A simple definition for Arbitrage would be the process of buying something for one price while simultaneously selling it for another price. In case you missed that, the word “simultaneously” is important. It means that the buying and selling happen at the same time.
In other words, if you buy something for $10 and later sell it for $12, that is not arbitrage, it is just a wise market decision. If however, you have a seller of a rare comic book on the phone, and also have a buyer on the phone, and you can make a profit by buying and selling at the same time – that is arbitrage.
Arbitrage happens all the time with online trading because the global markets are inefficient. If you’ve ever sat in traffic during rush hour you know very well that life on our precious planet is anything but efficient. If a company has a big breakthrough, it may take time for the information to get to all the markets.
In the world of the Internet, the time for information to travel is relatively quick, but that doesn’t mean that online traders can’t take advantage of short windows of opportunity. In fact, most big institutional trading firms have programs and algorithms looking for these little differences in order to automatically take advantage of the gains that can be made through arbitrage.
Okay, so that’s a little vocabulary work out of the way. Now let’s talk about the Infinite Banking Concept® (IBC) and ultimately how IBC can take advantage of arbitrage to grow your money.
What is Infinite Banking?
The term “infinite banking” was originated by Nelson Nash who wrote “Becoming Your Own Banker” and is generally deemed the originator of this strategy, at least as far as it is a recognized financial strategy. Another recognized promoter of this strategy is Pamela Yellen and her best selling book “Bank on Yourself.” Other more general terms such as becoming your own banker, personal banking strategy, self banking system, or any derivation thereof refers to this strategy.
All of the above are referring to a strategic process that uses whole life insurance in a way that is different from what is commonly promoted in the mainstream life insurance community. If you’ve never heard these terms before, they may seem fanciful or confusing, but really it’s just a creative way to state that you are capturing the interest that would normally be paid to a bank, by paying the interest toward a policy you own.
Paying the Bank
Some will say that you are “paying yourself” or that in the case of Yellen, you are “banking on yourself.” But ultimately it just means that you pay interest to your mutual life insurance company instead of to a bank. You are part owner of the insurance company, so you reap benefits associated with paying the company. But it’s actually so much more, as explained below.
Before going too much further, let me give you an illustration that may help you understand why people want to use Infinite Banking to create your own personal banking system.
Buying a Car through a Bank
If you are like most Americans, you’ve purchased a car by financing provided by a bank. Whenever you see car makers talking about 3.9% financing or something similar, you know they are trying to get you into their dealership by touting their low interest rates on car loans. Let’s look at the details of buying a car through a bank a bit further.
If you walk into a dealership today and ask to purchase a $30,000 car with zero down payment, you’ll still get plenty of takers. Assuming of course your credit rating is high enough. If you do get approved, and the terms are 60 months (5 years) and 3.9% interest rate, your payment will be $606.26 (assuming a 10% sales tax). The total cost is $36,375.43, with $3,375.43 being paid in interest.
You get the privilege of taking the car home without paying anything up front, and in return the bank will get $3,375.43 in interest over the course of five years. At first glance it seems like the bank is doing pretty good. Most people would agree that the bank made a good amount of money for doing very little. In reality, the bank took on a bit of risk (you could have driven the car to Mexico and never made a payment), they pay employees to handle the loan processing and the monthly payments. And of course if you ever have any questions or concerns they need to have people that answer the phones and respond to your requests.
What about Inflation?
In addition, the money that you paid back to the bank had been subject to inflation, so it was worth less and less with each passing year. So the bank didn’t really make $3,375.43, they actually made $3,375.43 minus the five year impact of inflation, which varies. But that’s a side note. If you’re interested you can read our article about financial leverage and the time value of money.
But the main point is that you would be paying $3,375.43 to the bank in interest. What happens when you buy the car with Infinite Banking?
Infinite Banking Example: Buying a Car
Now with this infinite banking example let’s assume you want the same $30,000 car, at the same dealership, but you have a cash value life insurance policy through a mutual company. What do you do? How does it work?
First of all, you still need to acquire the money.
But the money acquisition is fairly simple. You call your insurance company, ask for the money, and they send you a check. The only qualification is that you have the amount of money in cash value within the policy. Assuming you have the cash value available, you get a check in the mail and you deposit it in your bank account.
Ideally you work with your agent to work out a payback schedule based on the interest rate for the loan. The payment amount would be exactly the same if you chose to follow the same payback schedule and the same interest rate. So, what’s the difference?
Is Payback Required?
With the infinite banking example using cash value life insurance, if you don’t want to pay back the loan, you can choose not to pay it back. And nobody will come repossess your car! But you will pay interest on it each year and it will impact the growth of your cash value in your whole life policy.
Ultimately, if you choose not to payback the loan, it will be paid back in full when your death benefit is paid out. The insurance company will deduct the outstanding loan balance from the death benefit prior to issuing the life insurance benefit to your beneficiaries.
So the fact that you don’t have to worry about your car being repossessed is a nice thing. But there is much more than that.
How do life insurance loans work?
When you take out a life insurance loan you are borrowing money from the insurance company’s general account, using your cash value as collateral.
So you are not actually borrowing your own money, but the insurance company’s money. The cash value in your policy remains in your policy. The insurance company loans you money that was earmarked for policy owner loans, investing in bonds, investing in real estate, or investing in other investment grade securities.
Withdrawals
Note: It is possible to WITHDRAW money from your policy cash value, but it is not recommended. When you WITHDRAW your cash value you are removing it from the policy and therefore it will impact the cash value growth – policy loans are a better way to access the money in most situations. Although there are situations in which WITHDRAWALS are recommended, but that’s a topic for another time.
Now here is a huge benefit; with a properly structured policy from a mutual insurance company that practices non-direct recognition. The cash in your policy continues to earn interest that is guaranteed plus any potential dividends, even though you took out a loan against your life insurance cash value. That means your cash value is continuing to grow via compound interest, even though you are using it as collateral to purchase this car!
Policy loans are similar to home equity loans
If it helps, you can compare policy loans to a home equity line of credit (HELOC) on your house. Your house may be worth $400,000, and you may owe $300,000 on the house. If you get a HELOC for $50,000, you will have less equity in the home, but the home will still appreciate at the same rate regardless of the amount of equity you have.
In a similar fashion, if you have $50,000 of cash value in your policy, and you choose to get a $25,000 policy loan, the dividends paid to the policy will still grow on the total amount of $50,000. But just like a HELOC, there are some interest charges to consider.
Arbitrage and your policy loans
So what numbers do we need to consider here? We need to consider the policy loan interest rate, and we need to consider the guaranteed interest rate plus the average dividend. Some companies offer a wash loan which is just another way of saying they will credit you the same amount that they charge you. Essentially you get a 0% loan. But if you look at the national averages you’ll find that most companies will charge between .5 and 1% after the guaranteed rates and interest charges are considered.
In other words, an insurance company may offer a guaranteed rate of 4%, but will charge 4-5% on all policy loans. But remember, there is a dividend for policies holders of mutual companies! If the dividend is 1.5-2.5%, then you have a potential positive arbitrage.
A Long History of Dividends
Just as a point of reference, certain mutual insurance companies have reports that shows their dividend rates going back over 40 years. In that time, the lowest the dividend rate of for many top mutual insurance companies has been around 5-6%. That rate is the guaranteed rate plus the dividend. If you are paying a loan rate of 5%, you are still earning neutral to potentially positive arbitrage.
If you have been following the bouncing ball thus far, you can see that you are borrowing money and yet being paid to do so. It is true that the dividend is not guaranteed, so it’s not something you can be 100% certain will take place. But the track record of dividends is quite impressive with most mutual insurance companies, having paid a dividend for over 100+ years straight. So although it is not guaranteed, it is indeed a rather safe endeavor.
Why do they call it “Infinite” banking?
This arbitrage that is in your favor when you take out a policy loan is a tremendous opportunity. When people start using their policies like this, they see the benefit and they want to do it more and more, over and over, to grow their cash value (infinitely).
Think about it for a minute. When you borrow against your policy (use your cash value as collateral), you are still receiving dividends on your full cash value, AND you get the use of the cash on loan to invest in something else.
Real Estate?
Let’s say for example you want to buy some real estate. You use the policy loan money to put a down payment on a rental property. The property is cash flow positive and you are making positive arbitrage on your policy loan. If your rental property goes up in value during the year by 5%, you can add an additional 2% on top of that because of the positive arbitrage.
And to make it even better, you can choose to pay the loan back at a higher interest rate in order to increase your cash value. All the while you are taking advantage of the principle of compound interest, without disturbing the cash value principle in your policy! Another thing to consider is how all of the above keeps your money in motion working for you. This concept is called the velocity of money.
I’ve only scratched the surface with the ways in which you can use these policies. If you’re interested in the Infinite Banking Concept® and are curious how to get started, give us a call. This type of “banking” is not for every individual, but for those that have the discipline and the means, it can be a door that opens up a whole world of financial possibilities.
There are two cases here:
1. I borrow money from a bank for a car loan, and I pay interest to the bank plus I pay the principal back.
2. I borrow money from the insurance company for a car, and I pay interest to the insurance company plus I pay the principal back. Or I don’t, and my death benefit is reduced.
Presumptions are that I have invested some of my prior income somehow. In case 1, I have been putting my money into, let’s say, the stock market in a Total Stock Market Index fund. So I have $100,000 (let’s say), and it’s earning a market rate of return. Could be 5%. Could be 12%, or -12%, in any given year.
In case 2, I put $100,000 into a dividend-paying life insurance policy. So I’m earning a guaranteed rate plus dividend. Let’s say it totals 6.8%/year in return.
In case 1, I borrowed from the bank–and left my money in the mutual fund, where it’s earning a rate of return. In case 2, I borrowed from the insurance company–and left my money in the policy, where it’s earning a rate of return. In both cases, I pay for the car with loan payments that cover interest and principal.
You say I have an arbitrage gain in the insurance policy, because I’m earning a return larger than the interest rate. Okay: If the mutual is gaining on all my savings, and the rate of return is larger than the interest rate, is that not the same (or better) positive arbitrage?
The gain can exist either way. I can see that the insurance policy has a rate of return that is guaranteed, whereas the index fund could lose value. However, over time the market rate of return in the stock market is greater than that on an insurance policy. If that is earned, the only advantage to the insurance route would be that I don’t have to pay the loan back (but then I have to pay interest forever) if I don’t want to, plus there’s a (reduced, if I don’t pay the loan back) death benefit. What am I missing here? Where’s the advantage? Taxation of gains from the index fund versus no taxation of gains from which I can take loans in the insurance policy?
Hello David, thanks for your insightful comment and rather in depth analysis. In my opinion, you’re engaging in a very common comparison between market based investments and whole life insurance products…one that I believe has been carefully programmed and delivered to the consumer by the financial industry. This comparison makes a couple of assumptions…1. that AVERAGE RATES of return tallied over 100 years are accurate representations of what the consumer can expect…FALSE. When you run the numbers, a conservative guarantee in a whole life product, delivering a return EVERY YEAR compounding, will beat those returns when you actually take a 100 year period and plug them into a Truth Concepts calculator, side by side with an average guaranteed annual tax deferred return of say 4%. Remember that when you lose 10% of your market based account one year, even if you get 10% gain the next year, you still don’t earn back your loss as it takes longer (generally twice as long) due to loss of principle. 2. The other common “miss” with market based accounts and even indexed life products are uncertainties and/or omissions about costs. With whole life products, these are not a factor in guaranteed returns, whereas with other accounts costs are discretionary. Here is the reality to consider, market based investments and indexed life products allocate ALL of the risk to the consumer, whereas with whole life product, the insurance company bears ALL of the risk. AND YES, you’re correct that tax deferment is HUGE…when you run a calculation between a tax deferred and non-tax deferred account, the results are generally staggering. There is also the peace of mind factor…at one time whole life and pensions were the norm until the financial community convinced the public that it is a great idea to gamble with your retirement and security. Just some things to consider…if you’d like to run some actual calculations using a 100 year average S&P return vs. a conservative guaranteed return in a WL contract, connect with jason@insuranceandestates.com.
Best,
Steve Gibbs for I&E
Well, there are a few mistakes there. I didn’t at all talk about tax deferment; I was trying to compare taxable to taxable–investing in a mutual fund with already-taxed dollars, same as premiums to an insurance policy. And yes, there is volatility in the market, but the long trend of stocks is upward. The S&P 500’s historical return since its inception in 1957 is 7.96%. An index fund with an expense ratio of .04 is going to return almost everything to its owner. (Yes, investors can drastically lower their returns by churning due to FUD, and do so.) Still, one can do even better, as I have with my equity investments.
Also, pensions have never been the norm–I don’t think that there’s ever been a time when more than about a quarter of all workers had a pension. I know it’s much lower now. I don’t know how common whole life insurance has ever been.
I would like to see a comparison between equity market returns and a conservative guaranteed whole life policy. I’ve been investigating this “infinite banking” concept for a couple weeks, reading Nash’s book now, and trying to figure out its advantage–if there is one, to me. I’m on the cusp of retiring, and a search for the advantage of infinite banking for retirement led me to this site. I’m not sure if there is an advantage.
I see what you’re saying. I’m not really interested in an extended debate on the merits of life insurance vs. the financial markets because I think people adopt fixed positions and get lost in the weeds. For me it is about peace of mind and even if your mutual fund wins in terms of ROI in some scenario, whole life insurance shouldn’t be treated like a financial product and compared this way. It is a contract with guarantees which puts it in an entirely different arena and used for very different purposes. As an estate planner I’ve observed a few folks who were ruined by relatively speculative investments later in life and a few ruined by the market crash…you know the one. If you’re simply looking for ROI and are willing to lose money, perhaps the markets are the place for you. A better comparison is actually the 100 year bond average, where again, a conservative WL return wins over time. It’s your call and you’re welcome to connect with Jason.
Best, Steve Gibbs for I&E
I feel like this comparison misses the entire point of using WL as a tool in the infinite banking strategy. It’s not about the returns on the money you put into the policy, though, those are very nice. It’s about the ability to use that money to invest in other assets that will bring in cash flow. That cash flow can be used to repay the loan, so it’s not coming out of your paycheck, OR, it can be used for whatever you want, like invest in the market if that’s what you really want to do. This particular article is going into more depth and detail on the topic of using other peoples money (the insurance companies) to invest, and is particularly describing some of the other benefits that help grow the policy without you having to put more of your money into it. There are a plethora of other articles that go into detail about all the other facets of infinity banking and how WL fits into that. All that said, I do appreciate the discussion, it’s been just as insightful as the article. Thank you both!
You’re welcome Mark and thank you for commenting. I tend to agree with you for the most part; however, I believe the internal return offered by a properly designed high cash value policy, when put into a Truth Concepts calculation (considering both the guaranteed and adding historic projectected dividends) are powerful considerations. Sure, the point is about using the cash for higher risk return opportunities AND this article is about “arbitrage”. Point being, the projected cost of capital (the difference between policy loan interest and those factors (all be them estimated) are a part of the equation to consider. My thought is to ignore these are important factors, are an incomplete picture and frankly are characteristic of the kind of sloppy IBC that has contributed to critcism from the financial entertainers and the Wall Street crowd.
Best, Steve Gibbs for I&E
The problem with Steve’s comparison is that mutual funds don’t have a death benefit. Case closed.
Sorry…David’s comparison…you cannot compare mutual funds return and whole life return or anything to do with those two being compared to each other because on year 1 going forward whole life has a death benefit whereas mutual funds do not.
Hello Jason, thanks for responding. The death benefit is an important aspect to consider when making comparisons to financial products. The big consideration about death benefit is, of course, the tax benefit for future generations. This especially true since the Secure Act harpooned beneficiary IRA, which arguably weren’t great before that. However, that isn’t the end of the story. Barry Brooksby and I run financial calculations regularly that illustrate “average” S&P returns (using an actual 20 year average) against a “conservative” whole life return and the results can be shocking due to the steady compounding growth and tax benefits. This becomes even more evident if you want to account for the fees that those funds charge which aren’t generally disclosed, whereas, they are included in whole life guaranteed returns which are conservative by nature. Of course, we aren’t proposing whole life as an “investment” but rather a safe bucket wealth building asset. I would think all of this would hit home even harder given recent economic volatility.
Best, Steve Gibbs for I&E
I am just starting to look at life insurance policies for retirement tax-free cash. In your article you stated that – “Some companies offer a wash loan which is just another way of saying they will credit you the same amount that they charge you. Essentially you get a 0% loan.” Can you tell which insurance companies offer this 0% loan? Or where I might be able to find them.
Hello Carol, some companies like Penn offer a “margin lock” that does what you’re suggesting. Best option would be to connect with Barry or Jason on our team to explore companies and options. One of them should’ve reached out to you already. Or feel free to e-mail your contact information to barry@insuranceandestates.com.
Best, Steve Gibbs for I&E
great content. i had to put down how i m interpreting this. a few questions and comments built within;
– use cash flow to fund policy which is structured to max CSV early. this minimizes DB early which will impact how much of a CSV you can carry.
– therefore, use PUA’s to add to DB over time through dividends – this also allows you to continue to grow your CSV.
– CSV is secure. can be used simultaneously to borrow from and still grow due to ongoing dividend.
– 4 to 5 years until your CSV grows back to your original deposit through dividends. differential is NCPI and fees..
– now you can borrow from the policy without issue.
– borrow for personal asset (Car) your dividend offsets policy loan. in theory borrow for free. this works under assumption your ROR inside equals the cost outside.
– dividends not guaranteed. dividends across most insurers have decreased as the PE investment is rate sensitive. dividend is based on profitability of Par company but profitability based heavily on the private equity investing which drives the dividend itself. private equity fund heavy in fixed income, income producing investments, REITS etc. will fluctuate with market, you just don’t see it fluctuate, same as all private equity. its not valued hourly/daily.
– if you do this for a personal purchase – would you recommend paying the loan back. or is this concept better served if you take the principal and interest plus additional interest and pay it BACK IN the policy. which grows the CSV. which then builds your death benefit and allows for larger ongoing CSV and loans. essentially, you are not paying the loan, you are paying the policy which facilitates additional lending which you use to compound your debt. so you don’t worry about your debt. you just pay the policy and essentially leverage into the death benefit??
– if you buy an investment – REIT/dividend stock – you could use the cash flow from the investment to pay into the policy as well – further leveraging the DB/grow CSV and gives you more to borrow
Is that last part correct? pay yourself means pay the policy not the loan?
paying the loan is not like paying yourself. all holdings of the PAR policy through the insurer benefit from your policy loan. if you are 1 of 100 par policy holders and 50 have policy loans your loan profits paid to the Par insurer are spread across 100 people, along with the other 50 who carry loans. So ignore the loan pay the policy and let it compound while also allowing your debt to compound?
–
Hi Joe,
Please reach out to Barry Brooksby, our infinite banking practitioner. You can reach Barry Brooksby at barry@insuranceandestates.com.
Best, I&E
I think what is missed in David’s analysis is that none of his ROI bullsit matters until the DAY I want to retire. Even if I’ve moved everything to a conservative position years before like a good little sheep, if the market crashes the day before I’m ready to retire, I’m S-O-L! Have we learned nothing from history!? So tired of hearing this nonsense.