Will Infinite Banking Work With Assets Other Than Life Insurance?

The extremely direct answer is yes. You can run a banking system on stocks, on bonds, on funds — mutual funds or exchange-traded funds — or on savings vehicles like CDs, money markets and high-yield savings accounts. This video walks through the downside of each one, and why the mortality charges you sidestep by skipping life insurance usually turn out to be the cheaper half of that trade.

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What You’re Actually Asking a Banking Asset to Do

The perception behind this question is straightforward enough: use one of these other vehicles and the mortality charges that come with a life insurance contract simply go away, so you should end up with a better rate of return or overall yield on the money you’re banking with.

What I think you’ll find is that life insurance has characteristics in three departments — growth, safety, and very importantly taxation — that can more than make up for whatever mortality charges are incurred. And a skilled practitioner knows how to grind those mortality charges down to the absolute bare minimum while keeping every one of those favorable characteristics intact.

If you’ve watched any of my other videos on banking you already know the ideal we’re after. We want to accumulate assets in an account that gives us steady, consistent compounding over time, and that also gives us the right to borrow against the account — so that as we pay the loan back down, we end up a higher place in line in that compounding each and every time. That’s the target. Now hold every other asset class up against it.

Stocks, Margin Loans, and the Margin Call

Apply stocks to that model and the borrowing half actually works. Most online brokerage accounts will let you borrow against your holdings at any time — that’s a margin loan. And as long as your stocks go up, possibly at a better rate than whole life insurance, you’re doing fine.

The problem is that stocks go up and stocks also go down. There’s a saying that stocks take the stairs up and the window down. When things get bad they get really bad, and nobody knows exactly when that will be.

If it does happen while you’ve borrowed against your stocks, you get a margin call. It sounds like this: “We expected you to have a certain amount of equity. That was fine when things were going up, but now that the value of the stocks has gone down you need to maintain that level of equity — so we need you to put more money into the account, or sell some of the stocks you have to satisfy this margin call.”

That can create real problems, and the cleanest way to see why is to look at what the market actually did.

The Flaw of Averages: 1999 Through 2014

Take the S&P total return — the 500 most reputable U.S. stocks including every dividend paid — from 1999 through 2014. I picked that stretch because it contains some of the best of times and some of the worst of times in the index’s history.

It opens with a rip-roaring 21% return. Regardless of how much you had invested, you felt pretty good watching a dollar turn into a buck twenty-one. That was short-lived. The next three years were all negative, walking that dollar back down through $1.10, $0.97 and on to $0.96.

Then came the snapback rally of 2003. You earned 28% — but on a smaller number, so it only carried you back to 97 cents. Not back to even, and nowhere near your buck twenty-one. Good years followed and took that 97 cents to $1.08, $1.13, $1.31, $1.38. Then 2008 happened.

The headline number is negative 37%, and that’s January to January. Peak to trough it was a loss of greater than 50%. Either way, $1.38 turned into $0.87. Then the quantitative easing years — 2009 through 2014 — ramped it back up considerably, all the way to $2.26 by the end of that sixteen-year period.

Now notice there are two different rates of return sitting in that result, and the gap between them is what’s known as the Flaw of Averages. The average takes those sixteen annual returns, divides by sixteen, and hands you 7.03%. That looks a lot better than 5.23%, which is the actual rate of return — the IRR of turning one dollar into $2.26 over those sixteen years.

So any time you hear “our funds beat the Lipper averages” or “we beat the S&P average,” remember that you can’t walk into a supermarket and spend an average. What matters is the actual rate of return — and the sequence of those returns, meaning when they happen, matters too.

Borrowing Against a Steady Account vs. a Fluctuating One

Put two accounts side by side, each funded with $100,000. In one, you’ve built your own personal bank into something that steadily compounds at 5%. In the other, you’ve built $100,000 in stocks that fluctuate — the same sixteen-year 1999-to-2014 run of the S&P total return above.

Remember that 21% first year, so the stock account jumps to just over $120,000 right out of the gate while the 5% account plods along. Now run banking through both of them. Had you been borrowing against the stock account, you’d have caught a margin call shortly after that first year and been forced to liquidate stocks while they were down.

Against the steadily compounding account, you just keep borrowing. And one of the best times to borrow against your own private bank is precisely when everything else is down — those are the moments you get fire sales on real estate, on businesses, on business inventory, on whatever it is you buy. You borrow against the account without losing your place in line in the compounding, and there’s no fear of a margin call.

The stock account did recuperate, and eventually pulled ahead. But think about the heartache along the way, and the fact that you’d likely have had margin calls landing on you at the worst possible moments.

One more thing about margin accounts: most of them only let you borrow against 50% of your value, where most life insurance loans let you borrow anywhere from 80% to 95% of your cash value at any time, for any reason. So there are considerable advantages to using life insurance purely from a growth and risk standpoint, plus the ability to collateralize against it at a much better capacity.

Keep in mind that if you buy individual stocks your performance will vary, and historically a fund like an S&P 500 index fund has been a little less volatile than individual names. Even so: this is the top 500 companies in the U.S. economy, and that $100,000 account still slid from roughly $140,000 down into the $80,000s inside a single year. That’s a lot of volatility. Worth remembering before you make stocks or funds the underlying asset class you build your bank with.

Why Bonds Make a Poor Bank

For bonds, look at the Federal Reserve’s economic data on Moody’s Seasoned Aaa corporate bonds — investment grade. Whether you’d actually use investment grade, high-yield junk, municipals or treasuries isn’t really the point; bond interest rates have all tended to trend in the same direction regardless of their actual rate.

Across 1950 to 2015, 1950 sits at the lowest point on the historical curve and the highest point lands in the 1980s, with rates coming down steadily ever since. They could go a little lower, but it’s unlikely they get much lower — especially with the Federal Reserve having finally started raising the fed funds rate.

And the biggest problem with bonds is the inverse relationship. As interest rates fall, the price of bonds rises. If rates start climbing again, which plenty of people expect, bond prices fall. By price I mean the money you actually have in the asset.

Say you had that same $100,000 in bonds to borrow against. Buy in while rates are high and falling and it’s great — new bonds get issued at lower yields and the value of your $100,000 rises. Buy in near the bottom and there’s not much room left for that to happen. If rates rise and somebody else can buy newer bonds at a higher interest rate, the value of your $100,000 in existing bonds goes down.

That same chart is very relevant to whole life insurance, because life insurers buy a lot of investment-grade bonds. It’s no coincidence that the dividend history of most major carriers looks a lot like that curve: double digits in the 1980s, coming down pretty steadily ever since.

But here’s the difference that matters. The cash value in your whole life policy is not a bond. It is contractually guaranteed to go up every single year. Buy a policy while dividends are still on their way down and your performance may land below what was illustrated. Buy one and see dividends rise in the future and there’s a chance it lands above what was illustrated.

Either way, you can’t go backwards. Once you earn a dividend it’s locked in, and your cash value is guaranteed to compound off that number by some rate — which rate depends on what dividends do from here.

Taxes, Savings Accounts, and the Spread

One of the biggest advantages of earning money inside a whole life policy — or any life insurance policy for that matter — is that it’s immune from taxation as long as you keep the policy in force until the insured passes away. None of the growth and none of the distributions get taxed.

Compare that to every other vehicle we’ve talked about. Whether you’re taxed at ordinary rates, qualified dividend rates or long-term capital gains rates, a lot of my clients are losing somewhere between a quarter and a half of their growth to state and federal taxation.

A savings account will at least give you principal protection. Only it comes with a cost — really a lost opportunity cost, since rates on genuinely safe assets like that have run under 1%. And even when they do rise, look at the spread. A bank will let you compound a savings account at that wonderful rate and then lend the same money back to you somewhere in the 4% to 6% range depending on your credit.

Which is why permanent life insurance ends up being the most ideal asset for building your own bank: borrow against it, and let the asset keep compounding free of taxation, free of market risk, at a very reasonable rate.

Click here if you’re ready to see what your numbers could look like and how this strategy can be implemented in your life. Book a meeting with one of our team members today.

John “Hutch” Hutchinson, ChFC®, CLU®, AEP®, EA

Founder of BankingTruths.com · 19-year practitioner · 14 family banking policies across 3 companies · independent broker

John “Hutch” Hutchinson has no affiliation or association with The Infinite Banking Concept®, The Infinite Banking Institute, or Nelson Nash, nor his book Becoming Your Own Banker – Unlocking the Infinite Banking Concept; nor with Bank on Yourself, Pamela Yellen, or her book The Bank on Yourself Revolution. “The Infinite Banking Concept®” is a registered trademark of Infinite Banking Concepts Inc. “Bank On Yourself®” is a registered trademark of Hayward-Yellen 100 Limited Partnership.