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EIUL versus Whole Life for Infinite Banking August 15, 2012

Posted by shaferfinancial in Finance.
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A reader has asked me to review two articles written about the infinite banking concept and using EIULs.
Since, I have been getting quite a few inquiries about this I thought I would post my thoughts.
Here are the two articles he was referring too:

Article One

Article 2

It’s to bad that the infinite banking folks have panicked and exhibited the behavior of “true believers.” I very much like there work, and found it very useful in my education. However, these two articles are full of assertions that are either factually wrong, obvious or irrelevant.

Article #1 by Langston.

The only part I agree with is that some of the risk has been pushed over to the policy owner from the insurance company in EIULs compared to whole life from mutual companies that he pushes. Of course this is obvious or should be obvious that you can’t get higher returns without adding some additional risk. Here are my answers to the 10 reasons:

10. Internal costs are not guaranteed. True but in the history of EIULs there has never been an increase in internal costs. Does the author really thinks buying office supplies will push up the costs so much that a company will raise expenses in existing policies? I doubt it; he is just trying to induce fear here.

9. Mortality costs can change. True but irrelevant as this is a very small cost and any change will be miniscule compared to the total accumulated value. Again, a scare tactic.

8. EIULs don’t go negative so this is irrelevant to them. Variable universal has this problem and is the reason I don’t sell them.

7. Author thinks late premiums void the guarantee, but this is factually wrong and demonstrates the author has no idea how universal life works. The guarantee is 3% over the life of the policy no matter how much or when the premiums are paid. Besides, the history of EIUL interest credit demonstrates the smallest 10-year return is more than twice that 3%. The author probably thinks that is an issue because whole life has a history of small interest [or dividends] that might make 3% seem important.

6. No dividends are counted in the index is factually true, but irrelevant because that is included in all the illustrations and historic averages presented. Really….a whole life salesman pointing toward the performance of EIULs?????? Historically the returns in EIULs are about twice the size of whole life returns.

5. Participation rates are less than 100% is a factually wrong statement. The vast majority of companies use 100% participation rates and those have never changed since the inception of the product.

4. Index caps are in place and that is discussed in detail when I talk to clients because they do move within a small range as the interest rate environment changes. Once again a whole life salesman pointing to performance issues is pretty funny.

3. Irrelevant that guarantees are not calculated annually as they do in whole life policies. This is because it is a very different product than whole life and the guarantees are not the same. Once again more guarantees on the whole life product means smaller returns. Whole life is designed to guarantee a death benefit later in life not designed for cash value build-up like universal life.

2. Once again he points out that expenses are not guaranteed. True but this is just a fear tactic. Besides there are non-guaranteed aspects to whole life too.

1.Factually incorrect statement. All life insurance off loads some risk to the insurance company. Bottom line the life insurance companies have to invest their reserves and that risk is the same no matter whole life or universal life. The difference is simply that the designs of the two products are very different and universal life is structured so cash value can be maximized while WL is structured so death benefit is maintained.

The second article pointed too is really more of the same. Once again, they point out the importance [to them] of the various guarantees. Even though those guarantees are structured in, there is a big caveat here. During the premium paying time, there is no flexibility in premiums unlike universal life. When I structure universal life to maximize cash value build-up, there is much ability to skip premium payments, pay much smaller amounts; either permanently or temporarily and then catch back up.

They also fail to mention the ability to reduce death benefit in universal life, which is not available to whole life policy owners.

Once again, whole life has been designed to maintain death benefit and the guarantees are in place in order to accomplish this. However, in the ultimate banking concept you use the cash value for your own needs [I suggest retirement income, while they suggest anything you might borrow money for]; therefore the amount of cash value really does matter. Comparing the internal returns of the best EIULs to the best whole life policies is the true test. And you are looking at almost doubling of the returns of whole life inside an EIUL. This means higher cash value and more money for you to use any way you look at it. Remember EIULs are around 16 years old and have done quite well over the last 10-12 years, which have been very unfavorable years to the equity markets. If the insurance companies were going to need to increase expenses in existing policies then you would think they would have had to do it in the 2008-2011 time period because they were so devastating. But that did not happen.

Take away the fear mongering and you are left with simply a philosophical debate between being connected to the equity market or to a banking concept. However, even this is not quite as clean a difference as all insurance companies invest their reserves in equities as well as long bonds and money markets. Consumers need to understand that the ownership of whole life and its guarantees will cost them dearly in cash value.

Clearly, for some uses like estate planning, the death benefit is extremely important so whole life would be the tool to use. For cash value build-up EIULs are the best tool in my opinion. Use the right tool for your needs.

Also folks might want to consider why these whole life sales people would bother writing articles that only muddy the waters and in some cases are factually incorrect. Maybe it is because of the tremendous growth in sales of EIULs?

If you are considering the two different types of life insurance your decision should be based on which policy accomplishes what your needs are best. If it is cash value build-up then it is simple to compare the two over the last 10-20-30-50 year time period as whole life has an actual history that long and the data is available to compare EIULs. Or you could just compare actual results since the inception of the EIUL product you are looking at. I don’t think you will find many whole life salespeople that want to do this for you though.

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Comments»

1. John - August 15, 2012

Thanks, David. That’s a lot to chew on.

It’s interesting that the WL Infinite Banking folks don’t mention loans in their critiques. That’s a big part of their strategy–take loans for cars, house renovations, etc. Loaning to yourself while earning stable WL returns could be seen as a plus, right? Or maybe they don’t bring it up because you could actually pocket a spread during many years with EUIL loans?

While I understand the loan-to-yourself concept in terms of opportunity cost, it seems a bit overblown by some. Pam Yellen of “Bank on Yourself” fame probably hypes this idea the most. While she’s challenged the Ramseys and Ormans (who deserve some challenging, IMO), she hasn’t responded to this as far as I know.

http://www.cbsnews.com/8301-505144_162-57391839/bestselling-books-financial-promises-dont-add-up/

2. gregturn - August 15, 2012

Loan to yourself also works with EIULs too, which sort of knocks down another arguing point in my opinion. It seems to me that it boils down to overall return, and was part of the reason I relished Dr. Dave writing this post to clarify if there was something I was missing in their message.

3. John - August 16, 2012

I have a question about the internal costs. From my understanding, all EIULs use term insurance for the death benefit…right? And term insurance costs rise exponentially when the term is up and the person is in their 50s or older. So how is this dealt with? Is there any death benefit if a person reaches his 70s or beyond?

I understand that the idea is to minimize the death benefit and maximize the cash value–same as WL infinite banking. But the WL scenarios still end up with a sizeable death benefit if you live long enough and pay your premiums. Wouldn’t an “apples to apples” comparison look at both cash value and death benefit over the years?

shaferfinancial - August 16, 2012

John, this is where the fear mongering comes in,
Term costs do go up each year but not exponentially.
They rise as the actual deaths per year rise.
The term is never “up.” You are trying to compare to 20 year or 30 level term which is a very different product.

Yes, apples to apples would include both death benefit and cash value. It is how you look at internal rate of returns and how they are calculated. But what you aren’t told is that the amount of insurance you pay for goes down as the cash value goes up. That is how all permanent insurance is structured. So in essence the amount of life insurance you pay for is the most at the beginning of the policy and decreases as your cash value goes up. That is why when you reach your 70s or so the life insurance costs are contained. In whole life the dividends or interest received pays for the insurance at some point and the premium stops. Once again whole life is designed to maintain death benefit later in life. What I do is structure so you can maximize cash value and potential withdrawals during retirement. The death benefit goes down as you withdraw as this is a loan against the death benefit. The insurance costs goes down too. An illustration would demonstrate how this works for you as long as it demonstrates expenses and internal rate of return like the ones I send to my clients.

4. Russ, CFP - August 17, 2012

David, Please do more research, or refrain from using the words Infinite Banking and EIUL together. The only fear we have is that you will by lack of knowledge convince someone they are doing IBC and when their policy requires a significant capital injection later in life just to keep it inforce they will blame IBC.
A few points for you to correct:
-EIUL can have a negative return. Just b/c it has a guaranteed floor don’t let that fool you that is a net number. All expenses still have to be paid and those can be as high as 4% which can/will produce a neg. return.
-Saying Insurance companies invest in the markets and if you aren’t using products that trail the market you will lose out is a very misleading statement. Look at the financials of the insurance companies you are writing with to learn that they invest only around 2.5-4% of their assets in the equity markets. (Thank goodness).
-Markets don’t go up in a constant way. Try running your illustrations using fluctuating returns cap to floor throughout the policy to get a real look at what your IRR will be. When your policy dosen’t produce that impossible 6.5-8.5 every single year like you run it right now you might get a better understanding of what I’m talking about. (By the way I used to sell VUL b/c the returns on my illustrations were impossible to beat. I only figured out that they were just impossible to get.
-IBC is not about interest rates or IRR. It’s about controlling your money and insuring it will be there when you need it. (Like at retirement which seems to be your focus). Consider this: let’s assume your policy doesn’t perform at the max every single year and it’s IRR ends up being around 4-5% like every WL policy designed with the largest PUR possible. Which one do you want? The one with no guarantees or the one with the guarantees. (Oh and I know the div. is not guaranteed but considering the insurance companies have been making those dividend payments every year since they were declared I like my chances)
-Lastly and I will get off my soap box. If you decide not to take this information and continue on please forward me the names of the insurance companies you are writing through so I can do more WL with them. My policy holders will fair well taking advantage of the profit the insurance company will make through the sale of these policies which have such a high rate of lapse.

shaferfinancial - August 19, 2012

Russ, thanks for your comments.
We agree on a couple of items. Markets don’t go up in a constant way and the financial stability of insurance companies is incredibly important.
I only sell products of insurance companies that have a comdex over 90. And at least one company allows for a variable interest credit to be illustrated rather than an average number each year. This doesn’t change the overall results because of the 0% floor.
By the way whole life takes out expenses essentially the same way universal life does so your comment on net losses is irrelevant in this discussion.
All my clients receive an expenses chart along with an IRR chart which allows us to discuss expenses in detail for better understanding.
Overall expenses never approach your 4% number unless you surrender the policy in the early years. Mostly overall expenses for my clients will be in the .5%- 1.5% range assuming they keep it for life. I reduce the life insurance down to the lowest under IRS rules in order to keep expenses down. Also use some other strategies to keep them down. Do whole life folks do this?
Now to the returns: you make no mention of these but here is a sampling for comparison:
Met Life’s whole life had a 20 year cash value return of 3.72% last year.
New York Life’s was 4.17%
Using historical data Minnesota Life would have a 8.72% with their blended index option for the last 20 years.
The ML policy has been in existence for 9 years and has an average actual interest credit of 7.2% during its life.

I get your position with the guarantees. Don’t have any problems with it.
But don’t get why you feel the need to fear monger on other products.

Good Luck, I think we are dealing with very different types of clients for the two very different products.

5. Brandon - August 18, 2012

Good job with this one. We too have been asked for an opinion on this subject, and I too note the displayed lack of understanding of UL in general.

I’m certainly not knocking whole life, I’m a big proponent, personally own it, and have written quite a bit of it. However, the fear mongering concerning all UL products (minus VUL, perhaps) on the behalf of the die hards is nothing more than a sales tactic that we could all do without.

6. Russ, CFP - August 19, 2012

Sorry for my blunt reply didn’t know you would post it, assumed it would be monitored first. Might consider that in the future. Anyway please forgive me. Permanent insurance is a better alternative as long as it is done correctly and it sounds like you are overfunding your policies which makes them more viable regardless of returns. Please also forgive me for assuming you are doing IBC with EIUL. After reading a little closer you seem to only want to accumulate money in the insurance policy. There are several people out there promoting IBC with EIUL b/c of the return on the illustration and know little about how loans and early expenses will impact their clients policies. Hence my snap reply.

Anyway, thanks for the info. on Minnesota Life it allowed me to better analyze your product by signing on to their website. The track record you have over the last 9 years isn’t bad. However it isn’t as good as you project. It does matter when the index has a neg. return and a 0 is credited yet you still have expenses. Regardless if the compounded return of the index is the same it will impact the return of the policy. Do the math on the side and compare. My analyze showed a comparision being almost dead even in cash on cash using the returns of the last 9 years going forward. Going back to my original pt that I’d rather have a guarantee that I will get it vs a strategy based on hope. Regarding whole life folks most have no clue on what we are talking about but yes the one’s who do, understand how to create a cash heavy policy which will break even in the 5-6th year (contrary to the 10th year in the EIUL I ran with ML).

Still don’t understand the fear mongering concept or the sales tactic line.

shaferfinancial - August 19, 2012

Perhaps you didn’t account for the actual cap rate for the last 9 years. The cap rates have had to decrease because of the interest rate environment over the last 3 years. I have run into some folks who suggest early loans from these policies as an arbitrage strategy. Always a bad idea because of the front loaded expenses.
I really only care about the cash value 20 years out and longer as I always tell clients this is a long term play only. Enter into these policies with a short term mentality is almost certainty a way to lose money.

7. John - August 30, 2012

>>I really only care about the cash value 20 years out and longer as I always tell clients this is a long term play only. Enter into these policies with a short term mentality is almost certainty a way to lose money.” <<

David,

Maybe this can lead to an important question, then. If you plan to take loans within the first 20 years, would WL be a better choice? Is it somehow less risky or superior in this regard? Or would you be opposed to early loans in any kind of permanent life policy?

Some EUIL advocates actually say it's superior to WL because the loan provisions are more flexible. And you should get a better spread between returns and the loan rate as long as the stock market is behaving.

You may not be able to do this, but what I'd really like to see are a side-by-side comparison of WL vs EUIL with the same premiums, and several loans taken out. Perhaps one for a cars at years 5 and 12, and for kid's college at year 20. You can start paying them back 3 or 4 years after taking them. That's pretty much a textbook example that the WLIB crowd always shows.

Thanks.

8. Jeff Lezak - December 18, 2012

I am paying monthly for my wifes Minn Life EIUL. The first year 2/11/11-2/12/12 the S and P had 0 return. so this past year I did monthly, another mistake since since 2/1/12 s and P has gone way up. What should I do in 2013 staring in Feb. We have 3 more years left to contribute. she started at age 61. thanks Jeff

shaferfinancial - December 18, 2012

Jeff, it is always better to do annual premium payments if you can. This way the money works longer for you. In the long run it might not make much of a difference, but any positive difference is better than none! Did the agent you worked with not understand this? I hope he was able to structure it properly for your wife from the beginning outside of this.

9. Russ, CFP - December 19, 2012

Enjoying the discussion and always eager to learn. Help me understand:
1. When money is borrowed from EIUL’s @ Minn Life, does the borrowed money still participate in the index?
2. How can the insurance company pay out a higher yield in EIUL than it makes on its portfolio and stay in business?

shaferfinancial - December 21, 2012

Russ, 1. Depends upon which loan option you choose. Fixed does not, variable does.

2. Well, Russ I think you know the answer to this but it is a good question so I will answer it to the best of my ability.
All insurance products must, over the long run, be self supporting. Premium dollars go to two places, one to the general account which provides the regulatory required reserves and covers liabilities from the insurance contracts. The second is to create the revenue for the company to support the sales staff, administrative staff, costs to run the corporation, profits, etc. When a product is brought to market it is designed to support the needs of the company so the company can honor the contract commitments. How they structure each product to accomplish that is up to the management and varies from product to product, company to company.

EIUL products are 15 years old now and the ML EIUL is approaching its 10th birthday. ML has a COMDEX rating of 94, which means it’s financial stability is in the top 6% of all life insurers. As a company it has sold insurance for over 130 years.
I think we can all agree that the last 10 years have not been all sunshine and smiles in the US or the world economy. In fact, you can say it has been the toughest decade since the great depression.

So now I will ask you something Russ, if the EIUL was not self sustaining, meeting the criteria set forth by ML for all its products in terms of reserves and revenue, would they keep selling it as is? Or would they either pull it from the market as a broken product or dramatically change it to make it meet its minimum criteria for a product from ML?

If the EIUL has been a good product for ML through the toughest decade in anyone’s life, good enough for it to not only continue to be sold, but to be improved for the consumer in a myriad of ways, to continue to be structured essentially the same way as it was originally designed, doesn’t that mean that it is meeting the criteria set forth by ML for solid, sustainable, products?

And if that is all true, then doesn’t that mean it is not paying out such a high yield as to negatively effect the general fund nor the company?

Since I don’t know what the overall investment yield for ML is, and that yield changes from year to year anyway, that is the only way I know to answer your question.


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