Question for the Money Doctors
Question submitted on Apr 15, 2010.
QuestionI was recently introduced to the "infinite banking concept" which uses dividend paying whole life insurance as a tool for long term wealth building. Nelson Nash wrote a book about it and an agent at MPG Banking is talking to me about it. Is this a good way to accomplish long term wealth and shield my self from taxation?
Life insurance policies allow you to accumulate cash value income tax-free.
You can later make withdrawals from those policies that are also income tax-free. First, you can withdraw all of your premiums tax free and then you can withdraw
the growth in the policy in the form of policy loans. This is an excellent concept to consider, especially because income taxes may be going up.
This concept would work with both whole life insurance and with variable universal life insurance. The problem with using whole life insurance is that whole life
policies are interest sensitive. What that means is that their returns are probably going to be in the range of bond returns; say 5, 6, or 7%.
On the other hand, in a variable universal life insurance policy, you can own a diversified portfolio of securities. Long-term investors have always looked to the stock market for higher long-term returns. Therefore, I suggest that you compare an illustration of a whole life policy with an illustration of a variable universal life insurance policy. Two companies with excellent variable universal life insurance policies are Manulife and Lincoln.
If you are using the policy primarily for wealth accumulation, you want to make sure that the insurance is the minimum amount you can buy to permit the monthly/annual investment you want to make. If any more insurance is purchased, it is a drag on the investment performance of the policy. Also, choose a rising
benefit while you are accumulating investments in the account. Once you have stopped accumulating investments in the account and are making withdrawals, you
want to choose a level benefit. That also will help reduce costs.
Whatever policy you choose, it is important to be able to make "zero spread loans" What that means is that, for example, you are able to borrow from
the insurance company at 6% and credit your policy account 6% so there is no net cost to you. The zero spread loans should be part of the contract and not changeable by the company's board of directors at a later time.
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