This is a continuation of the previous blog entry entitled “The Infinite Banking Concept: Scam or legitimate?”
We established that the Infinite Banking Concept (IBC) or system is not a scam. However, it is definitely not for everyone. If you have decided to proceed with this strategy you must ensure it is carefully planned and implemented using the right type of product.
Choosing the right product could be a daunting task, as there are many types of universal life and whole life policies in the Canadian market. Perhaps a good approach would be to enumerate the ideal features we seek and go from there.
The idea policy should contain:
- Funds with low volatility
- Funds with stable long-term performance
- Flexibility in overfunding policy
- Immediate vesting
- Low interest rate on loans
- Low or no fees on loans
- Preferred underwriting
- Low cost of insurance
Low volatility and stable long-term performance
The participating whole life (WL) investment funds (par account) have long stable historical performances, even as long as 130+ years. They invest primarily in bonds and short-term securities, real estate and mortgages. A small percentage is allocated to equities. Accounting practices also allow each company to use a “smoothing approach” which further ensures stability in returns over time.
With a universal life (UL) plan, you are behind the wheel when it comes to making investment choices (I have seen policies with over 300 funds to choose from!). That defies the purpose of the IBC, unless you are willing to take on extra risk. Also, to my knowledge, there are no funds for UL that have over 100 years of historical performance data.
Flexibility in overfunding
Most UL policies are flexible in this regard. WL policies tend to be less flexible, so you need to shop around to find one that will allow you increase and decrease premiums with relative flexibility.
However, one thing is for certain. You must overfund your policy to the max during the first 5-10 years! This is because both UL and WL are governed by strict tax-status rules (also known as “walking the MTAR line”). Upon the 10th and subsequent years, the maximum contribution allowable will be 250% of the cash value of the 3rd preceding anniversary. So if you haven’t been maxing out your contributions, you will be severely crippling the IBC in future years.
Immediate vesting
This, in my mind, is very important. When dividends are paid out in a WL policy, they are immediately vested, meaning it cannot be taken away or reduced due to adverse market conditions. This is why insurance companies will allow you to borrow 90-100% of the cash value.
UL fund returns are not vested. The entire cash value is subject to market volatility. For this reason most insurance companies may lend up to 50% of the cash value. This is counterproductive for an IBC.
Low interest rate and fees on loans
As mentioned in my previous blog entry, yes, there is interest to be paid on all policy loans to the insurance company. Is an interest free loan ever possible from a financial company? I’m afraid not. Hence, look for a policy that has low rates and, if possible, no admin fees.
Preferred underwriting and low cost of insurance
This is very important. After all, you don’t want your cash value growth to be stunted by high premiums. Ideally you should obtain the least amount of insurance that will provide you the maximum overfunding limit you can afford.
That being said, if you can pay less because you are healthy, then why not? There are only a small handful of policies that offer preferred underwriting. Less money for premiums, more money in your pocket.
Summary
Participating whole life insurance is the right choice for clients who are looking for guarantees, low volatility, stable growth, and hands-off management.
Is the Infinite Banking Concept right for you? Would you like a more detailed analysis using real product examples? Contact me for a no-nonsense, straight to the point discussion.