I believe that understanding the worst case scenarios of infinite banking is critical if you are looking to implement the process in your life. Most likely you have already understood the negatives of the infinite banking (and if you haven’t, you should check out that article and companion video!) and you know want to know what the worst-case is.
Look no further! As always, I am not a financial advisor, nor life insurance agent. I am just simply a personal finance nerd who loves alternative financial strategies to maximize the use of every single dollar. As you explore the blog please share your thoughts; positive or negative. If you disagree, let me know why and let’s have a discussion!
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So what are the worst-case scenarios of infinite banking?
I see that the four main worst-case scenarios are as follows.
You need to cancel your IBC policy within 5-7 years
As I mentioned in my negatives of infinite banking, you really need to fund your policies for a very long time in order for the process to work correctly. If you need to pull your money out within 5-7 years, it is very likely that you will actually lose money as this is the period when many policies are still shy of their break-even.
Thankfully, once you get past the 3rd year, the actual ‘lose’ isn’t so great.
You cannot afford your IBC policy premiums any longer
This is probably the most likely worst-case scenario and is paired with the first worst-case scenario of needing to cancel your policy.
Because of how infinite banking policies are set up, approximately 50% of your premium payment is typically paid into ‘Additional Deposits’ which is how cash values grow so quickly. Thankfully, this portion of your premium is completely optional and you can stop paying in to it at any time.
You should note though, that if your intention is to offset your policy (which is where you are no longer required to many any policy payments whatsoever) you will need to pay premiums for longer in order to offset. I ran some illustrations recently that showed if you cut your additional deposit payments in the 4th year, you would be required to pay into the policy for an additional 2-4 years longer than you otherwise would.
Another benefit of whole life is that if you cannot afford the premium, the insurance policy will usually automatically lend you the money (Via a policy loan) to pay the required premium. This isn’t so great if you cannot afford your policy at all in the future, but is great if you have a temporary hiccup.
The Insurance company fails
Thankfully in Canada, Insurance companies are required to hold an immense amount of reserves. Most companies hold well in excess of the required government measure for solvency and stability, LICAT.
Because of this, it is highly unlikely that an insurance company would fail. Further, Assuris, a non-profit company provides insurance to policyholders of the majority of life insurance companies in Canada. It is funded by the insurance companies themselves as an industry safety net. As you can see, the insurance is up to certain values OR 85%, whichever is higher. This means a good portion would still exist even in the event of a company failure.
Dividends stop being issued
The entire point of using whole life insurance for the infinite banking concept is that insurance companies issue dividends which are in turn used to purchase additional paid-up life insurance that then produces more dividends. If a company were to cease issuing dividends then the IBC policies would stop growing.
This is a highly unlikely event, and would most likely be paired with a company failure which would be protected, as noted above. However, this is a benefit of working with a mutual insurance company. A mutual company is owned by it’s policyholders which in turn means that the company must do what is in the best interest of it’s policyholders. Whereas, a stock-owned insurance company has to do what is the best interest of it’s shareholders.
Insurance companies also practice what is called smoothing. This is essentially the process of retaining some of the growth of their portfolio in reserves for years when the growth of the portfolio isn’t as strong.
Is it likely any of this occurs?
Outside of the first two, which are primarily a byproduct of our own individual lives, I think it is highly unlikely that the last two worst-case scenarios would occur and if they do, I think their would be bigger problems.