For years, proponents of infinite banking have highlighted a certain benefit behind cash value life insurance. The specific benefit has been more closely associated with whole life insurance, and those directly connected with “The Infinite Banking Concept®” have towed a hard line for whole life insurance over universal life insurance. Last summer, a newsletter released by said company attempted to expose the weaknesses of indexed universal life insurance to promote the superiority of whole life insurance in accumulating wealth and providing security for one’s family. What we’re going to explore today is whether the rally against universal life insurance – and, more precisely, indexed universal life – is a just one.
First, Some Background
The Infinite Banking Concept is a company formed around Nelson Nash’s Become Your Own Banker, which was a book written to specifically highlight the benefits of life insurance policy loans and the non-direct recognition policy loans of a whole life policy.
Why Non-Direct Recognition Whole Life Policy Loans
Sales people and product pushers need a hook. When you’re trying to make money in an easily systematic way, it’s a whole lot easier to sell people on non-direct recognition than it is to simply explain a policy loan (You’d need to be able to grasp how it all actually works, which is expecting a lot from your average life insurance agent).
As we’ve said before, the direct recognition vs. non-direct recognition tag doesn’t matter. The specific treatment of dividends, as in loans, does. But…marketing is the refuge of the ignorant.
The Top 10 Reasons NOT to Listen to Hustlers
So, without further ado, we present to you the Top 10 Reasons NOT to Buy Indexed Universal Life Insurance as detailed by the Infinite Banking newsletter.
If you want to read the original by Todd Langford, here it is for your reference.
Reason #10 Internal Costs are not Guaranteed
The idea here is that insurance companies have the ability to adjust costs factored into a universal life policy to accommodate operational expense changes. While this is in fact true, it grossly exaggerates the liberty insurance companies have in exercising this right. For starters, all policies issued within a certain form number (think block of the same product) are individually considered for the purpose of administrative expenses. Therefore, if the insurance company realizes an increase in operational expenses, it must be able to draw a direct connection between those increased expenses and the block of business on which it wants to increase expenses.
Additionally, insurance companies are well-known for their management of operational expenses, and they aren’t going to start binging on new digs or whiz-bang technology thinking, “We’ll just let those universal life suckers foot the bill.” In fact, we’ve found that the expense ratio (defined as the relationship between total operational income to operational expenses) is lower at companies well-known for their focus on indexed universal life insurance than it is at companies whose focus is whole life insurance.
While these expenses can vary, they are limited in terms of the degree to which they can do so (i.e., the insurance company cannot increase expenses indefinitely in an attempt to extract an unlimited amount of money from universal life policyholders).
Reason #9 Mortality Charges are not Guaranteed
Again, the illusion here is that the insurance company can decide on a whim to ratchet up charges at the expense of policyholders. This is blatantly false. The policies remain segmented, and adjustments in mortality costs cannot be shared or blended across different policies. Additionally, increases require state filing and approval, and when the insurance company experiences lower mortality than assumed, there are legal imperatives that result in credited interest to policyholders. Also, just as is the case with administrative costs, there is an allowable range with respect to how high expenses can go.
Reason #8 Market Drops Cause Double Pain
There’s a hefty load of misinformation on this one, which is either intentionally misleading or all the proof we need that Mr. Langford has no idea how the mechanics of any level premium (i.e., cash value life insurance) product works. There’s even a cash flow graph to further illustrate this ignorance.
To be extremely clear, neither current assumption nor indexed universal life insurance credit negative interest. In the chart and the explanation within the newsletter, there’s a serious disconnect on this. The suggestion that a negative market year could cause a decline in the cash surrender value of an indexed universal life insurance contract because the credited interest rate will be negative is false.
Now, one can make the point that a zero or negative crediting year could draw down performance because the contract still has fees that must be covered somehow. While this is true, the graphical depiction still exaggerates its effect. And, there is a nifty trick one can employ to significantly lessen the impact (If you want to know more about it, send us an email).
What’s more, with his constant focus on term insurance, Langford completely overlooks a vitally crucial aspect to cash value life insurance that Primerica, Dave Ramsey, and all the other “trash value life insurance” hawks love to talk about: the declining net amount at risk.
Yes – when you die, the insurance company keeps your cash value and pays you the death benefit.
Semantically, it sounds terrible – and for non-participating whole life and level death benefit universal life insurance, it can be – but for those of us who know how to design life insurance, it’s an added benefit that we like to milk for all it’s worth. This declining net amount at risk means that the terribly expensive term insurance gets infinitely smaller as the insured ages. Some insurance companies make this even easier by setting an age after which internal expenses stop.
Reason #7 Late Premiums Kill any Guarantees
This is a reference to secondary guarantee riders that are sometimes placed on universal life contracts. Mr. Langford incorrectly states that a late premium sacrifices basically all of the guarantees placed on a universal life policy. His all-encompassing statements are only true for a certain type of secondary guarantee rider. What Mr. Langford forgets (or doesn’t know) is that there are two types of secondary guarantees. The technical explanation is a tangent best left out of this article, but you can read more about secondary guarantees in this article. You can also watch a video about it.
Langford’s suggestion that late payments could be made entirely on accident and force you to lose your coverage is also laughable:
Thinking about the time frame of a 50 year policy paid monthly (600 payments), ask yourself what the likelihood is of a mistake being made by the premium payer, their bank, the post office, the insurance company clerks, or anyone else along the way.
This worry is ridiculous, and here’s why. The guaranteed death benefit is made available by a rider. Whenever a rider is subtracted from a policy, a notice must be sent to the insured. So, it would be impossible for the insurance company to make a mistake and accidentally delete a secondary guarantee rider from a policy because the person in accounts receivable mistyped the date the payment was received into the computer. If that was the case, we’d have much bigger problems with the insurance industry than just the loss of a rider from one’s policy.
Reason #6 Dividends from the Index Don't get Credited
Let’s begin by noting that indexes don’t pay dividends. Let’s also note that the most common iteration of the S&P 500 that gets quoted, the Price Index, has never accounted for dividends. So, most of the statistics that depict the average return of the S&P 500 for the past several years don’t account for dividends. In other words, the exclusion of dividends is simply a distraction from the matter at hand.
Reason #5 Participation Rates are Often Less than 100%
The participation rate refers to the amount of the credited interest rate the contract actually receives. Let’s say that the return on the S&P for the year is 10%. A 100% participation rate would mean that the contract receives an interest rate of 10%, while a 90% participation rate would mean the contract receives 9% interest.
I’d challenge Mr. Langford to bring me one mainstream insurer who has a one-year point-to-point crediting strategy with a participation rate below 100%. Sure, there are other more complex crediting options available that use varying participation rates (sometimes more than 100%), but if you use the most sensible method (one-year point-to-point), you’ll be fine. Participation rates are guaranteed for the life of the contract, and late premiums do not forfeit this guarantee.
Reason #4 Returns are Usually Capped at Certain Interest Rates
I don’t understand the fascination a lot of the whole life hacks have for this feature. The point that you can’t earn more than 13% or so interest is just one more aspect they grab onto and present as a means to shift focus. Sometimes, they’ll even note that these caps can drop. I hear whole life dividends can drop, too. But, I’m sure that never happens. Just ask Northwestern Mutual, Guardian, Ohio National, and New York Life.
Here’s something else that can happen to rate caps: they can rise.
Reason #3 Returns are Not Credited Annual
This varies from company to company. Some companies do have a guaranteed minimum credit rate that is credited annually. Others guarantee that after a certain period of time, the minimum credited interest rate will be a specified amount. For example, they’ll guarantee a 2% minimum annually credited interest after 10 years.
The issue at hand for Mr. Langford is that if the minimum interest is credited annually, you have the potential for an augmented performance by earning the guarantee in one year and then earning something beyond the guarantee in following years. That’s all well and good, but again, Mr. Langford confuses the fact that indexed universal life does not credit negative interest using another incorrect illustration. This is yet one more example of focusing intently on one part of the whole in order to divert attention from the bigger picture.
Reason #2 All of the Above can be Changed by the Insurance Company
This is not even a little bit true. The insurance company cannot change the minimum guaranteed rate; it can’t change the participation rate; it certainly cannot change the mortality and expense on a whim; it cannot change the secondary guarantee benefit because it feels like it or pretend that it was processed late.
Further, there is a tone within this article that suggests that the insurance company is out to screw the client, which is incredibly unfair and untrue.
Reason #1 The Risk is Shifted back to the Insured
This is the old whole life tagline against all forms of universal life insurance. It’s entirely true that the owner of a universal life policy shoulders more risk with respect to the variability of assumptions, but lets be fair here – at least the specifics are detailed clearly. Would any staunch promoter of whole life insurance as the only worthy form of cash value life insurance care to explain how whole life contract dividends are calculated and reconcile this past year’s calculation to ensure I got paid what I was supposed to on my whole life policies?
Again, the suggestion that life insurance companies are simply trying to pass risk off to the insured and rob them of their money is absolutely false. In fact, aren’t universal life contracts the form of insurance that can guarantee zero net cost loans and offer over-loan protection benefits to ensure that the policy can generate retirement income and not lapse later on if too much money has been pulled out? Few whole life contracts offer anything close to this.
This is NOT an Attack on Whole Life
I still have mine, and I haven’t changed teams. I still write a substantial amount of whole life insurance (just as much if not more than universal life insurance). But, I won’t sit by and allow people to lie about products in an attempt to make the product they want to sell more attractive. Whole life insurance is a great product, but it isn’t the answer to everything.
I receive requests to address certain products or aspects of the insurance industry, and sometimes, I have to turn them down because someone wants me to point out the flaws of a product in such a skewed manner so as to suggest that there is a superior alternative in all cases. It’s just not true, and deception is not my style.
Sadly, it appears as though Todd Langford’s aggressive (and misplaced) attack on indexed universal life insurance has earned him space in Nelson Nash’s latest book: Building Your Financial Warehouse. At least, there’s a note within the newsletter that mentions this, but I haven’t read Nash’s book to know if it was indeed included.
I’ve always regarded Nash as an intellectual bright point within the infinite banking crowd, but I may have to adjust that view.
To be clear, the core of what they talk about does work, but as in other product fanclubs, there’s a high degree of sensationalism (and hawking) that we could all do without. And, as much as some may not like it, there are aspects to universal life insurance that make it capable of doing the same thing whole life insurance can do vis-à-vis infinite banking.
If you’d like to learn more about how we compare whole life insurance with universal life insurance and hear our honest opinion of which would work better for your situation, contact us. We’re always happy to help.