What Kind of Policy for Infinite banking – Whole life or Universal life?
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Infinite banking helps you control your capital, where you have access, safety, liquidity, growth, and you’re able to borrow against it as collateral and use it elsewhere earning a return in two places at the same time.
Behind this strategy is a product called specially-designed whole life insurance.
life insurance falls into three main classifications or buckets; term, universal, and whole life insurance.
Term life Insurance is just as it sounds; it’s for a term or a specified length of time. Within term insurance, there’s no equity build-up or cash value. It can have a very specific use in supplementing and adding on to other life insurance products to increase your total benefit. It may also be used as a temporary strategy where you put a convertible term policy in place, and then later convert that over to whole life. Term life insurance as a standalone product is not sufficient to use for privatized banking.
Universal life Insurance is a hybrid between Term life and whole life insurance. You’re getting cash value, and it’s often not quite as high of a price point in terms of premium. However, there’s a lot going on inside of a universal policy that makes it unstable, and not enough guarantees to be used for privatized banking. One of the key reasons why this is the case is that sometimes within a universal product, be it universal, universal variable, equity-indexed universal, sometimes the premium that has been illustrated is not sufficient to keep the policy in force, and more premium is needed to keep the policy from imploding.
That’s not the guarantee that we need in the privatized banking strategy.
The third bucket of life insurance is whole life insurance. There are a lot more guarantees.
First, you have a guaranteed premium, meaning you’ll never have a premium increase in order to make the policy perform.
Second, you have guaranteed cash value growth. So within the policy, you have access to your cash value, which is a portion of your death benefit that you can use.
Now, the type of whole life policy that we use is only with a mutual company. The reason that we use a mutual company is that, by law when the company is profitable, they distribute their profits to the policy owners in the form of a dividend.
A lot of whole life policies are structured with only base premiums. This is the foundational premium or payment that goes into a whole life policy. The base premium builds up a lot of dividends over time, and has a lot of long-term growth, but has very little cash value early in the life of the policy.
There’s another type of premium called paid-up additions, and that portion of premium buys a relatively small amount of death benefit, and a lot goes towards cash value. You want to structure the policy in a way that you have a lot of paid-up additions so that you have early high cash value.
It’s not your traditional whole life product that takes forever to build cash value. Instead, you have access to usually 50% – 70% of the money that you put in, in the very first year. Usually, we’re seeing a break even point where all of the money that you’ve put in is 100% available to you between years five and seven, sometimes up to year nine or more depending on the age and the health status of the person. So there are some adjustments and reasons to make changes to make sure that the policy is maximized for you.
Let’s recap the things that you need to know to make sure that a policy will work for infinite banking.
It needs to be a whole life product with a mutual company where you’re going to earn dividends, and have cash value growth. You also want to make sure that you have the funding structured with a paid-up addition rider to make sure that you’re maximizing early cash value.
The last thing I want to point out is that you want to make sure the policy doesn’t become a MEC (Modified Endowment Contract). This is simply fancy insurance lingo, but what it means is that without MEC’ing, a life insurance product is designed to be paid with after tax dollars. Then as it grows, the growth is tax-deferred, and if you use the policy correctly, it’s also not taxed when you use the money.
If you don’t utilize the policy correctly you lose those tax advantages, and it switches over to a vehicle where you pay tax when you access the money inside.
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