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The White Coat Investor ran an article where he laid out what he described as the seven truths about infinite banking.
Dr. Jim Dahle, the founder of the White Coat Investor, is a practicing emergency physician, and for someone who isn’t actively involved in the life insurance and infinite banking world, he unearthed some excellent points.
However, he was a trifle off here and there, and completely missed the mark on some important issues. In this article we will address Dr. Dahle’s seven truths about infinite banking and correct them where he went wrong.
For brevity I have included only the parts of his article I felt were important and pertinent. Here is the link to his entire article should you want to read it in entirety.
I don’t like when people use a bunch of acronyms around me that I don’t know. So here are the three acronyms that come up, and what they stand for. IB = Infinite Banking, BOY = Bank On Yourself, LEAP = Lifetime Economic Acceleration Process
Ok, Let’s get into it.
Dr. Dahle starts by defining infinite banking, he says the basic concept is:
“to get a bunch of cash value into a whole life policy and then, whenever you have a need for cash, you borrow that money against the policy cash value instead of borrowing it from a bank, withdrawing it from your bank account, or selling an investment. When you die, the death benefit is used to pay off the loans, with any remaining death benefit going to the policy beneficiaries (usually your heirs). Instead of having to go to the bank to get a loan, you can simply “borrow” the money from yourself. No matter what your credit score or the purpose of the loan, you can always get that loan from the policy at the terms set up when you bought the policy. Thus you are now “banking on yourself” instead of having to go to a bank. Okay, to be fair you’re really “banking with an insurance company” rather than “banking on yourself”, but that concept is not as easy to sell.”
Is this correct?
His definition works fine. Policy loans are already fully collateralized by the cash value so you can take a policy loan without having to prove you can make repayments or having to offer additional collateral.
Policy loans are interest only. As long as you keep up with interest payments, you can keep the loan outstanding as long as you live. If the policy has an outstanding loan when you die, the loan amount will be deducted from the death benefit.
For purposes of infinite banking, we suggest you pay the policy loan back, this replenishes the cash value and the money will be there for you to borrow again when another opportunity presents itself.
I don’t know if Dr. Dahle grasped the significance of “banking with an insurance company”. When you take a policy loan, you are not taking money out of your policy, you are leveraging your cash value to take a loan from the insurance company. Your actual cash value stays inside of your policy and continues to grow even while the loan is outstanding. This is unique to life insurance.
Dr. Dahle continues:
“Frankly, all of these terms are scams, as you will see below. But that does not mean there is nothing worthwhile to this concept once you get past the marketing.
Let’s get into seven truths about IB/BOY/LEAP, so you can see through the cloud of half-truths and outright lies surrounding this concept to understand how it really works.”
“Step one in IB/BOY/LEAP is to buy a whole life insurance policy… …The whole life insurance industry is plagued by overly expensive insurance, massive commissions, shady sales practices, low rates of return, and poorly educated clients and salespeople. But if you want to “Bank on Yourself”, you’re going to have to wade into this industry and actually buy whole life insurance. There is no substitute.”
Is this correct?
We will take this one in two sections.
Infinite Banking does NOT require you to buy a whole life policy. Nelson Nash, the founder of the infinite banking concept defined infinite banking as a process, NOT a product.
Infinite banking is the process of thinking like a wise banker. A wise banker would never lend out his money without expecting to receive interest as that money is repaid, interest is the fair wage for the work that money does.
So, even when you use your own money to make a purchase you should expect to repay that money to yourself with interest!
You can practice infinite banking in an envelope. If you take $1000 out of your envelope, you should return, say, $1100. 1000 in principle and 100 in interest. After all, you would have spent the interest anyway if you had taken the loan from a bank.
The beauty of this system is that the interest you would have paid out to a bank, and lost, is now back in your envelope and you can use it again. You can see why this process is often called Becoming Your Own Banker.
The downside to using infinite banking with just an envelope is that the money inside the envelope is just sitting, earning nothing, while simultaneously being weakened by inflation. It would be better to deposit this money in a bank, so at least you earn interest on the money that is just sitting.
The downside to depositing the money in a bank account, is that when you borrow your money and withdraw it from the bank account, your money stops earning interest from the bank.
So, it is even better to keep your money in a well designed participating whole life insurance policy where you can access it with a policy loan.
When you take a policy loan, you are not actually borrowing your money. The insurance company loans you their money, keeping your cash value as collateral. Your money stays in the policy the entire time, where it continues to earn the strong guaranteed growth a well designed whole life insurance policy provides.
Dr. Dahle got this part wrong, you do NOT need a whole life policy to practice infinite banking. However, I really can’t blame him for this. As he goes on to explain, the life insurance industry is plagued by “shady sales practices”. Many agents see infinite banking as a sales strategy to sell life insurance and hence the misrepresentation that a whole life policy is a prerequisite to practicing infinite banking.
“Most whole life insurance policies are not structured properly to do “Infinite Banking.” Most policies are structured to do one of two things. Most commonly, policies are structured to maximize the commission to the agent selling it. Cynical? Yes. But it’s the truth. The commission on a whole life insurance policy is 50-110% of the first year’s premium. Sometimes policies are structured to maximize the death benefit for the premiums paid. This is also a bad thing for an IB/BOY/LEAP policy. The point of an IB/BOY/LEAP policy is NOT the death benefit. It’s to allow you to “bank.” So you do not want the policy structured for that purpose.”
Is this correct?
This is spot on, I wish more people realized this. Most whole life insurance policies are not designed in a way that is conducive for practicing infinite banking. A good life insurance policy for infinite banking should be designed to keep the death benefit as low as possible while keeping premiums high.
This design causes the cash value to grow much faster than a typical, which is what you want for infinite banking.
However, a policy designed well for infinite banking will not pay as much in commissions, so this isn’t a popular design with agents.
Dr. Dahle goes on to explain that the three factors you want in a policy are:
Paid-Up Additions
Paid-Up Additions are critical for good policy design. It allows you to grow cash value aggressively and reach the break even point, where there is more money in cash value than you have ever paid in premiums, much faster, many years faster, than a traditionally designed policy.
Non-Direct Recognition Loans
Dr. Dahle believes that getting a policy with a Non-Direct Recognition loan status is critical for a good infinite banking policy.
Non-Direct vs Direct recognition was a raging point in the infinite banking circle not long ago. The wranglings seem to have mostly fizzled out now as proponents of both sides found out it doesn’t make that much difference. But it does make some difference, so let’s cover it briefly.
When a mutual life insurance company pays out a dividend on whole life insurance policies, it may first check to see if a loan is outstanding. If a loan is outstanding, they may decrease the dividend. This is a Direct recognition company.
If the insurance company does not check on the policy loan status before paying out the dividend, it is a Non-Direct recognition company.
If you have a whole life insurance policy, and are using it for infinite banking, you may have a loan outstanding when the insurance company pays the dividend. If this is the case, you will probably receive more in dividend with a non-direct recognition company.
What many people don’t realize is that non-direct recognition companies have already docked dividends slightly for all policies.
We own policies with both direct and non-direct recognition companies. When we are deciding which policy to take a loan from, we look first at the loan interest rate. If the interest rates on both a direct and non-direct recognition policy are exactly the same, then we might choose to take a loan from the non-direct recognition policy.
It’s good to be aware of direct and non-direct recognition, but in the long run it isn’t that big of a deal. Please don’t lose stress out over it.
Wash Loans
Dr. Dahle says:
“There is one more critical feature, usually called “wash loans.” While it is great to still have dividends paid on money you have taken out of the policy, you still have to pay interest on that loan. If the dividend rate is 4% and the loan is charging 8%, you’re not exactly coming out ahead. Some policies offer “wash loans”, usually starting after a few years.
With a wash loan, your loan interest rate is the same as the dividend rate on the policy. So while you are paying 5% interest on the loan, that interest is completely offset by the 5% dividend on the loan. So in that respect, it acts just like you withdrew the money from a bank account. There is no interest charged on withdrawals, but there is also not interest paid on that money once it is withdrawn. 5%-5% = 0%-0%. Same same. Thus, you are now “banking on yourself.”
Is this correct?
This is dead wrong! I’m trying not to be too hard on Dr. Dahle, after all, he is a practicing emergency physician, life insurance isn’t his specialty. This is a serious mistake. Toto caelo errare.
This “wash loan” theory has been floating around for years and it’s false. There are a lot of agents who promote the wash loan theory, but forget the whole idea. Wash loans do not exist. Never have, never will.
Dr. Dahle says the biggest issue with infinite banking is the people pushing it. Nearly all of them stand to profit from your “buying into the concept”. Some are selling seminars, books, online courses, but most commonly they are selling policies and “earning those fat commissions”.
Absolutely correct!
Selling well designed participating whole life insurance policies that work well for infinite banking is how we make money.
If we didn’t make money from selling insurance, we would be doing something else, and we would be thinking and talking more about that and less about infinite banking.
Ironically, we would actually make “fatter commissions” by selling policies that were not optimized for infinite banking.
Since we are making disclosures, it’s probably only fair to tell you, the White Coat Investor realizes they have a conflicts of interest too since they get incentivized to recommend their followers purchase term life policies through their recommended agents, purchase their books, take their courses and attend their events.
Here is the link to their full conflicts of interest.
So, apparently life insurance agents who stand to profit by what they promote are rowing in the same boat as Dr Dahle, the White Coat Investor.
“While it is an inferior way to invest your money for the first 5+ years, eventually it is a better way than just a bank savings account. It is nearly as liquid and safe, and has higher long-term returns. Of course, its returns are nowhere near what you should earn long term in an investment like stocks or real estate, even after tax. So it is not going to be some magic pathway to wealth. But it will help you earn a little more on your cash long-term.”
Is this correct?
Way back before world war 1, in 1911 the US supreme court ruled life insurance is an asset (Grigsby v. Russell). So technically, life insurance is not really an investment.
Other than that Dr. Dahle is right. Once the policy reaches the break even point where there is more in cash value than you have ever paid in premiums, you cannot lose money on the policy even if you wanted to. In a well designed whole life insurance policy this usually happens around year 5.
There is a whole discussion about whether insurance companies are actually safer than banks which we won’t get into here, but having money in life insurance cash value is indeed very similar to having money in the bank.
And no, this isn’t a magic pathway to wealth. Nelson Nash, the founder of the infinite banking concept was an aviator, and compared infinite banking to a tailwind. When an airplane has a tailwind, it travels faster, arrives at its destination quicker and burns less fuel in the process.
Infinite banking is a financial tailwind for those who use it. It isn’t going to get you to your financial destination all by itself, but it will help you get there faster and more efficiently.
Dahle continues: “Of course, there are other benefits to any whole life insurance policy. For example, there is the death benefit. While you are trying to minimize the ratio of premium to death benefit, you cannot have a policy with zero death benefit. Nor can you “borrow out” the entire death benefit. So there will always be at least a little death benefit for your favorite heirs or charities. In addition, about half of the states provide significant asset protection to the cash value in life insurance policies. So in the (admittedly incredibly unlikely) event that you are successfully sued above policy limits and have to declare bankruptcy, you may get to keep any cash value you have not already borrowed out.”
Is this correct?
I’m not sure why he titled this truth: The Other Benefits, but yes, the death benefit is a nice feature of owning a whole life insurance policy, something you certainly do not get with a bank account, 401k, IRA, or investments. The death benefit is always passed on completely tax free which is also nice.
Life insurance does indeed have a special spot in many asset protection laws. In many cases, life insurance is about the only asset that cannot be touched in bankruptcy court.
Dr. Dahle seems disappointed: “Unfortunately, those are really the only benefits. Everything else is hype or even scam. IB/BOY/LEAP is not a magic pathway to wealth… …Some people selling these policies argue that you are not interrupting compound interest if you borrow from your policy rather than withdraw from your bank account. That is not the case. It interrupts it in exactly the same way. The money you borrow out earns nothing (at best—if you do not have a wash loan, it may even be costing you). If you are the type to keep a lot of cash around (perhaps while waiting to find your next real estate deal), this is simply a way to earn 3-5% instead of 1-2% on it, in the long run. That’s it. Not so sexy now is it?”
Is this correct?
Sadly, he is laboring under two delusions.
This is not correct. When you take a policy loan, your money (cash value) stays in the policy, it becomes collateral for the money that the insurance company loans to you.
As such, it continues to earn the guaranteed growth even when a loan is outstanding. This is that financial tailwind Nelson Nash talked about.
My brother Jesse got married a while back and when they went to purchase their house, they ran the numbers and decided to take a policy loan and pay cash. Over 30 years, they will recover everything they paid for the house.
This may seem like a wild claim. Jesse did an entire video to document how he is using infinite banking to do this. If this is something you are struggling to understand, I think this video will help.
He is still confused about wash loans. Again, I don’t blame him for not understanding that wash loans do not exist. The whole wash loan idea has been recklessly promoted by agents for years.
“…You get a little higher interest rate on your cash (after the first few years) and maybe some asset protection. That’s it. Like your investments, your life insurance should be boring. If it is making you excited and you feel a need to go proselyte it to your friends and family, you are likely mistakenly buying into the scammier aspects of the concept.”
Is this correct?
Personally, I differ with Dr. Dahle on the revolutionary aspect. In the point that there aren’t rioters in the streets screaming and holding “down with TAMRA” signs, he is right, it isn’t revolutionary.
But for many people, hearing Nelson Nash explain his idea (infinite banking) was a revolutionary moment in their financial life. It was for our family.
Infinite Banking isn’t magic, it isn’t going to make you rich all by itself, but it does make everything you do financially better. For our family, for our clients and many of our friends, infinite banking has certainly been revolutionary.
Dr. Jim Dahle, founder of the White Coat Investor signs off by saying:
“Infinite Banking/Bank on Yourself is not a scam, but the way it is sold frequently feels scammy. It is not a magic way to build wealth but may help you earn a little higher rate of return on your invested cash in the long run and provide a bit of asset protection you probably don’t need.”
Dr. Dahle started the article by defining infinite banking as a scam:
“Frankly, all of these terms are scams…”
He was wrong there, but he is right here when he says:
“Infinite Banking/Bank on Yourself is not a scam”
He is also right that it is frequently sold in a scammy way. And yes, it helps you earn a higher rate of return on your cash in the long run and is also providing asset protection… that Dr. Dahle says you probably don’t need.
“If it is making you excited and you feel a need to go proselyte it to your friends and family, you are likely mistakenly buying into the scammier aspects of the concept.”
Dr Dahle would probably say I’ve bought into the scammer aspects of the concept, but infinite banking has been an amazing thing for our family, for our clients and for many of our friends, and I want you to be able to experience the benefits too.
We have been helping people with infinite banking for almost 20 years. If you want help getting started with infinite banking, whether you need to understand it better, or if you need help getting a well designed policy that will work well with infinite banking, we can help you.
Call us: 702-660-7000 or email: [email protected].
by Steven McFie
Many people make bad financial decisions, not because they want to, but because they don’t understand enough to make good financial decisions. I like to make things as simple as possible. Simple things are easier to understand. And when you understand something, it’s easier to make good financial decisions. (Yes this is an old picture - need to get an updated one.)
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