty of doctors and other professionals who (for example) set up third-party leasing companies to finance their office equipment with cash flowing through whole life policies. Say what you will, but when people take Nash's idea this far, that should be a hint that maybe it's not self-evidently stupid as Dave Ramsey suggests. You need to think about it more than just glancing at a table of internal rates of return.

(3) North mentions the ability of borrowing against other assets. For example, if Nash thinks it's such a great idea to, say, borrow out of your whole life plan in order to buy your next car, and then "pay yourself back" with interest, then why not do the same thing borrowing against your IRA? I asked one of Nash's devotees this very question, but in the context of paying cash for a car if you had the money in your savings account. He answered (paraphrasing), "Because with a savings account it's a sinking fund. With whole life, the money you borrow is still in the policy, rolling over at interest."

I didn't understand how this could be possible, so he elaborated (again paraphrasing): "When you borrow from a whole life policy, there is a lien against the death benefit. So if you die before paying it back, they subtract what you still owe before giving you the payout. If you withdraw money from your savings account to buy the car with cash, then that money is simply gone."

Now I am still undecided on whether there really is something significant here, or whether it is a "distinction without a difference" as they loved to say in debate. My point is that it is just possible that the quick rat-tat-tat disposal of the notion of whole life banking is wrong, and that Nelson Nash really did discover something amazing.

But I won't know for sure until I start writing the chapters to convince the reader--because that's when I will see if I can convince myself. In other words, I have heard the arguments from both sides, and I am going to have to sit down with Excel and do it myself, but only after we meet with the life insurance guys and I really understand what's going on when they calculate the policy owner's cash value, death benefit, and so on.

Stay tuned. And if we end up going forward with the book, don't send it to Gary North!

Mr. Murphy-
Having worked for two different insurance companies, at one in a call center and as a sales rep at another. What Mr. North says is complete bunk. When you take a loan against your whole life policy, you are paying "yourself" or I would use life policy back.

For easy numbers lets say you had a cash value in your whole life policy of $100,000 and this cash value earns 4%. On Jan 1st you take a loan of $10,000 from your policy with an interest rate of 6%. For simplicity, on Jan 1st of the next year you pay back your loan. Your $90k grew by 4% to $93,600. You pay back your loan plus interest of $10,600. Your total cash value is now $104,200(93,600+10,600.)

The concern you would have though is that if you don't pay off the loan. If you don't pay off the loan the 600 dollars is added to your loan and that now begins to acrue interest. It is possible that over time your cash value is eaten away by the amount of the loan. At that point in time you will then have a tax bill of ordinary income that you would have to report. Your loan is included in your total cash value and the the cost basis is what you have put in. So it's certainly possible that you paid $50,000 for a life insurance policy who now has a Total cash value of $150,000 (again if you don't pay off your loan this included in your cash value.) You could have a total tax bill of $100,000 of ordinary income and have no money to pay the IRS. At least that's how it worked at the two companies for whom I worked.

The nice thing about a whole life policy is that the death benefit can grow. Where as with the Term policy you don't have that growth potential. And what happens if you don't die in the term? That money is gone, at least with a whole life policy you can have a cash value if you really need it. Term policies are good if you have a time frame that you need more life coverage, like a home loan. If you die and you want to make sure your wife can stay in your house a term policy is the plan for you. But a whole life policy, as long as the insurance company stays solvant, will be there no matter when you die. Not to mention if you get a whole life policy when you are younger the premiums will be much lower. With a term policy, each time a term ends your bill increase. Having a steady payment is a nice feature for some people.

I hope all of this made sense.
I'm sorry for leaving another comment, but I also wanted to talk about the 401k loan. You are only allowed to take a loan on your 401k if it is allowed by your employer. The other issue with taking a loan is that it takes away from your earnings potential. So it is no longer working in the "market." This cuts down on your future retirement funds, this option doesn't make sense to me for someone who is worried about having money for when they retire.


The only people I have ever come across who were positive in this type of insurance/savings product, were people bought them and the people that sold them. The people that bought them couldn't explain how they work and the people that sold them couldn't express themselves beyond saying "cash value".

So I submit this question: Who is getting the better end of the bargin, the seller or the buyer?
All of the math in the other comments aside; let's take a real Austrian view sans math.

Do you REALLY think that you can have an asset (cash value in whole life policy), take a loan of said asset to spend on a new car, AND have that non-asset grow at interest???

NO! I don't care about your Federal Reserve / Government Accounting / make believe math. Your asset has been spent!

Your scheme is ENTIRELY dependent on the promises of one company. One company, which if all of the world did this, and spent their cash value and then went broke... what would you call it? A PONZI SCHEME.

I'm all for alternative banking. This can be a source. It's not the great Austrian financial plan. Look at what some of the executives said about the Hartford not a few months back. It was dead before the bailout. The only policyholders that would have been smart would have taken all of their money out before they lost it all.

And don't tell me you trust state guarantee funds to pay back individuals. This banking seems to have limited application, you damn well better understand and stay below your states backstop, and be sure its funded.

As far as whole life vs term, I've heard Dave Ramsey bash whole life many times. Whether he is completely off base depends on who he's addressing. He is very strict about his principles, because he is addressing them to a huge audience. With his plan, regardless of education, you will do well financially.

Also, he argues that you can invest the difference between what you pay for term and what you would pay with whole life, and you will get a much higher rate of return. The ultimate goal is to self-insure by getting out of debt and investing before your term is up.

I've never thought about it as acting as your own bank, so I'm looking forward to your findings.
Bob - WOW! I had no idea that life insurance continues to be such a confusing topic. Right after my MBA I studied for and received my LIfe and Health Insurance license in New York. I also obtained a Series 7 allowing me to sell stocks and mutual funds. I did this working for Investors Diversified Services which was later bought by American Express and recently spun off on its own as Ameriprise. While I only worked in the industry for two years I do have some knowledge about these products as IDS offered both WL and Term as well as a variety of mutual funds, annuities and saving certificates.

With regard to the claim that you can borrow from your WL policy but continue to earn interest on the amount borrowed, Anonymous has the right approach to analyzing this. Even when you borrow from the cash value, the premium payments you continue to make allow your cash value to grow as if the loan was not withdrawn. However, WL has changed a bit over the years in response to competition from the Term Life Invest the rest approach.

While there are real differences between the two product types, its important to understand that they are designed for different types of customers. These products are offering two different ways to obtain a death benefit and accumulate savings.

WL is designed for people who like the simplicity of one transaction to meet these financial needs. They are generally people who are busy with their own profession and are used to relying on other professionals for specialized knowledge. Thus, they are not as concerned about the higher cost. As much as half of WL premiums paid by the client in the first 2 or 3 years go directly to pay the Agent. SO to gain the full value of this product the client must stay with the program and payments for at least three years or more.

Term life and invest the difference appeals to those who want to minimize the cost. The premiums are lower and the cost (or penalties) of dropping out of the program and payments are less. It also pays the Agent a much lower commission. However, some of this can be made up if the Agent sells mutual funds or saving certificates for the save part of the program. But as you can imagine, this is a little bit more difficult to sell because it is two different products and the customer can do one without the other.

This brings up the other benefit of WL, it offers a kind of "forced" savings. If you stop the payments the death benefit is discontinued and your beneficiaries are unprotected. Agents find this "fear" of exposure to death risk is more motivating for the customer than the appeal of the distant goal of accumulating wealth (Kahneman and Tversky formalized this idea in academics decades after insurance companies had been using it). Term insurance and invest the rest customers must maintain their own discipline as they can easily stop the savings without effecting the death benefit.

IDS was actually founded in the 1930's on the idea of "pay youself first" selling investment certificates. These certificates could be borrowed from and repaid and offered a guaranteed rate as well as bonus rates. It reminds me of your "infinite banking concept."

I understand North's concern with Whole Life but it is certainly not immoral. All Agents are supposed to fully disclose how the products work so the client can make a strong commitment to the one that serves their interest best.
"That this man thinks I want to hear his self-serving views on this high-commission product is simply astounding."

I think the saying "people in glass houses shouldn't throw stones" has been lost on Gary North in more than one way...
So, let me get this straight: I buy a term life in 1999, and invest the rest. Or I could have bought a whole life that pays 4% interest. Because the market averages 10.5% per year, we can assume with no risk that we are going to get 10.5% a year. Oh wait, the S&P is down 20% over the last 10 years.

This is the problem with nearly all of the criticisms of life insurance and annuities. They assume away contingencies that life insurance mitigates. Weird life insurance products sell to cover real contengencies that people perceive.

I'm not 100% sure on this but I suspect the edge in WL comes with the tax angles. I'm sure insurance companies have gotten to Congress to make it a tax advantaged way to save.

Things I would want to know:

1.If I am borrowing against my WL savings, is the interest I am paying tax deductible? If it is this is a big edge.

2. What percentage of my "savings" am I allowed to borrow?

3. At what point in terms of a time frame am I allowed to borrow against my savings?

With answers to these three points, it's juat working out a mathematical equation to see if it makes sesne.
Shelley has a point regarding the risk of investing in the equity market. However, you can fund the saving part of Buy Term Invest the Rest just as conservatively as the savings in a WL policy.

Wenzel lists some good questions and they are just as applicable to the investment products available to fund the savings part of a Buy Term Invest the Rest program. The point is, the investment business is just a busy lobbying congress for tax benefits as the insurance business. Believe me, any "edge" the WL policy might appear to have over the TL invest the rest will be absorbed by higher fees charged by the insurance company. Up front fees on a savings product can kill the yield just as effectively as income taxes.

Although I am not fully familar with Murphy's "infinite banking" concept, it seems it could be based on either WL or TL. In fact the more flexible it is in using a variety of insurance/investment products, the more likely its success.
Bob - one angle to consider is that buying whole life at a young age provides insurability even if you become uninsurable or only insurable as very high risk later in life.

Granted that could be considered a high premium for the risk probability, but tell that to someone who bought 20 year term in their late twenties and finds insurance unavailable later in life when they still need it.

I worked in the insurance industry in the 80's when whole life was dumped wholesale for variable universal life for the promise of vanishing premiums, but much to the dismay of many policy owners the premium 'un-vanished' when interest rates fell below 9 percent.
I got very upset reading all those extensive arguments against the Infinite Banking Concept, and till you guys are clear with what a participating mutual life insurance company is and what a non-direct recognition contract means, you should refrain from blogging or writting.

Do you know how much the market has to recover to get to where it was when there is a loss of 50%?
Just checking.

I wonder why is that Dave Ramsey and Suse Ormand have not answered Pamela Yellen's challenge about the IBC; This challenge is openly posted on the internet. Perhaps you Bob want to answer the challenge and make an easy $100,000
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