When you ask financial advisors about buying life insurance, most will recommend that you avoid permanent life insurance and buy term insurance instead.
These advisors may be doing their clients a major disservice. Term insurance, as you probably know, pays a benefit only if the insured dies during the term of the policy. Permanent life, on the other hand, is designed to pay a death benefit whenever you die, and it accrues a cash value as well.
What’s the typical advisors’ problem with permanent life? They often point to its cost, which is higher than the cost of term life. Their mantra is to buy the cheaper form of insurance—term—and invest the money you save.
But permanent life is more expensive for a reason. Unlike term insurance, it can be used to put you on a path to financial independence. How? By serving as the centerpiece of your own private bank.
In “infinite banking,” we use permanent life insurance policies that are specifically designed to grow large cash values relatively quickly. These cash values serve as collateral for loans—on very favorable terms—to you, the policyholder.
Over time, infinite banking can reduce or eliminate your need to borrow from banks. When you borrow from a bank, you send debt payments to the bank, never to be seen again. When you borrow from your permanent life policy, you effectively repay yourself. This can make a profound difference in your wealth accumulation. For more on infinite banking, check out my blog post from February.
Now let’s look at term insurance closely. Insurers pay out death benefits on term policies a tiny fraction of the time; most policies expire while their policyholders are still alive. Not surprisingly, term insurance is hugely profitable for insurance companies. Still, most advisors counsel their clients to “buy term and invest the difference.” Permanent life pays a lower return on its cash value component than you can achieve in the market, according to the conventional wisdom.
But let’s face it, most of us don’t have the discipline to invest our excess cash. It’s human nature to spend the supposed savings. And even if term policyholders do “invest the difference,” they have no guarantee of earning any return, and they could experience a loss. The rate of return on permanent life insurance, on the other hand, is guaranteed. Some permanent policies pay a fixed rate on your cash, and others allow you to participate in market gains while providing a “floor” to protect you against market dips.
About 99% of term policyholders die with expired policies, meaning their families receive no death benefit despite the many years of premiums that have been paid. That’s not the case with permanent insurance.
Perhaps most importantly, properly designed permanent policies can, over time, help us to take our financial futures into our own hands. Used to create our private banking system, they can allow us to break our dependence on outside lenders and on costly investments that come with no guarantees. They allow our money to grow tax-free, and they assure us of having cash whenever we need it, for major purchases, college costs and even retirement.
Please contact me if you’d like to learn more about permanent insurance or infinite banking.
