How Does Infinite Banking Fare During High Inflation?

With news sources reporting every higher inflation measure–and ample signs of prices increasing across the country–it's understandable that many people are seeking ways to personally combat the effects of inflation on their lives.  The Infinite Banking crowd appears ready to pounce on this topic and celebrate their ethos as the solution to the problem.  Philosophically, they hate the Monetary Policy Institution of the United States–and by extension the world–so any sign of a misstep appears opportunistic for them to rush in with an “I told you so” and argue it's time to adopt their way of thinking to live a better life.

But are we really going to hell in a hand basket?  And if we are, is there anything Infinite Banking can do about it?

Temporary Pain

I'm going to begin by highlighting a bias with which I come at this issue.  I do not believe that inflation is the “new normal.”  While the hike in prices will be uncomfortable for a while–I'd predict somewhere around 12-24 months–I highly doubt this will persist indefinitely.  Further, I'm not a believer that the Government secretly manipulates inflation metrics by omitting certain goods such as food and energy.  Both items are included in CPI-U measures the Bureau of Labor Statistics prepares regularly.

But, since Monetary Policy has no tools to deal with the price volatility both food and energy can experience, the Federal Reserve often uses refined CPI metrics to gauge inflation.  Further, food and energy price spikes have proven temporary throughout our history.  So while it may be unpleasant to live through moments of exceedingly high grocery bills and gasoline purchases, it's highly doubtful that they will remain high.

I'm also not interested in any argument about who in Federal Government is making mistakes and how that results in any circumstance you–or anyone else–might be dealing with presently.  People in government come and go.  We have to think about how we protect ourselves from the collective efforts of those people because complaining about them is not a strategy that gets us anywhere.

Now that we have that out of the way, let's dive into inflation and Infinite Banking.

Can Infinite Baking Save you From Inflation?

As much as some insurance agents and marketers would like you to believe, there is nothing uniquely equipping Infinite Banking–or whole life policies implemented specifically for Infinite Banking–to specifically handle the woes most of us will experience in a time of high inflation.  If anything, there are certain elements of strict Infinite Banking adherence that might prove a slight weakness in the idea at the start and potentially through the majority of a period of high inflation.

This DOES NOT mean that whole life insurance–and indexed universal life insurance–cannot all on their own be reasonably good protective measures against inflation in general.  The cash value that accumulates in these policies has outpaced inflation.  As a store of cash that has high liquidity, the product provides an opportunity to seize certain investment opportunities that might arise–this is true of any period be it high or low inflation.  And it is true that these types of cash value life insurance will likely benefit from a period of high inflation as the mechanism used to combat it, higher market interest rates will most likely result in a higher rate of returns payable on these products.

But none of these attributes are unique to Infinite Banking, which is ultimately just an extension of using life insurance policy loans to finance major purchases–investments if we're being true to the spirit of the original idea–instead of applying for a loan at a bank.  Further, if we uphold the idea that only non-direct recognition (NDR) loans are Infinite Banking worthy–an axiomatic notion to some–then we potentially sit in a compromised position with respect to shielding ourselves against the negative impacts of inflation.

Rising rates will force loan rates on most–if not all–NDR loans higher.  It's unlikely that we will see dividend rates rise as quickly, which will make borrowing more expensive without an equal offset to the rising expense.  We also know empirically that companies using non-direct recognition have generally struggled with increasing dividends payable to policyholders vs. direct recognition companies.

Can Whole Life Insurance or Universal Life Insurance Save you From Inflation?

Whole life insurance and universal life insurance do provide a reasonably good hedge against inflation.  These products have a history of returns that do exceed the rate of inflation.  They operate with cash-equivalent like principal preservation and liquidity with bond-like returns.  This means you can ratchet down your risk profile while ratcheting up your rate of return expectations with these products.

Cash values are denominated in U.S. Dollars, though, so they are not immune to temporary devaluing when inflation spikes.  That said, they will most likely benefit considerably from rising interest rates as that tends to be a primary driver of cash value rate of return.  In addition, life insurance products such as these tend to hold on to those higher rates of return even after market rates have come down.  From 2008 through roughly 2015, many of these insurance products maintained much higher than market average rates of accumulation on cash value despite rates having dropped considerably and remaining lowered around 2008.

Cash value life insurance products can also provide the emergency capital you might desperately need at this time.  One of the best hedges during high inflation is simply having enough cash on hand to weather the storm.  Large balances in a savings account might have an appeal due to their safety and ease of access, but many life insurance products display similar attributes with considerably higher rates of return.

So yes life insurance can work as an excellent hedge against some of the pain people experience when inflation spikes.  Infinite Banking is fine and I don't intend to suggest that it's going to fall apart due to high inflation–not at all.  But there is nothing about it uniquely that equips it to specifically handle the negative consequences of inflation.  Nor do I buy into any of the religion of Infinite Banking to suggest that what the Federal Reserve is doing further validates the need to practice Infinite Banking.

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