For years, infinite banking has highlighted a certain benefit behind cash value life insurance that has existed–more or less–since its inception. 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 promoting whole life insurance over universal life insurance. Last summer, a newsletter released by the company attempted to highlight the weaknesses of indexed universal life insurance as a means to promote the superiority of whole life insurance as a means to accumulate wealth and provide security to one’s family. But is the rally against universal life insurance, and more precisely indexed universal life, 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 more specifically to highlight non-direct recognition policy loans of a whole life policy.
Why Non-Direct Recognition Whole Life Policy Loans
Sales people product pushers, need a hook. And 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 (and you’d need to be able to grasp how it all actually works and that’s expecting a lot from your average life insurance agent).
I’ve stated before that the direct recognition and non-direct recognition tag specifically doesn’t matter. The specific treatment of dividends a la loans does. But…marketing is the refuge of the ignorant.
The Top 10 Reasons NOT to Listen to Hustlers
So, without more meandering introduction, let’s dive into 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, 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 expenses changes. While this point is, by literal point of fact, indeed true it grossly overstates the liberty to which insurance companies can exercise 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. This means 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 wiz bang technology thinking all along “we’ll just pass this along to those universal life suckers.” 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 continues to be whole life insurance.
And, while these expenses can vary, they are limited in terms of the degree in which they can vary (i.e. the insurance company cannot increase expenses indefinitely in an attempt to extract an unlimited amount of money from universal life policy holders)
Reason #9 Mortality Charges are not Guaranteed
Again, the allusion here is that the insurance company can decide it wants to ratchet up expenses associated with the cost of insuring lives of the policy holders at its whim. This is also blatantly false. Again, and to a much more serious degree, the policies remain are 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 has experiences lower mortality than assumed, there are legal imperatives that result in credited interest to policy holders. Also, just as is the case with administrative costs, there is an allowable range with respect to how high expenses could 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 (I don’t build ‘em I just fly ‘em? Poorly I might add).
There’s even a cash flow graph to further highlight the
point ignorance. To be extremely clear, both current assumption and indexed universal life insurance do not credit negative interest. From 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. And this is true, but the graphical depiction still embellishes just how extreme an effect this has on things. And there is a nifty trick one can employ to significantly lessen this impact, if you want to know more send us an email.
Furthermore, the constant hammering on the “term insurance” side completely overlooks an vitally crucial aspect to cash value life insurance. It’s the piece that Primerica, Dave Ramsey, and all the other “trash value life insurance” shrillers 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 we use to our maximum benefit. This declining net amount at risk means that terribly expensive term insurance the whole life insurance only hacks cry on about gets infinitely smaller as the insured ages (damn details). Some insurance companies make this even easier by placing an absolute limit on this by defining 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 places on universal life contracts. Mr. Langford incorrectly states that a late premium sacrifices basically all of the guarantees placed on a universal life policy–not even close to true. And, 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.
The additional suggestion that late payments could be made entirely on accident and force you to lose your coverage is laughable. Langford writes:
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.
Utterly ridiculous allusion 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 the insurance company can’t just make a mistake and accidentally delete a secondary guarantee rider from a policy because the person in account 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 this 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. An example will ensure greater clarity. 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 1 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 (1 year point to point), you’ll be fine. Oh and participation rates are guaranteed for the life of the contract, and no late premiums don’t forfeit this guarantee.
Reason #4 Returns are Usually Capped at Certain Interest Rates
I don’t understand the fascination on this one, but a lot of the whole life hacks have. 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 one varies. Some companies do have a guaranteed minimum credit rate that is credited annually. While others guarantee that after a certain period of time the minimum credited interest rate will be a specified amount. For example, after 10 years we’ll guarantee that the minimum credited interest will be the equivalent of 2% credited annually.
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. He uses another incorrect depiction to paint this picture in an untrue manner.
And, this is yet one more example of parsing one piece to focus on intently in order to divert attention from the total discussion.
Reason #2 All of the Above can be Changed by the Insurance Company
No, not even sort of true. The insurance company cannot change the minimum guaranteed rate, it can’t change the participation rate, it cannot change the mortality and expense on a whim, it cannot change the secondary guarantee benefit because it feels like it or pretend like 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 tag line 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. Anyone out there telling the world that whole life insurance is the only form of cash value life insurance one ought to own care to explain the precise manner in which whole life contract dividends are calculated and reconcile this past years calculation to ensure I got paid what I was supposed to be paid 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 haven’t lost my mine, nor have I changed teams. I still write a substantial amount of whole life insurance (just as much if not more than universal life insurance). I also personally own whole life insurance. But I won’t sit by and allow people to lie about products in an attempt to beautify the product they want to sell. Whole life insurance is a great product, but it isn’t the answer to everything.
I receive requests to discuss 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 there is a superior alternative in all cases–it simply doesn’t work that way.
Sadly it appears as though Todd Langfords’s aggressive (and stupid) attack on indexed universal life insurance has earned him space in Nelson Nash’s latest book Building Your Financial Warehouse. There’s a note within the newsletter that mentions this, I haven’t read Nash’s book to know if it was indeed included.
What’s annoying to me is that I’ve always regarded Nash as the more intellectually capable one within the infinite banking crowd. I guess I have to adjust expectations.
To be clear, the core of what they talk about does work, but like elsewhere, there’s a high degree of sensationalism (and product 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 give you our honest opinion of which would work better for your situation, contact us, we’re always happy to help.