In life, you need to have a backup when things don’t go according to plan. In your training we call this a contingency plan, in life, we call this risk management.
In this episode of Money Mile, we’ll dive deep into the dangers of the infinite banking strategy–one risk management strategy posing as a good investment strategy. Listen in to learn why banking on yourself isn’t always the best bet.
You will want to hear this episode if you are interested in…
- Using insurance to retain, share, or transfer risk [1:42]
- The risks of the bank-on-yourself strategy [3:02]
- Similar investments [7:11]
- Why these policies have significant surrender charges [10:53]
- Your homework [14:10]
Make sure to have the right amount of insurance
Back in episode 32, we discussed risk management beyond insurance. Risk management involves retaining, sharing, or transferring risk. When you retain risk you are responsible for 100% of the risk and its financial consequences. When you share risk that means you carry some degree of insurance to offset the full impact of the risk. Transferring risk means that insurance is used as the primary resource to absorb the risk.
While not having enough insurance can leave you vulnerable, being overinsured comes with its own troubles. You’ll want to ensure that you have the right amount of insurance for your needs.
The dangers of being overinsured
You may wonder how one could ever be overinsured. The risk of being overinsured is the opportunity cost.
One way that unscrupulous insurance salespeople may try to overinsure you is by talking you into using the bank on yourself or infinite banking strategy. This strategy appeals to people who would like to avoid paying taxes. However, by using this strategy to try to avoid paying taxes you’ll end up losing out on gains by getting caught up in hefty fees that insurance companies charge.
The infinite banking strategy may leave you with infinite holes in your investment buckets
The bank-on-yourself strategy is a strategy where an investor purchases extra life insurance to avoid paying taxes. The money is invested with the life insurance company and instead of bringing in typical returns of 8-10%, the returns are often as low as 2-3%. The appeal to some people is that these returns are not taxed. However, with the way compound interest works, you’ll end up losing money over time.
Investing is like putting money in different buckets, but when you use the infinite banking strategy using extra life insurance it’s like there are holes in your buckets.
Instead of purchasing extra insurance, try buying the right amount of term insurance for your needs and investing the difference. Remember, the only people who become financially independent with life insurance are those who are selling it.
Listen in to hear just how much you could save by using a low-cost portfolio and avoiding funds with high fees you’ll also learn the questions you should ask any insurance salesperson.
Resources & People Mentioned
- Episode 32 – Risk Management – Olympic Level