The infinite banking concept is often filled with mystery. It is incredibly hard to find an honest outline of the negatives of the infinite banking concept. The ones you do find fall into one of two categories:
- Written by life insurance agents who are IBC practitioners, or
- Those who think IBC is a complete scam.
I am neither. I am single a personal finance enthusiast who is interested in everyday personal finance but I also like to dive into alternative finance concepts like IBC & velocity banking.
Hopefully, this article will shed some light on what I consider to be the biggest negatives of the infinite banking concept.
If you don’t want to read the article check out my YouTube video which discusses the same topic. Don’t forget to subscribe!
Negatives of Infinite Banking Concept
To be upfront – I believe all of the negatives below also have counterarguments. However, I would still consider these negatives and aspects of infinite banking that you absolutely need to be aware of before you dive into implementing IBC in your life.
The upfront cost of a policy is high
I am quite envious of my friends to the south. American IBC policies can have 85-90% of the initial premium of the policy be directly available as cash in the first year.
Unfortunately, that just isn’t the case in Canada. At least yet – although I understand in speaking with a few agents that some insurance companies have been testing using term riders to deliver a similar result as American policies achieve.
In Canada, you can expect to “lose” 20-30% of your total premium paid in the first year. That means, for a policy designed with infinite banking in mind, that if you deposit $10,000 as a premium you would expect a year 1 cash value to equal out to be $7,000 to $8,000.
This isn’t the end of the world – as over time this closes and your policy will yield an internal rate of return (IRR) of 3-4.5% but that certainly isn’t the way things start off.
But that leads us to the second negative…
You have to keep up your infinite banking policy for the long-term
Most policies do not break even in Canada until year 4/5 at the earliest, and more commonly at year 6ish. This assumes your policy has been structured properly and you maintain your premium payments (+ paid up addition component) for the whole time.
If you cannot commit for at least this period of time, then you will lose money. Now there are plenty of methods to mitigate losses in the event you are unable to maintain the same level of premium payments for that entire time and we will discuss those in a future blog post.
The goal is to get where you can ‘offset’ your policy – which usually can occur in year 5/6 assuming dividend rates maintain. However, to be safe, you will want to plan for 6-7 at least.
This 6-7 timeframe is if you want to break even and have the ability to stop making premium payments. If your goal is to practice the infinite banking concept, you are talking about a 10+ (or even a lifetime) commitment. Because the concept involves borrowing from your policy (or leveraging your policy) and some transactions are multi-year you can’t simply start and stop.
The Infinite Banking Concept requires out of the box thinking
While this may not seem like a negative it absolutely is. The concept can be difficult to wrap your head around.
You are ‘losing’ money (see negative #1) to then borrow that money from the insurance company (who charges you interest). How does this make sense? Well, if you’ve seen any infinite banking explanation videos, it makes perfect sense. Pro-tip – Check out my YouTube Channel – I’ve explained how this can make sense.
Losing money is only the tip of the iceberg. The concept would encourage you to funnel as much of your funds through your policy as possible. Sometimes even suggesting you funnel ALL of your income through the policy. How does that make any sense? (PS – I don’t believe it does, I’ve covered this in a video and will also cover it in a future article).
So do these Infinite Banking negatives matter?
Absolutely. Depending on who you are. While many would argue that IBC should be practiced by everyone I do not buy into that logic. My belief is that it takes a certain person to properly implement the process into their life. That is someone who typically wants certainty with their finances, understands the power of leverage, and someone who has had challenges dealing with banks.
This is the first blog post on this site. I am not a life insurance agent nor a financial advisor. I am just a personal finance enthusiast who likes writing blog posts and making YouTube videos. If you agree with me, let me know. If you disagree with me, let me know and we can have a discussion. If you have any questions, ask! Don’t forget to check out my YouTube Channel and subscribe.
Until the next one.