Category: Personal Finance Software

Whole Life Insurance and The Infinite Banking Scam

Is infinite banking a scam? If you consider permanent life insurance to be a scam, then it’s a scam. I don’t, but I know that some do.

While I don’t think it’s a scam, it can feel that way for a few reasons, not least of which is the pushy salespeople.

The Be Your Own Banker, Infinite Banking, and Bank On Yourself methodologies have been around for a long time because they are whole life insurance policies marketed as financing and banking tools. The real question to ask is whether you should purchase permanent life insurance. Generally, you should simply purchase term insurance.

Permanent life insurance should not be your first “investment” and is best suited for those looking for additional ways to pass money to their heirs or for those who need permanent insurance due to age. It’s an estate planning tool or a way to get life insurance if you are past the age where term insurance is a viable option. Be Your Own Banker  / Infinite Banking looks to turn permanent life insurance into a retirement plan and perhaps a means of financing major purchases. I recently sat through a series of meetings with a Be Your Own Banker life insurance broker to understand what it is all about and if I could use it to finance a major purchase that would require a bank loan.

The basic concept in Infinite Banking is that you would fund a whole life insurance policy and use the cash value of the policy purchase permanent life insurance and tack on a paid up additions rider. This allows you to borrow against the cash value of the policy. In theory you could then pay off your car loan or use it to finance your business. As a financing vehicle it could potentially be cheaper than getting a loan from a bank. As an investment vehicle, studies show that you are better off putting your money into a balanced portfolio. If you’re not sure how to create one of those on your own check out Personal Capital or MarketRiders and they’ll do it for you. A risk adjusted portfolio will have better returns over time.

I ultimately decided not to purchase the product primarily due to the high up-front cost of purchasing whole life insurance, the 7% fee that would be scraped off the top of my investment, and my personal confidence in earning a return equal to the compound average growth rate of 9.3% by investing in the market.

The counter-argument was that to achieve that tax savings, the lower fees, and guaranteed returns achieved by purchasing whole life insurance were a safer and better investment. One of the main components of achieving that return was the purchase of a paid up additions rider. By adding that rider, the cash value of the policy increases, allowing for better returns.

Major Selling Points

1. Forced savings plan

2. Guaranteed returns

3. Secure financial institutions

4. Interest free loan

5. Tax free withdrawals

Major Drawbacks of Infinite Banking / Permanent Life Insurance

1. Cost – Here’s where I balked. The initial cost is quite prohibitive and the money injected was not accessible for a number of years. Perhaps if the returns were better over time it would’ve been easier to take the bitter pill.

2. Forgoing High Returns in the market. While I understand the calculation, I believe that by investing in a low cost 401k plan with a diversified mix of assets that are rebalanced over time, I can still out perform the projected permanent life insurance.

The returns were our main disagreement. I argued that the average return generated by stocks is about 10% since 1928. The salesman said that we should use the most recent 30 years of data. This actually took the returns higher, but we brought it back down by layering on a crippling management fee of 3.0%. Fees average between 1% and 2% on 401k plans so the 3% was overstated.

The Be Your Own Banker concept (is trademarked!) will appeal to people who do not want any risk.  They’d rather have a fixed return, even if it is potentially lower than what is available on average from the market. Purveyors of the Be Your Own Bank concept run through a series of calculations with you to “prove” that you’re better off putting your money into permanent life insurance than into your 401k. And in many cases they are right. There are a lot of people who do a very poor job of managing their finances. They end up in a 401k with high fees and the wrong asset mix for their age and risk tolerance. In turn, this creates a financial tsunami that buries them when they need their money most!

I had a generally positive experience with the salesman. We disagreed but he was not disagreeable. I can see this concept appealing to some people but would not recommend it unless market risk puts you into a catatonic state or you simply will not ever save unless forced into it. Know that this is not a true savings account and your money is not immediately available. Instead of going with permanent life insurance, embrace some risk and you will see higher returns. Be confident that you are not throwing your money away by putting into your 401k. The life insurance industry calls this strategy, buying term and investing the difference. It’s a good strategy. Automate your savings and work towards specific investing goals (Betterment style investing). You’ll achieve them and end up with higher returns in the long run.

There’s a great discussion over at the White Coat Investor site. The good stuff is in the comments.

Betterment Review: Get Motivated With Betterment’s Goal Based Investing

Betterment Review

Betterment.com is a great fit for people who need a clear plan and some motivation. I really like the goal based investment plan. It allows you to allocate your money in a way that makes sense for your needs. It is clear to the user how they are progressing and because they segregate the cash into different tranches, you mentally separate the dollars as well. Betterment’s automatic savings plan is a great feature because automation is one of the keys to growing your nest egg. For some people, socking money away on a regular basis is as easy and natural as breathing.  For most people, we tend to live closer to the edge of our income than we are comfortable doing, but don’t know how to get out of the cycle.  As a college student you hear about investing and dream that someday when you are in your dream job you will be earning enough money to have extra to use for investments.  How quickly those dreams vaporize as you are hit with the expenses of inflation, taxes, and the reality of just how expensive life is.  That is why an investment program like Betterment.com is helpful. Betterment helps you save for life’s major financial hurdles by providing you with a goal oriented investment plan. It’s so easy. The best part of a service like Betterment is first, it is easy to use.  It takes about 10 minutes to get an account.  The majority of their clients are not financial advisors and they have developed their product to be easy enough to be used by just about anyone.  Second, it helps you ease into investing with a low monthly deposit, gets you out of the cycle of spending every dollar you earn and uses it to help you achieve your financial goals and protect you for your future through sound investments.

What are you investing in? Although it’s an automated program, you are involved in what you are investing in based on the way you define your asset allocation when you start your account.  And you don’t have to be a financial advisor to make good investment choices.  Betterment has done the market research already and has put together a varied portfolio of stocks and bond.  Here are some investments they offer: (the ticker is in the parenthesis) bettermentsummary2Stock Portfolio Makeup

  • 25% Vanguard Total Stock Market ETF (VTI)
  • 25% iShares S&P 500 Value Index ETF (IVE)
  • 25% Vanguard Europe Pacific ETF (VEA)
  • 10% Vanguard Emerging Markets ETF (VWO)
  • 8% iShares Russell Midcap Value Index ETF (IWS)
  • 7% iShares Russell 2000 Value Index ETF (IWN)

Bond Portfolio Makeup

  • iShares Barclays TIPS Bond Fund ETF (TIP)
  • iShares Barclays 1-3 Year Treasury Bond Fund ETF (SHY)

These choices all follow their respective index very closely and are very liquid, which lowers the bid/ask spread.  They are also tax efficient, and offer low annual fees.  In other words, you can feel secure in what you are investing in because Betterment has done the background work and only offer the best investment options for their clients.  Of course, nothing in investing is a guarantee.  There is always some risk in investing.  But where there is no risk there is no reward. Why ETFs? You will notice that the above portfolio is full of Exchange Traded Funds (ETFs).  That’s because they are more liquid and easier to trade and very cheap.  It’s like buying a stock of a bunch of tiny pieces of stock which helps you diversify in a very quick and easy way.  And being diversified is one of the biggest keys in investing.  It’s also one of the hardest things for anyone besides a financial advisor or someone who closes watches the market to do because it takes a lot of research.   You don’t want all of your eggs in one basket.  With ETFs you get a little bit of a lot of different stocks.

Aren’t we all a little afraid of how to handle our money? Because of the ups and downs in the economy, banking industry, real estate industry and the stock market over the past 20 years, many people are afraid of investing and just end up keeping their money in their savings account.  Some credit unions and banks will even pay you a small interest rate to bank with them, but there is usually a cap on what they are willing to pay you.  While savings accounts and credit unions definitely have their place in the market, they are not the best way to build a large savings account, nor will they be able to pay you the highest return on your monthly deposits. “Over the long-term, investing in the stock market tends to outperform money in a traditional bank savings account.”

Watch it Grow With Betterment, your money is always accessible to you if you need to withdraw it at any time and there is no penalty to do so.  Better yet, hopefully you won’t need to withdraw your money, as you are trying to achieve certain financial goals, and you will be able to sit back and watch over the years as the dividends you’ve earned are automatically reinvested to keep earning you money.

How Much Does Betterment Cost?

You’ll pay between 0.15% – 0.35% as a management fee. There is no minimum investment amount and no minimum balance requirement, but if you cannot invest at least $100/month, you will pay a $3/month fee. They really want to make investing easy and accessible to everyone.  They offer a free 3o day trial period and 3 plans to choose from.  You get to decide where you fit in and pick the plan that fits your lifestyle the best.  And here are the plans they offer: 1.The Builder Plan: If you are in the beginning stages of trying to build your savings/investments, the builder plan is as easy as depositing $100 and being done with it.  You can break up the $100 in to as many smaller increments that you need to in order to reach that amount, but the monthly total must be $100.  You can even use direct deposit to accomplish this and forget about it entirely, while all the while your money is being saved, invested, and used better than it would if you had it on your bank statement, just waiting to be spent.  The annual fee is .35% As noted above, if you cannot commit to $100 a month then you will be upgraded to the Better Plan.  And if you don’t have the $10,000 required for that plan, you will pay a $3 monthly fee in place of the annual fee. 2. The Better Plan: At a lower annual fee of .25%, the Better Plan requires a $10,000 investing minimal balance, but the monthly deposit is optional.   Better yet, “the $10,000  minimum is across all of your Betterment goals, including IRAs.”  This plan also carries with it the next day deposit benefit, which means that your money will be invested within 24 hours of originating a transfer, as long as the market is open. 3. The Best Plan: This is for those people who have at least $100,000 to invest.  Of course, the annual fee is the lowest for this plan, at .15% and it also has the most “perks”, including: optional monthly deposit, next day deposit, a personal consultation and also trust accounts. While Betterment does not charge hidden fees, their management fee does not include fees associated with the funds that you choose. However, the management fee does cover transaction fees, trading fees, transfers, rebalances, advice, and account administration. Betterment is an SEC Registered Investment Advisor. Betterment purchases your selected portfolio through Betterment Securities, which is a registered broker-dealer. While your deposit is not safe from market fluctuations, you are protected by SIPC up to $500,000. So if you aren’t interested in hiring a financial advisor or going through endless hours of research on your own to become your own financial advisor but want to start investing, Betterment.com is a really great option. It’s easy to use and very intuitive.

How Could Betterment Improve? I keep waiting for another Personal Financial Management company to combine investing and expense tracking like Personal Capital. I’d like to see Betterment combine my accounts and then provide advice based on the whole picture. For now, you could combine Betterment with SigFig to get a picture of your combined portfolio. You’ll like the clean look and goal based investing. Tracking investments inside the system is easy and if this is your first foray into investing, Betterment is a great choice. You can sign up for Betterment by clicking here.