Can you “Bank” on Universal Life Insurance?

Bank on Yourself® and the Infinite Banking Concept® are well known selling systems that promote whole life insurance, but can we apply the secret sauce of these ideas to universal life insurance as well as whole life insurance?

The purests (i.e. those with a vested interest in promoting whole life insurance) would tell you know. But not one to avoid a fight, I’m going to suggest they may be lying to you.

If it Quacks like a Duck…

The application of cash value life insurance for the whole banking idea gets off the ground based on one very important principle. This principle is simply that loans taken against a life insurance policy do not actually remove the money in the policy, but rather pledge that money as collateral as a loan issued by the insurance company itself.

Because the money doesn’t actually go anywhere, it will continue to receive some sort of interest and (if participating whole life insurance) dividends while the loan is outstanding. But this principle is not unique to whole life insurance, nor is exploiting this feature unique to Bank on Yourself® or Infinite Banking®.

Several years prior to either of them really hitting their stride, Bob Castiglione dreamed up the Lifetime Economic Acceleration Process® which was also based on the principle (though dreadfully convoluted and really seemed to be of the opinion that every last dollar you had should be placed into life insurance).

And Doug Andrews has been championing the topic for years, which began with his mind numbingly long book Missed Fortune®. Interestingly, however, is the fact that Doug is the Pam Yellen fanboy equivalent to Universal Life Insurance.

So while each hawker of their own specialized secret way to the top of the mountain has suggested that only their weapon of choice will do, the fact of the matter is that the quintessential component of their weapon of choice is not unique to either type of cash value life insurance.

Paid-up Additions

Still the Bankers would tell you there are other differences when it comes why whole life insurance is the weapon of choice. Namely that whole life policies have an option to add a rider known as a paid-up additions rider and that this rider “super charges” the policy. That statement is a little sensation on my eyes, but it’s a really good marketing hook.

But suggesting that universal life insurance is at some sort of disadvantage because there is no paid-up additions rider is a statement made out of either ignorance or intentional deceit. We know fundamentally that universal life insurance has no specific premium, that’s what the whole “flexible premium” thing means. So in reality the option to place more money in to the policy than you have to (what you are effectively doing with a paid-up additions rider) is already a benefit inherent to every universal life insurance contract, no rider necessary.

So in reality we could easily set up a universal life policy to accept a larger loan repayment than you have to nonsense the Bankers talk about and suggest that you somehow magically made the policy work better. Just as we could easily place more money into the contract without a loan and have more money. Paid-up Additions help whole life insurance, but their lack of presence with universal life insurance is not noteworthy, nor is it a disadvantage.

Non-direct Recognition Loans

One of the big design features discussed by both Pam Yellen and Neslon Nash is non-direct recognition. To them, it’s a crucial item on the check list for a properly implemented Bank on Yourself® or Infinite Banking® policy. And for this reason the whole life hacks will suggest universal life insurance just won’t do.

But universal life insurance, specifically speaking variable universal life and indexed universal life, have had non-direct recognition loan options for years. They just don’t call it that. The principle is the same, however, money in the policy continues to earn whatever it would have earned if there was no loan.

In fact, there are several indexed universal life policies that possess a non-direct recognition loan with a fixed loan interest rate (we get asked a lot what whole life carrier is non-direct recognition and has a fixed loan rate, the answer is none).

Okay Fine…But they’re not Mutual!

In a last ditch effort to make an argument that has no counter some will suggest that whole life insurance being issued by a mutual life insurer is always a better bet because ownership is vested with the policy holder and earnings are shared with those owners/policy holders.

While this is fundamentally correct, and we pointed out some months ago that the mutuals certainly appear to payout a larger benefit in the aggregate than their non-mutual counterparts we can’t ignore that individually speaking you have to do what’s right for you.

Northwestern Mutual has touted it’s total dividend payout for years. It’s several billion dollars and is the largest absolute dividend payout in the industry. But on their whole life products they still maintain a dividend interest rate that is on the left end of the distribution curve. This is reality simply due to the huge number of policy holders that Northwestern has. Their total payout means nothing to the individual if it means he or she needs to share all of that with a disproportionately larger pool of people. Who lives a more comfortable life, all other things being equal, a family of 5 with an income of $150,000 per year or a family of two with an income of $80,000 per year?

The fact that universal life insurance is typically issued by non-mutual companies isn’t really that important for our purposes. It’s like the dividend recognition debate, specific details matter, not overarching themes. Doing otherwise is kind of like picking a car at the car lot based solely on the type of headlights it has.

Details Matter

I feel as though I could just as easily swap out the where insurance gets de-mystified

tag line with this statement, details matter. It’s a pretty common slogan within our articles here. The fact is, you can employ either product for the concepts supported by Bank on Yourself® and Infinite Banking®.

There’s a big difference between hawking products and talking conceptually about these ideas, and then actually applying them to a situation to see who works out best. People are unique and you can’t shove them into a neat box that makes the sale of your preferred product easier. This is why we spreadsheet like we do—sometimes really great products are duds given a certain goal. Matching the right product with the right circumstance is what we all need to be doing in this industry.

4 thoughts on “Can you “Bank” on Universal Life Insurance?”

  1. My only problem with universal life is the fact that it fails… I’ve never met anyone with a long term UL that beat a whole life policy… never…

    • Hi there,

      Define beat. We’ve seen plenty of Universal Life contracts work out very well. Beat a whole life contract is sort of a relative notion that would require identical clients with an identical scenario and each buying the other product to compare. So we could play the doubting game for some time. That or we could look at the past 10 years and compare average crediting rates (the IUL side wins that one, I’m afraid). Doesn’t mean it’s necessarily better.

      Our point is simply to point out that both product choices can be good when implemented correctly. And we’re not going to pretend like only one is best for all circumstances. It’s intellectually dishonest. And we’re not going to make nonsensical platitudes about why someone should lean towards one vs. the other. It’s going to be about facts and figures and probabilities of various events. Not long tail/black swan-like events that are unlikely, and won’t bode well for either product.

  2. So, how do you support the UL illustration eventually running out of money and the WL still growing cash? Not antagonizing, just honestly intellectually curious on this. The dividends help of course, but how do you design the UL with the same input of cash, to equally perform at extended ages? If you can show me I’ll gladly sell more of them.


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