Ask The Expert. Umm?
January 22, 2009 Leave a comment
Here is an article written by By Walter Updegrave, Money Magazine senior editor. I want to point out some of the flaws in traditional thinking. As I add my comments to this article I want to give my disclaimer…My comments are not aimed at the writer or the magazine. I don’t know him. My aim is at traditional thinking and ideologies. The article will be in black and my comments will be in red.
Do you want to be your own banker?
Buying an ‘infinite banking’ life insurance policy may not be the best way to build long-term wealth for retirement.
NEW YORK (Money) — Question: An adviser has been telling me about a concept that he calls “infinite banking.” Apparently, it involves using a life insurance policy to become my own banker. It seems like a good idea, but something doesn’t seem quite right to me. Do I have cause for concern? – Matt, St. Louis, Missouri
Answer: This concept that your adviser is touting has nothing to do with banking, It has everything to do with banking…you are doing the same thing banks do which is turn your money over and over and capture interest on loans. at least not in the sense that any normal person thinks of it. Is normal person thinking what has gotten everyone in the position they are in i.e. 401k’s down 50% and foreclosures out of control. And the only thing “infinite” about it, in my opinion, Opinions are the problem with all the advice that has been given over the last 30 years. Why don’t we find out the facts when making life decisions. is that it represents yet another in the seemingly infinite number of ways people can come up with to induce you to invest in life insurance. I guess new ideas are out of the question since all of the traditional ones have done so well.
Now, I want to be clear. I have nothing against life insurance. Virtually everyone who has family members depending on him or her for their livelihood should have a life insurance policy, No one needs life insurance…it’s a want. as it’s the only financial product that can replace income when a breadwinner dies.
I think the best way for the overwhelming majority of people to get the valuable protection life insurance affords is through a low-cost term insurance policy, Has anybody ever stopped to prove to you that it’s the best way to get protection? although in some circumstances other types of policies can also make sense.
What I do object to, however, is advisers employing mumbo-jumbo and financial sleight of hand to convince people that they should be plowing money into certain types of life insurance policies when they’re likely better off in more conventional investments or simply funding regular old retirement plans like 401(k)s and IRAs. If funding a 401k instead is better then why don’t we just go to Vegas and put it all on red…at least you could have free drinks. It seems like “mumbo-jumbo to tell someone to keep funneling money into a stock market that just lost 40-50% of it’s value and there is no end in sight.
When you strip away the gibberish surrounding pitches like infinite banking, How about Dollar Cost Averaging, Diversification, Asset Allocation and Buy Term and Invest the Difference. Everyone of these “pitches” have FAILED. it basically comes down to this: You should invest in cash-value life insurance because it pays dividends Remember to state Non-Guaranteed Dividends (which aren’t taxed as long as they remain within the policy) and you can borrow against the policy. Somehow, these dividends and the ability to borrow are supposed to make you a banker. Right. If the homework would have been done before this statement it would have been found that those thing are not what makes you a banker.
At its core, this spiel is similar to other questionable life insurance sales tactics I’ve written about, such as the “7702 (a) Private Plan” pitch, which essentially couches life insurance policies as an IRS-approved retirement plan. Do your homework on these policies.
I don’t know what, if any, specifics this adviser discussed with you. But what these sorts of sales presentations tend to gloss over are the high costs of investing via life insurance The truth is that as a long term strategy term insurance is the most expensive way to buy life insurance…If you don’t die during the specified time period then you have wasted all of those premiums plus what you could have done with them somewhere else and the fact that borrowing from a policy can have serious downsides. If not managed correctly. I would say it’s a lot cheaper then losing 40% of my retirement account.(See more on those drawbacks.)
To be honest, I don’t think this sort of proposal is worth a lot of serious consideration. Obviously there was not much serious effort put into research before writing this article. But if you’re sufficiently intrigued by it and the adviser has given you concrete figures and projections, you can always hire a financial planner on an hourly fee basis to do an independent analysis. The same financial planner that told me to max out my 401k and fund my Roth IRA. The same one who told me that Assett Allocation will keep my money going up even when the markets down. The one who told me I would have enough to retire at a certain age and then 2008 happened. The same one that projected out my future using a 12% return because that was the average and the market will always be on an upward trend. The one who told me to save for my kids education in mutual funds. I would say that I don’t think I would spend any money on planning that has been proven not to work.
Ultimately, I think what you’ll find is that your best shot at building long-term wealth for retirement and your overall financial security is to keep your life insurance costs down by buying a term policy. That will free up more money that you can then contribute to tax-advantaged retirement accounts like 401(k)s and IRAs (preferably investing that money in low-cost investments like those on our Money 70 list of recommended mutual funds and ETFs). Thats interesting that after beating up a legit strategy that was not fairly looked into…There is a reccomendation to buy specific mutual funds HMM? If you look hard enough you will find that there is always some financial motivation to peoples advice.
So the next time this or any other adviser starts telling you he’s going to let you in on some little-known and unique strategy that will put you on the road to riches, just remember: There is no magical path to financial success. There are, however, an infinite number of ways you can get hurt looking for one. Or maybe we could start thinking for ourselves instead of others doing the thinking for us. 
Recent Comments